Avery Dennison Corporation (AVY) Q4 2014 Earnings Report, Transcript and Summary

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 January 3, 2015. This call is being recorded and will be available for reply from 10 AM Pacific Time today to midnight Pacific Time February 5. To access the replay please dial 1-800-633-8284 or 406-977-9140 for international callers. The conference ID number is 21734744. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Eric Leeds, Avery Dennison's Head of Investor Relations. Please go ahead, sir.

Thank you. Welcome, everyone. Today, we'll discuss our preliminary unaudited fourth quarter and full year 2014 results. Please note that unless otherwise indicated, today's discussion will be focused on our continuing operations. The non-GAAP measures that we use are defined, qualified and reconciled with GAAP on 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 and CEO; and Mitch Butier, President, COO and CFO. I will now turn the call over to Dean.

Thanks, Eric. And good day, everyone. 2014 represented another year of solid progress toward our strategic and long-term financial goal. We delivered 3% growth in organic sales and 16% growth in adjusted earnings per share while boosting return on capital by nearly 3 points. We maintained our strong capital discipline, returning over $480 million to investors through dividends and share repurchase. We raised the dividend by 21% in 2014 and repurchased 7.4 million shares. Free cash flow came in below our original expectations for the year due largely to the combined effects of currency and actions we took to reduce the volatility associated with year-end changes in working capital level. Going forward, we expect to see return to our consistent pattern of delivering solid free cash flow. We remain highly confident in our strategy and in our ability to achieve the long-term financial goals we communicated last May. We will grow through innovation and differentiated quality and service. Our significant exposure to faster growing emerging markets, global share gain opportunities in performance tapes and graphics, and our leadership position in RFID will continue to be key catalysts of long-term growth for the company. We will further expand margins through productivity and leveraging our global scale that reflected in the increase to 2014 and 2015 restructuring investments. We will continue to optimize our use of capital in terms of both investment strategy and our disciplined approach to shareholder distribution. Any long-term strategy requires some mid course correction and we are in the process of executing some of those now. We are strengthening the long-term competitive positions of all of our segments including actions to adapt through recent challenges in RBIS. What continues to guide our actions is our commitment to achieving our long-term financial objectives, which we set with the view to delivering above average returns for our shareholders. In this regard, 2015 represents an important milestone for us as the final year of measurement for the full year financial targets we first communicated in 2012. I am very pleased to report that we are well on track to meeting those objectives. We included our scorecard in the supplemental materials we distributed earlier this morning. Without walking you through all the metrics, I'll just highlight that anticipated compound annual growth and adjusted EPS over this four-year period is expected to be roughly 20%. Last year, we established aggressive new five year targets through 2018 and we are already making progress towards achieving them. We’ve had a slow start on the organic growth front, but are taking actions to strengthen our competitive position in all of our key market segments to ensure that we stay on track for both mid-teens compound annual growth in adjusted EPS as well as the four plus point improvement in return on total capital by 2018. Achievement of these goals will deliver strong growth in EVA for both of our core businesses and of course for the company overall. So let me just touch briefly on our three businesses. Pressure-sensitive Materials delivered its third consecutive year of strong volume growth, while maintaining its profitability and high return on capital. This is a great business, but we believe it can be even better. I am really pleased to see our already high performance team demonstrating a heightened sense of urgency. The team has made good progress addressing the product mix challenges we faced last year and in the first half of 2014, by accelerating growth in high return segments. We are continuing to invest in growth while reducing fixed cost to ensure we can win and grown in all key market segments. I know everyone is keenly focused on the raw material outlook for PSM. Now, recall that over the long run, material input costs and pricing rise and fall together in this business, albeit with some lag. It's very difficult to predict the overall impact to the full year. Though, while we may see some short-term benefits, the cost outlook for the second half is highly uncertain, as is the timing of any pass through. Retail branding and information solutions faced top line growth challenges this year, reflecting share loss in the value and contemporary segments of the market, offset by solid growth in RFID and the performance segment. To address the recent top line challenges, we are focusing our sales efforts to recapture share while reducing fixed costs and aligning resources to better serve all segments of the market. We're expecting improvement in our growth trajectory by mid-year and to resume our strong pace for margin expansion. We continue to see significant opportunities for top line growth. RFID remained a key growth catalyst. Unfortunately, the sales trajectory can be somewhat choppy in this relatively early adoption phase for the industry as evidenced by a year-on-year decline for RFID sales in the fourth quarter. With the few customers driving a significant share of our total volume today, we do expect some continued volatility, but our customers remain fully committed to the technology and our partnership. And we are seeing quite a bit of new interest in pilots and rollouts and we continue to expect RFID to grow 15% to 20% through 2018. As far as the core market is concerned, I'm confident in the team's ability to adapt to recent challenges. Underlying demand for apparel hasn't changed. And our value proposition for the performance and premium segments of the market remains strong. Admittedly, we were not as focused as we should have been on meeting the needs of the value and contemporary segment, but we know what we have to do here and we have the will and the proven capability to get it done. Finally, Vancive, our small but high potential medical products business delivered 8% organic growth for the year at the high end of our long-term target. We expect to significantly reduce the operating loss of this business in 2015, and are still investing here ahead of growth. We remain focused on achieving a sustainable breakeven run rate in 2015. Wrapping up, we expect this year to be a year of strong operational improvement for the company. Adjusting for a roughly $0.25 hit from currency translation, our EPS guidance reflects a growth rate of about 15% at the high end of our long-term target with further expansion of our return on capital and the continued commitment to returning cash to shareholders. Now I'll turn the call over to Mitch.

