Avery Dennison Corporation Q2 2009 Earnings Call Transcript

Jul.30.09 | About: Avery Dennison (AVY)

Avery Dennison Corporation (NYSE:AVY)

Q2 2009 Earnings Call

July 30, 2009 2:00 pm ET

Executives

Eric Leeds – Head of IR

Dean Scarborough – President and CEO

Dan O’Bryant – EVP of Finance and CFO

Analysts

George Staphos – Banc of America Securities/Merrill Lynch

Analyst for Jeff Zekauskas – JP Morgan Securities

John McNulty – Credit Suisse

John Roberts – Buckingham Research Group

Gansham Panjabi – Robert W. Baird & Co.

Operator

Welcome to the Avery Dennison earnings conference call for the quarter ended July 4th, 2009. This call is being recorded and will be available for replay from 1 p.m. Pacific Time today through midnight Pacific Time, August 3, 2009. (Operator Instructions) I would now like to turn the conference over to Mr. Eric Leeds, Avery Dennison’s Head of Investor Relations. Please go ahead, sir.

Eric Leeds

Thank you. Welcome everyone. Our discussion today will reference the earnings release that we issued earlier along with the slide presentation titled, Second Quarter 2009 Financial Review and Analysis. Both documents were furnished today with our 8-K and posted at the Investor's Section of our Web site at www.investors.averydennison.com. We remind you that these results are preliminary as we have not yet filed our 10-Q.

Our news release references GAAP operating margin, which includes interest expense, restructuring and other charges included in the other expense line of our P&L. Also referenced are transition costs associated with acquisition integrations. Restructuring charges and integration transition costs tend to be fairly disparate in amount, frequency, and timing. In light of the nature of these items, we will focus our margin commentary on pre-tax results before their effect and before interest expense. This detail is in schedules A2 to A5 of the financial statements accompanying today’s earning’s release.

We also remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to uncertainty. The Safe Harbor statement included in the documents that we provided today, along with our 2008 form 10-K, address certain risk factors that could cause actual results to differ from our expectations.

On the call today are Dean Scarborough, President and CEO; Dan O’Bryant, Executive Vice President and CFO and, Mitch Butier, Corporate Vice President of Global Finance. Dan is participating remotely. I’ll now turn the call over to Dean.

Dean Scarborough

Thanks Eric. Good morning and good afternoon to those of you on the East coast. I will start with the announcement that the board of directors has reduced the quarterly dividend from $0.41 to $0.20 per share. Before we go over the quarter I want to explain our decision and particularly the timing and the size of the reduction.

We know how important the dividend is to our shareholders. The board is committed to paying a dividend and we did not take this decision lightly. Given the uncertainty about the timing and extent of an economic recovery and given the increased cash requirements of pension contributions, we have a responsibility to take this action. The dividend reduction is prudent and in the long-term interest of the company.

In the first half of the year we held the dividend at $0.41 per share through two quarters of declining earnings because we believed that market deterioration would start to moderate and business conditions would begin to recover meaningfully in the second half of 2009. While conditions may have hit bottom, the pace and strength of the recovery still remains highly uncertain. Our planning scenarios now include the possibility we will see weak market conditions throughout 2010. At the same time, it is clear we will have to make significant cash contributions to our pension fund and this could range from $200-300 million over the next several years.

The size of the dividend reduction reflects a combination of our near-term debt reduction goal as well as our target to pay a cash dividend of 40-50% of normalized earnings over time. When our outlook improves we expect to raise the dividend in line with this target. The new dividend rate will enable us to reduce debt to levels we believe will help us maintain our current credit rating, our access to the commercial paper market and to ensure that we comply with our debt covenants.

We believe that this new dividend rate will be sustainable even under our low end scenario. We will also maintain our ability to continue to invest in new growth platforms and emerging business opportunities such as new label materials, RFID and Japan.

Turning now to the second quarter the challenging macroeconomic environment continues especially in our retail businesses. Volumes for all of our business segments declined and drove net sales down 14% on an organic basis and adjusted profit down 42%. Operating margin contracted to 6.2% as the lower volumes reduced fixed cost leverage.