Thanks, Dean. And hello, everyone. As Dean mentioned we are focused on driving profitable growth to differentiate quality, service and innovation. With a specific focus on opportunities with greater growth in margin potential such as tapes, graphics, RFID and of course emerging market. We have and will continue to invest in these key opportunities. We are adding new coding capabilities to support growth for LCM and industrial tapes in Asia. We recapitalized a graphic business as part of restructuring program in Europe and we are expanding our commercial capabilities in a number of these important market segment. We will also continue to improve our cost structure and maintain our capital discipline. This has been strength of ours over the years and it is something we will continue to focus on as evidenced by our increased level of restructuring savings estimated for 2015. I want to highlight that our productivity focus is not just about lowering costs and expanding margin, which are both obviously very crucial but also about becoming more competitive so we can grow profitably and better serve the less differentiated segment of our market. This is right overall strategy but I can tell you after my first 90 days as COO that we will be making some adjustments to the execution of this strategy that I believe will make us more competitive and further improve return in both of our core businesses. Let me just touch on some of these course correction. In the near term we face three key challenges. Rebalancing the dynamics between price, volume and mix and Pressure-sensitive Materials. Expanding margin in a less differentiated segments of this business. And winning in the value and contemporary segment in RBIS. In terms of PSM's price volume mix balance, we've already seen some progress with product mix actually being a modest positive to EBIT in the fourth quarter, we will continue to drive for improved mixed by focusing on the higher growth and margin potential segment of the market. In terms of other few challenges, the course corrections actually share a common thing. Both PSM and RBIS are in the process of further reducing the fixed cost structures to be more competitive in the less differentiated segments of their market. As I said earlier, these aren't just short-term cost place, it is part of our long-term strategy to win in a market place, expand margin and improve return. With these refinements underway, we are confident in our ability to achieve our long-term goal. My focus here is same as it has always been to deliver exceptional value for our customers and employees and our shareholders. Now I'll provide some color on the quarter. In Q4, we delivered a 30% increase and adjusted earnings per share on 1% organic sales growth with modest top line growth in PSM offsetting a decline RBIS. The impact of currency translation and the extra week were significant. Currency translation reduced reported sales by 3.7% in the fourth quarter and the extra week added 4.5%. Adjusted operating margin in the fourth quarter improved 70 basis points to 8.1% as the benefit of productivity initiatives and higher volume more than offset the net impact of raw material input costs and pricing. Restructuring saving in the quarter were $8 million and approximately $35 million for the year. And our adjusted tax rate for the fourth quarter was 26% and 31% for the full year better than expected due to the benefit of tax planning in the fourth quarter. The difference in our tax rate compared to the prior year contributed about $0.07 of EPS to the year, all which came in Q4. And the extra week provided a modest benefit to EPS for the year approximately nickel per share, all of which also benefited in Q4. Free cash flow was $122 million in the fourth quarter and $204 million for the year. Full year free cash fell well short of our usual 100% plus conversion of net income reflecting a combination of currency effects and higher working capital. As Dean mentioned, those higher working capital levels were due in large parts to steps we took to reduce the volatility associated with yearend customer receipt and vendor payment. We've begun to see the impact of those actions in 2015 with a roughly $40 million favorable swing in cash flow in the first weeks of January. Going forward we expect to resume our pattern of delivering free cash flow above the levels of net income. We repurchased 7.4 million shares in 2014 at a cost of $356 million and ended the year with roughly 92.5 million shares outstanding including dilution. We remained committed to returning cash to shareholders and have sufficient capacity to continue our share buyback program in a disciplined manner. But we are not as under leveraged as we look based on the simple net debt to EBITDA calculation of 1.4 yearend. As we said in the past, this ratio serves as a simple proxy for the rating agency measure that guides our policies for maintaining a solid balance sheet and optimal long-term cost of capital. The rating agency measures included a number of adjustments to debt that are exclusive from our simple metric such as the addition of under funded pension liabilities. The change in discount rates in 2014 among other factors increased our under funded pension liability by $170 million reducing our near-term leverage capacity, but again we have sufficient capacity to continue or disciplined share buyback program. Looking at the segments. Pressure-sensitive Materials sales in the fourth quarter were up approximately 2% on an organic basis due in part to tough comps against the prior year. Label impacted immaterial sales were up low single digit while combined sales with performance tapes and graphic were up mid-single digits, which graphics back on track as a services use in Europe are now largely behind us. On a regional basis, sales in North America declined modestly due to a combination of weekend market demand as well as loss of some low margin business. Western Europe was up low single digits slower than the pace we've seen earlier in the year and emerging regions grew mid single digits with the continuation of the softer growth we saw in Q3 for Asia Pacific, continued strong growth in Latin America and a modest decline in Eastern Europe. PSM's adjusted operating margin of 10.6% in the fourth quarter was up 100% basis points compared to last year as the benefits from productivity and higher volumes were partially offset by the net impact of pricing and raw material input costs. Results from Retail Branding and Information Solutions were disappointing. Sales declined 5% on an organic basis and operating margin contracted as the benefit of productivity initiatives and lower cost run incentive compensation were insufficient to overcome the impact of lower volume and other factors. We commented during previous earnings call on the share loss we've been experiencing within the value and contemporary segments in the US. While the rate of decline lessen in the fourth quarter for these segments, demand by European based retailers and brand owners which have been relatively strong for the better part of the year slowed in Q4. A large part of the slowdown among European customers reflects lower than expected sales of RFID products. RFID revenue was down by more than 10% on an organic basis in the fourth quarter due to the choppy demand that been discussed earlier. Outside of RFID, as I've said, we are focused on recapturing share in less differentiated segments of the market by redirecting efforts of our sales and customer service teams who serve factories in Asia particularly in China. At the same time, we are reducing our cost structure to improve competitiveness and continue to expand margins. Sales in Vancive Medical Technologies grew over 30% in the fourth quarter partly reflecting a delay in order that negatively impacted the third quarter. The segment's operating loss declined to nearly breakeven due largely to volume growth. In 2015, we will continue to focus on a milestone needed to drive long-term growth of this platform with the objective of achieving positive contribution and earnings by yearend. Turning now to the outlook for 2015. All things considered, we anticipate adjusted earning per share to be in the range of $3.20 to $3.40. Now I have to admit that this is one of the more challenging years we've had to call in a while due to extreme volatility in currency exchange rate and commodities markets. Having said that, we are focused on accelerating our cost reduction initiative to position ourselves to achieve our long-term goals regardless of the macro environment. We've outlined some of the key contributing factors to this guidance on slide 9 of our supplemental presentation materials. We estimate between 3% and 4% organic sales growth which is adjusted for the loss of the extra week of sales in 2014. While we are optimistic that the commercial actions we are taking will bolster organic growth in the back half of 2015. We are cautious about the near-term outlook given the weaker volumes we saw in Q4. Certainly in RBIS but also for label and packaging materials in North America and Asia. At current exchange rates, we estimate that currency translation will reduce net sales by approximately 6.5% and pretax earning by roughly $35 million or $0.25 a share. Combining carryover benefits from 2014 with new actions taken this year, we estimate that restructuring initiatives will contribute roughly $60 million pretax, or about $0.45 a share. We expect that 2015 tax rate back in the normal range. We've seen over the past few years in the low to mid 30% range. We estimate average shares outstanding assuming dilution of roughly 91 million shares reflecting our continued return of capital to shareholders and our outlook for free cash flow includes fixed and IP capital expenditures of approximately $175 million and cash restructuring cost of approximately $35 million. Importantly, our guidance for 2015 is consistent with the progress necessary to achieve our long-term financial goal. Slide 10 of the supplement materials highlight our progress against our 2012 and 2015 targets while Slide 11 shows progress against the new 2018 targets we provided this last year. We are pleased with what we expect to accomplish through the end of 2015, a roughly 20% compound annual growth and adjusted earnings per share over four years. And ROTC well on its way to the 16% plus target we set for 2018. We are confident that we will achieve the new set of objectives we've laid out for 2018 and we will continue to adjust course as necessary to ensure we do so. As we've said before, while we may be please, we won't be satisfied until we achieve all of our goals. In summary, we delivered another quarter and year of strong earnings per share growth despite a number of challenges. Our two market leading core businesses are well positioned for profitable growth which combined with our continued focus on productivity and capital discipline will enable us to expand margins and increase returns and achieve our 2015 and 2018 targets. Now we'll be happy to open it to questions.