I am pleased that we maintained our gross margin in the face of a substantial decline in volume, largely because of our cost out restructuring actions and pricing discipline. We also improved working capital efficiency and in fact ended the quarter with our inventory turns at the highest level in more than two years.

I want to thank the employees of Avery Dennison for their exceptional performance on these initiatives. These actions, along with continued investment in growth will position the company for stronger profit growth when volumes improve.

Now I will turn the call over to Dan who will take you through the quarter in more detail.

Dan O'Bryant

Thank you Dean. Let’s begin with a summary of preliminary results for the second quarter on slide seven and eight of the handout. Starting on slide seven, on an organic basis in the second quarter sales declined approximately14% with the decline attributable to lower volume. Throughout my comments all references to organic sales include results before the impact of acquisitions, foreign currency translation and the extra week in our 2009 fiscal calendar.

Reported sales for the second quarter were down 20%. Currency translation reduced reported sales growth by 6.9% with a $0.04 negative impact on earnings per share. Although the slowdown is impacting us globally with the emerging markets declining substantially as well with the exception of our raw materials business in Asia which was up in the quarter.

First quarter operating margin before restructuring charges and other items declined to just over 6%, reflecting reduced fixed cost leverage, partially offset by pricing, productivity improvements and restructuring.

Turning to slide eight, we continue our efforts to expand our restructuring actions. We have increased our target to in excess of $160 million in annualized savings from restructuring actions initiated since the fourth quarter of 2008 and we expect to reach this run rate in mid-2010. We are estimating a $75 million benefit net of transition costs in 2009.

We estimate we will incur about $130 million of total restructuring charges associated with the program with the majority of these costs incurred during 2009. In addition to the savings from the new actions we continue to expect about $40 million of carry over savings from previously implemented actions.

At the end of the second quarter we achieved a run rate savings representing 50% of our restructuring target so we are right on track. Our adjusted tax rate for the quarter was 15%. Our ongoing annual tax rate is expected to be in the low 20% range although it can vary significantly from quarter-to-quarter. Adjusted earnings per share of $0.56 in the quarter includes $0.18 of restructuring, asset impairment and other charges.

Now as previously announced, in the first quarter of 2009 the company began an interim goodwill impairment test that resulted in a non-cash impairment charge of $832 million. We reported this charge in our first quarter 10-Q. In the second quarter of 2009 we completed the test with no additional charges incurred.

Slide nine shows our recent sales trends and as mentioned sales declined organically by nearly 14% for the quarter which was similar to Q1. Turning to slide 10, it is worth noting again that consolidated gross margin was flat to prior year, notwithstanding the reduction in sales. On a sequential basis gross margin was up 260 basis points from the first quarter. As Dean mentioned our restructuring program, productivity initiatives and pricing discipline are all making a big difference.

In addition to gross margin holding steady the other highlight for the quarter is the sequential improvement in margin in our largest segment, Pressure Sensitive Materials. This segment’s Q2 margin grew 220 basis points from that in Q1. As you know this is a relatively non-seasonal business so sequential comps are meaningful here. Again, this is evidence of the effectiveness of our restructuring, productivity improvements and pricing actions.

Moving to slide 11, we have already talked about gross margin. MG&A declined $41 million against prior year due to cost reductions and currency translation. The factors affecting profitability are the same across all segments; reduced fixed costs leverage more than offset restructuring, productivity improvements and pricing.

Turning to slide 12, organic sales in our Pressure Sensitive Materials segment were down approximately 10%. The sales decline in our rolled materials business was less than 10%. Europe was down low double digits. North America was down mid single digits and emerging markets were down low single digits. As mentioned, with emerging markets Asia was up slightly. As we said last quarter we believe the stability of our rolled materials business continues to be masked by high inventories. This business, which is the company’s largest single business has a strong tie to consumer staples so we are confident we will see growth in this business when both the economy and inventories stabilize.