[Operator Instructions] And first our question from the line Ghansham Panjabi, Robert W. Baird. Please go ahead, sir.

Hi, good morning. It is actually Mehul Dalia sitting in for Ghansham. How are you doing? What are you expecting in terms of free cash flow for 2015? Any range that you can give us.

Just that basically a converting a thing, we are going to get more than 100% of net income and free cash flow going forward.

Okay, great. And with working capital [Technical Difficulty] -- lower raw material cost in 2015, is there any reason that shouldn't be the case for the year?

I am sorry, can you repeat your question, some one kind of walked over your -- first part of your question.

And our next question will be from the line of George Staphos, Bank of America-Merrill Lynch. Please go ahead.

Hi, well, maybe out of a question of fairness. You want to put Mehul back in the queue and then I'll go next.

We will go for Mehul after you, George. Thanks.

Okay, understood. Thanks and good day everybody. I guess the question I had to start was on strategy. So if we rewind the tape and correct me where I am not phrasing it correctly, in the years -- last couple of years, you have been trying to grow more aggressively potentially even in markets where there was maybe lower margin because you thought it was positive for EVA, and if we fast forward to the current time, and this isn't a shocker. You've talked about this on evolving base for last few quarters, it sounds like you need to further reduce cost to be able to grow in some of the markets that you would like to grow into. So the question is did you initially as an enterprise misgauge your cost competitiveness versus peers and some of these markets that you wanted to grow at? And if that's the case, how do you know that you’ve still got the correct bead now on where your cost position needs to be going forward?

George, this is Dean. That's a good question. In PSM specifically, our strategy has been pretty much the same in terms of growing in the higher return segments, so that's graphics, performance tapes, our specialty products, et cetera. I think where we’ve got a little bit out of balance was in some of the more paper based segments especially in Asia, what was clear that we had room to grow on a positive EVA basis last year and we just overshot the mark. I think the teams were a little too aggressive, and the mix started to deteriorate somewhat and we didn't need to do it. And then, the course correction has actually helped us, and you can see the numbers certainly in the fourth quarter I think are a good indication of that. That being said, I think now with new management in materials, we're just taking another look and saying we wanted to be even more competitive in those segments, are there things we can do to tweak the strategy and accelerate our growth a little bit more. So some of that is around innovation in some of those lower margin segments, it’s material cost out, and it is also a reflection of our cost to survey, since I think we have a more precise view on what it takes to compete in those segments. So we are going to continue to grow our share in those segments, and we are confident that we can hit our 2018 goals for growth as well as deliver the margin targets that we had for PSM in 2018.

Okay. I guess two questions, and then I'll go back in queue. If we think about RFID, everything that we've heard from the company and our contacts over the last couple of years, the price points have become even more competitive for somebody wanting to explore RFID making payback period even much more attractive to a retailer looking to roll this out, recognizing that it is very lumpy, it is driven by a couple of customers at a time, why do you think rollout for RFID has maybe slowed a bit despite what you would advertise as a really good return to your customers if they adopt this? So that’d be question number one. And then on the restructuring and other savings that you expect for this year, I think you said $60 million. Correct me if I am wrong, I thought the last goal on that was $35 million, so an incremental amount here. Where are you finding, where should we find if we had visibility into this -- those incremental savings would come from? Thanks. I'll jump back in.

Okay, George, I'll handle the first question on RFID. I’d liken RFID to EAS, Electronics Article Security which also has a good payback for retailers and I would say it took probably 25 years for it to become 80% penetrated in the retail market. The fact is that retailers, because of the complexity of the number of stores they have, because of the opportunities they have to invest in a lot of different things, the technology investments by retailers simply take a long time to roll out. So, as I look at RFID, I think that's reflective of why we think this business which is nicely profitable for us will continue to grow at a nice rate. In the fourth quarter, we had a large customer who is big in RFID that expanded the number of items that they had in their stores last year. And then this year, reduced their inventory say probably weren’t as competitive as they wanted to be in the market place. Interestingly enough, they didn't cut back on the percentage of items that are tagged with RFID, but they said they’ll lower their inventories and that did have an impact on us. I will say that at the National Retail Federation show early in January, we probably heard more excitement, enthusiasm by US and Asian retailers than we've ever seen before. So we remain highly confident that this product line is going to continue expand.

Yes. Just I guess the only thing to add on that Dean said earlier demand has been choppy over the years. And this decline isn't similar to the decline we had a couple of years ago when one major retailer was pulling back. There is nobody really pulling back from what we are seeing. It's just because it's concentrated with relatively few number of retailers it will be choppy for a while as they roll out their programs. So as far as restructuring you are asking did the number increase. So we have basically accelerating restructuring initiatives for going forward, for all the regions we've laid out and $60 million of the anticipated levels of savings for what we are planning on right now. And roughly half of that is carryover from actions that we implemented in 2015, and the rest of it is from new actions as well, which will obviously have a carryover benefit going into 2016 as well.

And our next question will be from the line of Ghansham Panjabi. Please go ahead.

Hi, it's actually Mehul still. Thanks for getting me back in. My second question is also free cash flow related. Working capital, it seems like it should benefit from the timing of tender payment and also lower raw materials cost. Is there any reason not to assume that?

Well, free cash flow will benefit from the timing of payment and the yearend of timing that we talked through earlier. And that had about -- we estimated about $40 million swing which is how much free cash flow we saw in the first few weeks of the year improved in 2015. As far as the lower raw material costs, yes, that will have lower inventory but it will also have lower payable so it is really the question of how much sticks through on the bottom line which we commented on pretty hard to predict overall and over the long run as been commented earlier. Raw material and our end pricing end up matching up over the long run.

[Multiple Speakers] Okay, great. And just one last one. How much do you think working capital -- the working capital initiative that you talked about in 2014, how much do you think that cost it you free cash flow for 2014?

How much it cost us for 2015?

2014, so then working capital initiatives that you talked about just trying to see what normalized free cash flow in 2014 would have been without that initiative?

So impact is about $40 million.

$40 million. Right, great, thank you so much.

Our next question is from the line of Scott Gaffner from Barclays Capital. You may proceed.

Good morning. Dean in your -- I am sorry, Mitch in your commentary on the guidance, you mentioned that was one of the more challenging years to call and sometime-- so I was just wondering if you could walk us through maybe the level of conservatism you baked into the guidance, how you thought about it as you are coming into the year, did you approach it in any different way than you have in the past? Thanks.

Sure. We approached a little bit different because you can see that our guidance range is narrower than we've given at this time of the year which implies more certainty when actually that's not what we are trying to communicate here. So reason why it was more challenging is just as you saw what was going on with the currency exchange rates between December and January. The euro was just in free fall for a while and so that's one of the things that made it more difficult as we were going through just a month of January continue to update our outlook on that. And then two is just the full impact of raw material deflation that we are seeing. And how long if is there any gap, how long that it can hold down to and so forth. So that's what made it more challenging if you will. The other key question is on the top line. So we got 3% to 4% organic growth picked in, we said things slowdown as you heard in Q4 for RBIS as well as we had in North America for the materials business some declines. So that obviously impacts our thinking as well. We expect growth to come back and it's going to be little bit more second half weighted on the top line perspective given our starting point.

Okay. Would you say it slightly more conservative than usual or how would you feel about that?

No. I think over the last few years we've actually called it pretty well as far as setting guidance overall. And if you look at where we started off with the guidance at the beginning of this year, it was at $3.05, we ended up at $3.11 and that was largely due to the lower tax rate, a lot of factors going back and forth. And what we are trying to say is we've got the high ended numbers things up to go for us and at the low ended numbers things go against us, but we've got also some counter measures that go against those as well. So now I'd say it is pretty consistent with our methodology. It is definitely not more conservative.

Okay. I think going back to George's question on the restructuring actions or the incremental savings of $60 million. When I look back at last year, the cash restructuring costs that you guided to was about $55 million, the cash restructuring this year 2015, looks like it is going down to $35 million and yet the restructuring savings are increasing. Can you kind of walk us through how that is flowing through?

Yes. The biggest reason just has to do with the large restructuring we did of our graphics business in Europe. Europe restructurings tend to be more costly relative to the payback and lots of those costs were incurred in 2014. Some of will still be in 2015. So that's a little bit the reason for the disconnect.

Well, last question on working capital 2014. You talked about these working capital initiatives to reduce volatility, so it sounds like you actually took some sort of corrective action whether that was securitizing some of your receivables or something along those actions. Can you talk a little bit more about what the initiatives were that you took that cause a working capital changes?

It was just operational measures nothing securitization or anything else specifically being done. So we had seen -- if you recall last year and the year before we had seen significant free cash flow in Q4 and then large declines in Q1 and we were down over $150 million of Q1 of 2014 negative cash flow. And what we saw that there was -- from a number of terms and so forth that we had set up that there was just more cash being pulled into the previous year and we've commented on that at the end of 2013 that was look like $30 million had been pulled into 2013 and we basically took some actions to make sure that wasn't happening. And we have free cash flow measures across the business and it looks there was just more cash getting pulled into Q4 at the detriment to Q1 and we wanted to normalize that.

This is Dean. Just one more comment on the guidance and that is the other thing that's in our mind is how do we predict things like currency or raw material inputs for the back half of the year. And I think given the volatility that we saw in the first -- just recently, we are basically pegging our guidance based on the current rate for the euro. And lots of the commodities that we buy are forecasting cost increases for the back half of the year. Now whether or not you choose to believe that I mean it just makes a difficult because we just don't have that greater forward visibility. So I think we've been fairly conservative in the sense that we are kind of taking today's stake and clearly if things change, if the euro does something much different or raw material prices do something much different, I think from an investor point of view, you have to realize will be agile and will shift as need be.

Our next question from the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

Good morning, all. I was just wondering either Dean or Mitch, when you talk about raw materials and pricing, are you expecting to give back all of the benefit on the raw material side that you maybe expecting -- that you may get? Or there some of your operations where you can actually hang on to some?

Rosemarie, typically what happens over the cycle is that pricing levels on our industry tend to track over time when raw material prices are up -- across are up, prices go up when raw material cost go down, prices tend to trend down over time. And there is always lag time in the business and there are a lot of others obviously strategies that go in, in terms of pricing and cost out. So we are constantly looking for ways to thin our materials, get more productivity in our operation et cetera, et cetera. So it is actually very difficult I think for us to predict and project exactly what that looks like especially over a 12 months period.