The Graphics and Reflectives business in this segment continues to experience sharp sales declines. Graphics products generally represent more discretionary purchases by businesses often linked to promotional spending which has been dramatically cut by businesses just about everywhere. Fleet marketing and other signage applications are delayed when times are tough.

RIS’ results are summarized on slide 13. The decline in sales primarily reflected the continued weakness of the retail apparel market in the U.S. and Europe. Volumes continue to be negatively impacted by retail store closures and inventory de-stocking. We are experiencing delays and reductions in orders for fall season merchandise.

As you know, we are implementing significant restructuring measures to reduce RIS’ fixed costs while introducing new products and improving new value added services to increase its share of the large market for tickets and tags used in apparel retail.

Turning to slide 14, the decline in Office and Consumer product sales reflected weak end market demand led by slower activity in the commercial channel consistent with declining white collar employment. Exposure to the automotive and housing markets again had a strong negative impact on our specialty converting businesses. Here too we are implementing significant restructuring measures.

Looking now at slide 15, our cash flow slide, year-to-date free cash flow continues to be relatively stable, declining just over $12 million versus 2008. As Dean talked about, we are steadfastly committed to maximizing free cash flow in 2009 and beyond especially if poor market conditions continue.

Now as you know we are not providing a 2009 earnings forecast. In January we did provide to you some of the factors that would drive our 2009 results and we updated them in April. Slide 16 provides a June update to some of these factors. Namely, the currency headwind would be 200 basis points lower at current exchange rates, CapEx is now targeted to be between $115-130 million down from a range of $120-150 million. Third, we had a class action settlement of $37 million as reported in our 10-Q. Finally, the non-cash impairment charge reported in our fourth quarter 10-Q will adversely impact reported EPS but not free cash flow.

Before turning the call back to Dean I too wanted to say that the board’s decision on the dividend was obviously a difficult one but should volumes continue to be weak the increase in debt reduction gives us some assurance our balance sheet will continue to strengthen. As Dean said, taking precautionary actions at this time is the right thing for us to do.

Now I will turn the call back to Dean.

Dean Scarborough

Thanks Dan. I just have a few comments before we go to Q&A. Again, on the dividend reduction I want to reemphasize we are not doing this because the company is in a crisis but in fact, it is a difficult but sensible business judgment. I think the question is why now. As we looked at the second quarter we got thrown a number of curve balls. First of all, volume continues to be low and in fact the only upside we see in earnings is coming from cost cutting and restructuring, not from volume improvement.

We anticipate there will not be a dramatic recovery in the back half of the year or even in 2010 and that is definitely a change from our outlook. That has certainly been informed by the fact that none of our businesses are really showing any signs of volume improvement. Third, the additional headwinds with the cash needed for our pension expense is also new information. We continue to operate with discipline in a very tough economy, noted by our gross margin trajectory in the business and we still have great franchises with market leadership in very good markiets and we are well positioned to rebound when volumes recover.

Thank you. We will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of George Staphos – Banc of America Securities/Merrill Lynch.

George Staphos – Banc of America Securities/Merrill Lynch

I wanted to go through the volume trends first. Earlier you said there has been no pick up from what you could see. Can you provide any color perhaps on what some of the early third quarter trends look like, adjusting for seasonality if there is any factor there in some of the key businesses. As a tag along question, you mentioned you are seeing continued signs of cancellations and delays in orders specific to the RIS business. Can you give us a bit more color on that?

Dean Scarborough

First of all, we are about three weeks into the third quarter and it looks just like May and June. I am also reluctant to take any judgments from that. Europe will likely take the opportunity through their normal shut down period to take an extended shut down. I think a lot of businesses are thinking and talking about that. I am not optimistic the third quarter is going to show any kind of dramatic improvement.

When you talk about RIS, in fact Europe really did play a role here. Our order rates from European based retailers and brand owners were decreasing the last few quarters at a single digit rate and they moved into double digit territory in the second quarter. In fact, that was probably the single biggest surprise that I saw in that business. In the U.S. most of the retailers I talked to have this attitude; that is, I would rather run out of stock of something than have to mark it down because I can’t sell it.