And the only thing I would add is we've talked over the last couple of years about net headwind if you will price and raw material cost. Paper prices have gone up from where they were a couple of years ago and that's over half of our spend as paper based in sourcing, the drop in oil as everybody is focused on -- and we buy a number of raw material inputs that are based on oil but not highly linked to it. So we are seeing a little bit deflation right now. But we've actually been seeing a headwind on the net price and our objective here what you see in the guidance is to stem that tide if you will.

And just making sure I understood properly what Dean said in answer to a previous well actually additional comments, did you say that there is talk about raw material cost increases in the second half and if I understood that properly then you probably should be able to have more of a tailwind know for the short term?

Yes. The IHS forecast that we look at for again some of the either derivatives or close to the commodities that we buy. If they go up in the back half we would expect to see a short term benefit and then in the second half we could expect a bit of headwinds. So again I would say those forecasts are just they are forecast. We don't really know what's going to happen in the back half of the year. And we will adjust our pricing and our approach as we changes in the raw material market.

Okay, sure. So now still on the cost side but not sure necessarily but because gasoline prices I mean fuel prices are down while I guess that's the same as gasoline. Consumers are ending up with more money. Are you expecting or are you seeing sign or hearing anything about retailers actually getting ready for that which would be a net benefit on your RBIS and RFID possibly?

Well, I think RFID is not so much impacted by that. I do think that the hope is that consumers with more money in their pockets will buy more things. I think I read out just recently though that many consumers are just saving the money and putting in their pocket right now so I would say our forecast doesn't really consider a broad increase in end demand our market.

Yes. I think it's important to think about these -- the different dynamics regionally as well. So in Europe things are different obviously with what's going on there and where the currency is moving. There is not actually as much deflation as we would be seeing here in the US. And when you look at despite the economy having grown in the US, end consumption on the unit level of consumer package goods and so forth have been relatively flat. So would expect there is going to be an improvement here in the US, given -- if things continue where they are, sometime over 2015. But by and large we are not expecting a large broad pickup.

Okay, thanks. And if I may ask one last question. In your assumptions, in your guidance on the top line, do you already -- have you included the impacts from FX and then on the bottom line, have you included the potential impact from lower share count and is that 7.4 million share buyback should get in 2014, could you duplicate that in 2015?

So as far as the top line, our guidance is based on organic growth, the 4% that we've laid out there. So and as far as the share buyback, the implied amount of shares outstanding on average that we have for 2015 at $91 million is still more than $1.5 million to $2 million of dilution. It implies a level lower than what we did in 2014. We really stepped up our share buybacks in the third and fourth quarter given where the stock price was. And so this is just an estimate but really one of the biggest factors that dictate the level of share buyback is really how the stock is trading. And we look to opportunistically take advantage of market dislocation. So that is our estimate, but as we proven this past year, we estimated beginning of year we thought we'd have 97 million shares outstanding on average, we ended up with less than 96 million. And so we'll continue to monitor and adjust accordingly.

Our next question is from the line of Jeff Zekauskas with JP Morgan. Please go ahead.

Hi. Thanks very much. Can you speak to the utilization rate and PSM industry wide meaning I guess in the United States and Europe currently. Are we in the 70, low high 70s or low 80s or high 80s? Where do we set?

Well, I think it's a very difficult number to put your finger on as we said before; you don't have to run your coding lines 24x7, 365. You're not like paper machine and some of these assets run different product lines. I think the way I look at it is in Europe, there's not been a lot of additional capacity added over the last few years if anything describing a little bit of take out. In the US, we do have a competitor, small, privately held competitor that is adding capacity what I think as we said before. My guess is that they will not utilize some of their other lower productive capacity as we go forward. So people are expanding capacity in Asia as you might expect given decent growth there including ourselves, but I don't see fundamentally any big disruptions to the marketplace from capacity adds or reductions anywhere in the world. It's not a big task in our thinking.

So I think this year if I remember previous calls correctly, volume growth in North America and pressure sensitivities of – it's maybe flat or flat to up for the four quarters. And that's a slower rate of growth than GDP. And in the old days Pressure - sensitive Materials used to be sort of a GDP grower or GDP plus. Is it fair to say that the industry now is GDP minus or was there something peculiar about 2014? And are utilization rates in general tight or snug or are they loose?

Well, I think it is certainly we've been disappointed by the market growth in North America, I think its too early to make a call to say it's a GDP minus business because we've had over the average if you look over a multiyear period, it is probably around a GDP business in North America and when you juxtapose that with Europe actually, we've definitely GDP plus business over the past couple of years. So all I know I think in mature markets I look at the GDP business and then the business grows at a multiple of GDP in emerging markets, we don't really see a change to that trajectory. I think as I said before in North America have a little bit of a net increase to capacity this year, again we had a small competitor add capacity. And in Europe, I don't think there have been any real big changes. I know one of our competitors bought a company and ended up shutting down the factory. So I guess technically that would be a net reduction. So it is a very difficult thing to get any kind of precision on, Jeff.