In fact, most of the retailers and brand owners have anywhere from 15-20% inventory reduction targets and even when they place initial orders they are placing lower initial orders than they normally do and again will chase replenishment rather than having it kind of flow in. So they have definitely changed their buying behaviors there.

Finally, in Pressure Sensitive I think most of us see Pressure Sensitive, or at least those of us who have been around for awhile, it is a bit of a leading indicator. I would say that we have seen a little bit of an improvement in the emerging markets of Asia where we saw a little bit of a rebound in the back part of the quarter. Maybe we have hit a bottom in the U.S. but I wouldn’t characterize it as growth. As well in Europe I am just not sure we have hit the bottom yet. Hopefully that is enough color.

George Staphos – Banc of America Securities/Merrill Lynch

One of the things we have been hearing about during earnings season is companies we track and their customers finding it increasingly able and possible to operate with lower working capital and lower inventories. That is good but how could that affect the RIS business in the years to come? Do you think that actually might make the business more valuable to its customers? Do you think it leads to a continued drag on volume over time? How do you think that could play out relative to RIS and relative to its value to the whole company?

Dean Scarborough

I think it actually plays to our strength. Retailers are basically moving to multiple seasons. They are placing smaller orders more frequently. Therefore the complexity of their product offering and supply chain goes up. They are certainly not adding staff to deal with that complexity. So, increasingly they have been I would say that is where Avery Dennison is able to step in and manage that for them.

What we are fighting right now is inventory reduction and lower order sizes. If there is a bright spot our variable margins have improved still a bit even with dramatic reductions in order sizes. At least at that level I think we are handling that trend very well. But because this is a high variable margin business it is really tough to show any progress. We certainly didn’t in this quarter until volumes start to improve.

Operator

The next question comes from the line of Jeff Zekauskas – JP Morgan Securities.

Analyst for Jeff Zekauskas – JP Morgan Securities

The commentary in the press release said the size of the dividend reduction reflects a combination of the company’s near-term debt reduction targets and a target to pay a cash dividend of 40-50% of normalized earnings. So is that to be interpreted the dividend is now annualized $0.80 that would mean the normalized earnings are $1.60 to $2.00. Is that the way to think about it?

Dan O'Bryant

Our goal here is to provide guidance. Obviously our dividend, our 40-50% target is a historical that we have had for a number of years. Certainly for the last few quarter’s the payout ratio is way over that target. So the board has been looking at longer term factors and I would encourage you not to try to triangulate all this in a very short-term manner to try to estimate what guidance is in there. This is definitely not normalized earnings.

Analyst for Jeff Zekauskas – JP Morgan Securities

So these seem too low for normalized earnings?

Dean Scarborough

Absolutely. We are not normally in an environment where our volumes are dropping 13-14%.

Analyst for Jeff Zekauskas – JP Morgan Securities

A clarification on the pension funding requirements. So $200-300 million to be spent over the next few years I think there was a $25 million outlay in 2009. Do you know roughly how much it may be in 2010 and 2011? Just to get near-term?

Dan O'Bryant

That is going to ramp up over the next few years and for 2010 it is roughly in the same range of what we have laid out for 2009, around $25 million. Then it does ramp up over that through 2013 to get to the $200-300 million range. That range is based on a number of factors. Obviously when you consider what your pension outlay is going to be such as future return in the equity markets, discount rates and so forth. It is not that much immediately in 2010 but it ramps up after that.

Analyst for Jeff Zekauskas – JP Morgan Securities

The restructuring costs of $130 million for 2009 I think there is about $65 million that has occurred so far. Another $65 million to come. Is that correct or is the loss on extinguishment of debt also a part of this?

Dan O'Bryant

We are going to be spending $130 million for the current restructuring initiatives we started in Q4 2008. Some of the restructuring you saw in the first half of the year related to the restructuring initiatives we started before that. We have implemented 50% of the initiatives. We are hitting 50% of the run rate savings as of the end of June. We have a little bit more than 50% of the $130 million from the Q4 actions left to spend. That will not all be in 2009. That will go into 2010.