So going into 2015, do you feel that demand conditions -- in PSM are strengthening or weakening? And with raw materials coming down, is it the case that your customers are maybe delaying purchases helping to get better price realization, so little bit later in the year. So how do you see the demand trajectory in PSM over the coming couple of quarters?

It's a great question. We definitely saw a slowdown in the fourth quarter in terms of organic growth. Customers don't try to either build inventories or reduce inventories in anticipation of raw material pricing mainly because most of them are small. They don't have a lot of place to store inventory. It tends to be a very customized business where they have to respond quickly to the customers, so most customers are reluctant to that, that their customer is going to actually order something. So we try not to see those kinds of -- those kinds of shift. Definitely, we saw Europe slowdown in the fourth quarter, we had been – I been anticipating that for two years and it's finally happened, so it had actually -- had much better buying demand in Europe over the past couple of years than I would have expected. North America continues to be relatively soft; we did see growth in the third quarter in the market. We haven't seen the fourth quarter numbers yet. It was interesting to hear that fourth quarter GDP wasn't as strong as everyone expected. So I think overall this year we're kind of expecting maybe a little smaller growth than normal. And you can see it reflected in our guidance range for organic growth for the year.

So in the quarter I think you said that PSM prices maybe edged to down. And if that's true why did they edge down or what was the source of the pricing pressure?

Well this is a theme we've been talking about for a number of quarters now. Jeff. And so big, good portion of that was actually carryover to the comments where year-over-year price impacts, but it's basically just looking to net impact and some of the less differentiated categories, there has been more pricing pressure and one of the thing we're looking to focus on is to make sure our pricing strategy ensure we have the right, long-term profitable growth to remain competitive and continue to invest over the long run. So that's a key area of focus right now.

And then lastly, how much was your pension funding in 2014 and what you expect it to be in 2015?

So it's over $400 million about $430 million of under-funded pension liability across all of our plans, the biggest one obviously being in the US, but we have a number of overseas plans. So that's the large adjustment just from the discount rates and everything else. So and it's not considered, it's expected to change that much between the end of 2015.

Right but when you funded it, in other words your pension contribution in 2014, what was that and what might it be in 2015?

So we did not have pension funding requirements in the US, it was nothing in 2014 and we don't have another pension funding requirement for the next couple of years in the US

Our next question from the line of Chris Kapsch from Topeka Capital Markets. You may proceed.

Yes. I had a follow-up on the FX headwind for 2015, just wondering if that, how much of that is Europe, it sounds like a lot of it. And then just on FX, are there any instances where the changing currency rates have actually changed the competitiveness of your local businesses overseas or is this truly just a translation issue?

This is by and large translation, I mean us as well as our competitors manufacture the products in the regions where we did business. So this is essentially all translation and it was essentially all Europe. Now one of the things in the past that tailwind that we've had was the fact that Renminbi was appreciating over the years that did not happen in 2014. So we lost that tailwind and then had the new headwind of FX in our second half that going into this year as well and will continue. And other thing is just to give rough rule of thumb for the Euro is very simple on high level but for every cent movement in the euro to the U.S. dollar would basically have a penny movement on EPS as well. So cent equals a cent, roughly.

Okay, and then just to follow up in pressure sensitive, the margin improvement year-over-year in the quarter 100 basis points. Just wondering was that fairly consistent across the regions or where was the improvement most pronounced?

Improvement was pretty broad-based, but we thought Latin America a little bit more than we saw elsewhere, but we've seen it in Europe and Asia as well. So we've seen it pretty broad-based, I'd say North America was the place that we saw the least amount of overall improvement, if you look at this pure operational standpoint, which lower volume environment makes that challenging of course.

And then just on that lower volume that you saw in --a lower demand you saw in North America, was that -- and I know you haven't got any industry data yet, but your sense at this point. Was that more market driven or was it intentional, intentionally rationalizing some of your lower margin, maybe your paper-based roll stock grades, or was it just a competitor sort of taking share? If you could just provide a little bit more color on why the demand being down?

Yes. So we don't have the data right now as you highlighted, so we don't know is the short answer. But we think that a big chunk of it was just the market continued to be rather anemic, but there was a couple of specific opportunities that were extremely low margin, that we let walk, if you will. They were extremely low, variable margin. So that the impact. I will say things can be choppy in this industry, given where we are in the overall value chain. Earnings as top line growth in the first few weeks of this year in North America have actually picked up, whereas all the other regions, the trends basically continued with what we saw in Q4. So things picked up a little bit in North America, so whether that's end demand or just broad inventory movements throughout the entire value chain and so forth, it's hard to predict.

I see, and then I had also a follow-up on the RBIS business and this issue was having lost share in the value and the contemporary segment. I think Dean had talked about when we were out there visiting, and possibly when he was in New York late last year, about one of the tactical things that might address this was focusing on conveying to the customers that they should -- in that particular value and contemporary segment, that they should shift more towards nominated tags and ticketing program versus open. And I think there were some initial successes with the big customer there. I'm just wondering is that something that you still sees as a way to recapture share in that segment and how is that going?

Well I mean that is part of our strategy, which is to convince our customers to use nominated programs, because we at the end of the day believe that they will get the best economics there. Now, not every customer chooses to go with that strategy. And frankly, the mistake we made was not listening to customers who work in those programs and deciding to be competitive. Now we changed the strategy in the fourth quarter, and I would say the decline, the amount of decline was arrested. Unfortunately, the business in Europe slowed down, certainly the trend of the business look worse. I think from my perspective, the team is -- we're doing a lot better job listening to customers. And we're getting a lot more competitive in winning the battles in Asia. Fortunately for us, in some of those types of programs, customers don't insist on using sort of global raw materials back. So the opportunity is local materials which are lower cost, so we still believe we can be competitive in that business. We have in the past and frankly I think we just lost our focus, so we are taking additional actions though as Mitch talked about to ensure that we're more competitive in those segments. And that's part of the acceleration in our restructuring, because frankly, we're really disappointed about our performance in RBIS for the year, and we don't have a good excuse for it frankly. So we're going to be more competitive, we likely won't see a huge change in trajectory really until the second quarter when we have a seasonally strong quarter. But the team is focused, we've got a renewed sense of energy there, we've got more aggressive sales programs as well as a focus on further reducing costs and our material costs in that portion of the market. So we feel we had a better performance last year again, but we're focused on delivering in 2015.

I think one of the key overall things is we're looking to provide a value proposition that's fit for purpose for each segment and each customer values overall. And most of the market wants a global consistency of products and so forth, others are less concerned about, and so we need to adjust accordingly. And I'd say it's too broad-based, we've been talking about the value in contemporary segments, you actually can't make comments about each segment broad-based of what the customer behaviors are. Each customer is in a different level of cycle and has some different needs, and so we're basically adjusting our approach to be able to win success with those customers in those spaces.

Our next question from the line of John McNulty with Credit Suisse, please go ahead.

Good morning guys, this is Rob batting for John. Just a quick one on your 2015 targets. On your most recent Investor Day, you highlighted that you guys think you can hit the low end of your RBIS, adjusted EBIT margin range that you put out in 2012. Is that so realistic given some of the recent challenges in that business? Thanks.

I think hitting to the 2015 margin target given the end of the year is going to be extremely difficult. We'll make good progress, we'll get back on -- our goal is to get back on track in the weight of performance improvements that we've shown in the previous two years. And we're still focused on delivering the 2018 target.

All targets we laid out for 2015, we're confident we're going to basically hit all of them with the exception of RBIS margin target. But we consider we've got a few years ahead of us, and some of the adjustments we're making are confident we'll hit the 2018 margin targets.

And we'll proceed with our last question from the line of Anthony Pettinari from Citigroup. Please go ahead.

Good morning. Just had a couple of follow-ups on, I just had a couple of follow-ups on RBIS. I guess first if you strip out the value in contemporary segments, would you describe your market share outside of those categories as stable or growing or are you seeing any incremental pressure? If you were to look at in faster premium or performance segments. And the second question, do you have a sense of what overall apparel industry volumes grew at in 2014 versus your organic growth in RBIS?

Yeah so in the performance and the premium segments I would say we're taking market share, there our strategies of global consistency, of innovation, really good focused sales efforts are helping us win business. I mean that's the good news in the story. And we're quite pleased about that as well as RFID. We have more than 50% market share in that category and I think it reflects a successful execution of our strategy there. Actually apparel unit growth importing into the US was pretty -- was quite robust this year

Low to middle single digit.

Low to mid single digit, so the disappointing part for me is that we should have had a terrific year because the market is there. And that's the real good news there is that market demand for apparel in the imports for actually for both Europe and North America was quite robust. And so it's really up to us to tweak our strategy and get more competitive. And I actually expect that trend to continue. The trend of market growth for apparel I should say to be clearer.

Okay. That's helpful and then just one last follow-up on the $60 million cost savings. Apologies if I missed this earlier, but do you have a sense of the timing of the realization of those cost savings as we move through the year?

They will be coming throughout the year, more weighted towards the last three quarters.

Mr. Scarborough, I'll be turning the call back to you. Sir, so you may continue with your presentation or closing remarks.

Thanks, Frank. Just a quick recap. Our playbook is the same. We're continuing to pursue the broad strategic priorities that we've communicated in the past. And we're making some fine tuning right now where appropriate. And we look forward to seeing that strategy and execution translate into superior total shareholder return over the long term. Thank you for joining us and good bye.