Analyst for Jeff Zekauskas – JP Morgan Securities

So the $130 million in costs will go into 2010?

Dan O'Bryant

Correct. There is a timing difference between when you see it in our P&L and when we take the charge versus what the cash outlay is.

Operator

The next question comes from the line of John McNulty – Credit Suisse.

John McNulty – Credit Suisse

With regard to cost cutting, up to $75 million that you expect to get this year how much of it hit in the first half and sequentially how much of an improvement should we be looking for?

Dan O'Bryant

We are looking for $160 million overall annualized with the full implement. $75 million of that is expected to hit this year. If we take what we implemented as of the end of June we are at $80 million run rate. Year-to-date what we have seen from that it is about 1/3 of the $75 million, approximately $25 million of that so far.

John McNulty – Credit Suisse

So in the second half of the year we could be seeing something in a neighborhood of $40-50 million of incremental cost savings?

Dan O'Bryant

Yes. If you think of it as just a ramping up curve of costs out there is going to be a lot more in the second half than we saw in the first half.

John McNulty – Credit Suisse

With regard to pricing in the pressure sensitive area, I believe in your opening comments you spoke about how part of what drove the margin was your pricing action. Can you give us some clarity as to what those specifically were?

Dean Scarborough

If you recall, last year we had this pretty large gap between the inflation we were feeling and our pricing actions. We finally just about caught up in that business. We are raising prices I think 2-3 times last year. We raised prices again in January and then during the first quarter especially in countries where we had some pretty wild currency swings on top of the inflation in the first quarter. Those seem to be holding right now.

John McNulty – Credit Suisse

So what was price up year-over-year in the pressure sensitive business?

Dean Scarborough

I’m not sure we give that information by sector but it is up definitely especially over last year from a low.

John McNulty – Credit Suisse

At the end of your discussion you had talked about as far as the dividend cuts why now and volumes haven’t gotten any better and you were worried about the pension requirements. It seems like those were two of the big ones. Your costs it looks like you have incremental cost cuts coming in. The pension hit of $25 million doesn’t sound like it is a deal maker or breaker. Is there anything else that is kind of concerning you or concerning the board in terms of why such a dramatic cut in the dividend was necessary now versus even in the first quarter?

Dean Scarborough

All of the earnings we had a benefit, and I take that lightly because it was less worse in the second quarter than it was in the first quarter. I think it is all about cost cutting. There is no volume impact at all. We had assumed in our planning with the board earlier in the year that we would see a recovery in the back half of 2009, relatively, I wouldn’t say strong, but a decent recovery in 2010. As we look at our worst case scenario, our low end scenario, and say what if we don’t have a recovery in the back half of 2009 and 2010 is flat or down a little bit what would happen? What would happen is a series of events that would not look very good.

We would potentially have problems meeting our debt covenants or lose our access to commercial paper. That would cost us another $20 million or so a year. If we ran into covenant trouble that would not be a good thing. I think the board took the prudent action in saying, hey look in a really bad forward-looking volume scenario and with the additional pension costs we have looking at the business, what is the most prudent course of action? Because the dividend reduction has a cumulative benefit over time and if we wait until the last minute it is too late. So that was really the feeling. The pension over time, that is a headwind and just because it is not next year, I think it is almost irrelevant. It is still $200-300 million of cash outlay we had not planned for in our earlier scenarios. So that is how we think about it.

Operator

The next question comes from the line of John Roberts – Buckingham Research Group.

John Roberts – Buckingham Research Group

Did you learn anything new about the pension during the quarter? Say the impairment charge, did it trigger any funding requirements? The markets have actually gotten better since the start of the year and so forth and I don’t recall last quarter the pension coming up as a major issue.

Dean Scarborough

The pension is something that is one of the big reasons of the funding requirements of the pension over the next few years is the decline in the equity values obviously. It is something we are watching and monitoring as well as the considerations around the legislative changes we have seen. So, it was completely realized in the second quarter about the magnitude and extent of the funding requirements over the next 3-5 years working with our consultants and actuaries on what the requirements would be.

John Roberts – Buckingham Research Group

You completed a study or analysis that kind of came to fruition here during this quarter?

Dan O'Bryant

Yes.

Dean Scarborough

The impairment had nothing to do with that analysis.

John Roberts – Buckingham Research Group

That tax rate of 15% currently and then low 20’s on a forward basis, the second half of 2009 will be at 15 or low 20’s?

Dan O'Bryant

Right now low 20’s is what our expectation is for tax rate over the coming years. That will vary year to year and even more significantly quarter-to-quarter. The GAAP tax rate this year will be artificially low because of the size of the goodwill impairment charge we took in Q1. If you adjust for that our tax rate we are currently anticipating, and there is a range, but it is around 15%. That is what we used for the quarter and expect for the full year.

John Roberts – Buckingham Research Group

For GAAP earnings in the third and fourth quarter?

Dan O'Bryant

Yes, the pro forma earnings which would be GAAP in the second half.

Operator

The next question comes from the line of Analyst for Jeff Zekauskas – JP Morgan Securities.

Analyst for Jeff Zekauskas – JP Morgan Securities

The earlier remarks that things could be weaker through 2010, is that everywhere or is that particularly in RIS? What does that sort of entail? In weakness, does that mean volume is down 3% or it is down 8%? How does one think about it?

Dean Scarborough

Our low scenario we are looking at a range of scenarios. High, base case and low. Our low scenario we are looking at no recovery in the back half of 2009 so a continuation of the current trends. And a slight decline, flat to slightly down in terms of volume in 2010. It is tough to get more granular than that. Fundamentally what we are seeing is much an l-shaped recovery. In other words no recovery in our low case scenario. That is what the board based their decision on.

Analyst for Jeff Zekauskas – JP Morgan Securities

Again is that really everywhere or driven by particularly the RIS business?

Dean Scarborough

It is driven by all our businesses. I mean, pressure sensitive is down double digit percent. That business tends to be a leading indicator. We assumed in that scenario that Europe would continue to fall in the back half of the year. Certainly the retail sector in office products is driven by white collar employment which we don’t expect will rebound very quickly. Then consumer spending for retail and apparel, again in that scenario, basically assumes consumers are saving whatever income they have and not increasing their spending levels as consumers continue to deliver. That is how that works. That may sound really conservative but I think running the company in this environment it is prudent to do so.

Analyst for Jeff Zekauskas – JP Morgan Securities

Should the depreciation and amortization charges change with all of these restructuring charges being taken or are the restructuring charges largely employee related?

Dan O'Bryant

I think the question was will our depreciation charges go down over time? Yes, they will be declining and we have seen that because of some of the write offs we have had with the restructuring charges. Also you will notice our capital expenditures we have ratcheted way down to reflect the current environment. So our depreciation is higher than our CapEx. Yes you will see that.

Analyst for Jeff Zekauskas – JP Morgan Securities

Do you have an initial D&A target for this year and next year?

Dan O'Bryant

We don’t have specific targets for D&A and we are not providing guidance as far as 2009 and forward.

Analyst for Jeff Zekauskas – JP Morgan Securities

If it goes down is it going down single digit million? $10 million? Just an order of magnitude without giving an exact number.

Dan O'Bryant

It is going to continue the trend we have seen over the last year.

Operator

The next question comes from the line of George Staphos – Banc of America Securities/Merrill Lynch.

George Staphos – Banc of America Securities/Merrill Lynch

On the subject of the restructuring you will be doing within RIS and the other markets, obviously the company has been pretty aggressive in restructuring and cutting costs for many years now within its businesses and within those businesses over the last couple of years. What is next? What is left to do? What do you hope to accomplish with these restructurings? What will be the one or tenets behind it? What will you accomplish with this restructuring and how perhaps manufacturing processes change within those businesses?

Dean Scarborough

Actually if you look over the last couple of years I think the headcount is down almost 4,000 people in RIS and the first wave of that, I would say that was really all about the first 18 months, was simply taking out the overlap and the duplication within Paxar and with Avery Dennison. Now we have two objectives. One is to reduce our fixed costs to a level that is appropriate given the reduction of volume in the business. Second, we believe on top of that there is an opportunity for a significant amount of productivity that can happen through basically standardizing the work processes we have in customer service, order processing as well as order fulfillment in our factories.

We have made good progress I think so far in the factory this year but we still have quite a bit of work to do in the front end of the business. Some of that will require some automation and investment in information technology as well.

George Staphos – Banc of America Securities/Merrill Lynch

Is there a trade off you worry about? These businesses based on my impression, you obviously know them a lot better than we do, are very decentralized. They are very much driven by reacting to your customers. To the extent that you perhaps have automation and try to centralize, do you risk perhaps having that very quick reaction time and maybe now is not the right environment to be worrying about them because demand is down so much but do you perhaps impact the business ability and its advantages when we finally do have that recovery hopefully sooner rather than later?

Dean Scarborough

Actually, here is the way I look at it. Day one when we bought the business we had a lot of independent, family-run restaurants and now we are building Burger King. All the processes inside the restaurants all actually look identical but the customer can still have it their way, if you will. There is still a high amount of customization that needs to occur in the businesses. So what we have been doing is standardizing and streamlining processes. The business is now organized globally on a functional basis so we have people in charge of the supply chain around the world and in charge of customer service around the world because our goal is to have the customer feel the same good, high quality level of service no matter where they are.

I actually see a bigger risk of not doing it than doing it today. As cycle times decrease and customers expect to get the same service no matter where they are sourcing their garments. We are actually the only game in town that can actually provide that.

George Staphos – Banc of America Securities/Merrill Lynch

I know this is kind of hard to gauge this given where we are right now economically, but you still feel this as a 12% operating margin business or whatever goal you provided in the past? Do you still feel equally good now about the earnings power within RIS [courtesy packs] than you did a couple of years ago? When we finally do get to that recovery.

Dean Scarborough

At the risk of my credibility I haven’t given up on that goal for this business because I think it is absolutely doable. It looks really far from where we are today but given the variable margins in this business which has expanded, it doesn’t take that much more volume and it won’t going into the future, to realize that objective.

Operator

The next question comes from the line of Gansham Panjabi – Robert W. Baird & Co.

Gansham Panjabi – Robert W. Baird & Co.

There seems to be a fair amount of debate in Washington on changing the corporate overseas tax rate. Can you just give us some color on how you think that could impact your overall tax rate, understanding it is well below at least your historical levels? Is this something that could go up 3-4% or something more meaningful?

Dean Scarborough

It is definitely a risk factor. I am not very happy with a lot of the proposals that are sitting in Washington right now. Here is the risk for us. We get a lot of our earnings from overseas corporations and for some reason the U.S. government feels that is just a pot of money they can dip into and it doesn’t really impact anything. It could have an impact on us for sure. It is definitely a risk factor going forward.

Gansham Panjabi – Robert W. Baird & Co.

In terms of your RIS business I assume CIT is a big provider of working capital to a lot of your customers. Given the troubles there have you seen any sort of volatility in your accounts receivables?

Dean Scarborough

Actually we did a check of our key accounts and all that. It is a pretty minor factor for us.

Gansham Panjabi – Robert W. Baird & Co.

That includes PSM too?

Dan O'Bryant

Given the nature of our customer base it is extremely distributed. We don’t have a significant amount of concentration of customers within PSM as well as RIS. Not a significant factor for us. We are particularly in this environment focused on the quality of our receivables and we continue to be comfortable at the levels where we stand. Not a particular impact from CIT in particular. Overall, the quality of our receivables is still within our comfort level.

Operator

There are no further questions at this time.

Dean Scarborough

On behalf of all of us thanks everyone for joining. We look forward to speaking with you again.

Operator

Ladies and gentlemen that does conclude our conference call today. We thank you for your participation and we ask that you please disconnect your lines.

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