Avery Dennison (AVY) Dean A. Scarborough on Q4 2015 Results - Earnings Call Transcript

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Avery Dennison Corp. (NYSE:AVY)

Q4 2015 Earnings Call

February 03, 2016 10:00 am ET

Executives

Cynthia S. Guenther - Vice President, Finance and Investor Relations

Dean A. Scarborough - Chairman & Chief Executive Officer

Anne L. Bramman - Chief Financial Officer & Senior Vice President

Mitchell R. Butier - President & Chief Operating Officer

Analysts

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Alex Wang - Bank of America Merrill Lynch

Scott Louis Gaffner - Barclays Capital, Inc.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Marc Solecitto - KeyBanc Capital Markets, Inc.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Christopher J. Kapsch - BB&T Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to Avery Dennison's Earnings Conference Call for the Fourth Quarter Full Ended Year. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. This call is being recorded and will be available for replay from 9 AM Pacific Time today through midnight Pacific Time, February 6. To access the replay, please dial 1-800-633-8284 or 402-977-9140 for international callers. The conference ID number is 21782905.

I would now like to turn the conference over to Cindy Guenther, Avery Dennison's Vice President of Finance and Investor Relations. You may begin.

Cynthia S. Guenther - Vice President, Finance and Investor Relations

Thank you, Franz, and welcome, everyone. Today, we'll discuss our preliminary unaudited fourth quarter and full year 2015 results as well as our outlook for 2016. The non-GAAP financial 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.

Making formal remarks today will be Dean Scarborough, Chairman and CEO; and Anne Bramman, Senior Vice President and Chief Financial Officer. Mitch Butier, President and Chief Operating Officer, is also with us today to participate in the Q&A portion of the call.

And now, I'll turn the call over to Dean.

Dean A. Scarborough - Chairman & Chief Executive Officer

Thanks, Cindy, and good day, everyone. I'm very pleased to report another year of excellent progress toward our long-term goals. We delivered strong organic sales growth and double-digit growth in adjusted earnings per share above the high-end of our original guidance range. We continued our disciplined execution of our long-term capital allocation strategy, yielding free cash flow of over $325 million and more than 3.5-point improvement in return on total capital relative to our 2013 baseline.

We also distributed $365 million of cash to shareholders in the form of share buybacks and dividends. Given challenging economic conditions in many parts of the world and significant headwinds from currency translation, these results speak not only to the resilience of our businesses but to the creativity and commitment of our associates worldwide. And I'd really like to thank the team for delivering such a great year.

What continues to guide our actions is a drive to achieve our long-term financial objectives, delight our customers, and fully engage our talented workforce. I'm confident that the achievement of these goals will result in continued above-average returns for our shareholders.

This past year represented an important milestone for us, as the final year of measurement for the four-year financial targets we first communicated in 2012. I'm very pleased to report that we substantially met or exceeded all of these targets.

If you turn to slide 6 of the supplemental materials we distributed today, you can see our final scorecard. On a compound annual basis, sales grew 4% organically and adjusted EPS grew 20%. We came in just slightly under our target for average annual free cash flow due to the onetime impact in 2014 of our decision to reduce the volatility of working capital at year-end. Our balance sheet remains very healthy. While net debt to adjusted EBITDA is still below our long-term target, we'll continue to exercise discipline in the execution of our long-term capital allocation strategy.

In May of 2014, we communicated a new set of targets extending our planning horizon to 2018 and raising the bar for both organic sales growth and operating margin. You can see the total company scorecard on slide 7, and if you turn to slide 8, the progress against the long-term targets for our two core segments. As the chart on the left shows, 2015 marked the fourth consecutive year of strong organic growth for Pressure-sensitive materials above the high-end of its long-term target.

Performance was solid across all key product segments and regions with above-average growth in targeted higher value segments. While sales growth in emerging markets was slower than usual this year, in the fourth quarter, we gained momentum in Asia. We exceeded our long-term operating margin target by 70 basis points in 2015. The vast majority of PSM's margin expansion last year was driven by productivity and fixed-cost leverage on the strong volume growth. So, we do expect to sustain margin in this segment at 11% or possibly higher.

In contrast to the strength in PSM, RBIS has had a slow start against these five-year goals. Growth has been too volatile, and we've been behind on the pace we set for margin expansion. We began executing a new strategy in 2015 to accelerate growth in the core business through a more competitive, faster, and simpler business model.

The team made good progress against its financial targets in the second half of the year, delivering both top line growth and margin improvement with particular strength in radio frequency identification products, or RFID. We also saw improvement in the underlying trend for the less-differentiated segments of our core business in the back half of the year.

We continue to see significant opportunities for top line growth in this business. RFID, of course, remains a key growth catalyst with a five-year compound annual growth target through 2018 of 15% to 20%-plus. Sales of RFID products increased by more than 20% this year and we expect that momentum to continue through 2016. Likewise, external embellishments grew more than 25% last year.

While this category is still a small share of the total business, about $50 million in sales, we expect continued rapid growth of this highly-differentiated, high-value category through 2018. We also expect to gain share in the less-differentiated segments through faster service and a more competitive product offering enabled by our business transformation. In short, I'm confident that our strategic shift will get us back on track to accelerate growth and achieve our operating margin target by 2018.

We didn't include Vancive Medical Technologies on slide 8 because of its size, but let me touch quickly on this business. Though small today, Vancive continues to offer potential for sales and profit growth. In 2016, we expect to accelerate growth in Vancive's core product line, as well as in our new antimicrobial wound dressings, while delivering continued margin expansion. Vancive continues to represent one of several very promising opportunities for us to gain share in a fragmented market that offers above-average growth with attractive margins.

Returning to the total company view, we remain highly confident in our ability to achieve our long-term financial goal based on our ability to execute against a few key strategies. We will grow through innovation and differentiated quality and service. In particular, 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.

Emerging markets, while slower in 2015, will continue to be an important part of our growth story over the long-term. Productivity-driven margin improvement has been a hallmark for the company for many years now and will continue to be a major strategic focus. We will drive capital efficiency, while continuing to invest to support growth in the high-value segments of our core businesses.

To this end, we anticipate a large increase in capital spending in 2016 compared to last year; partly due to carryover from projects we began in 2015, but also to support our strategy to accelerate growth in high-value segments.

On the PSM side, we're investing in capacity to support growth in the Graphics business, while optimizing our manufacturing footprint. We're adding coating capacity in Asia to support still solid growth in that region. And we're investing in information systems to drive supply chain productivity by upgrading systems in our North American Materials business.

In RBIS, major investments include capacity additions to support rapid growth of RFID and heat transfer technology, as well as projects to support a more cost-effective footprint. Finally, we will continue to pursue a disciplined approach to returning excess cash to shareholders.

Looking to 2016, given the lack of forward visibility in our markets, our guidance reflects a number of significant uncertainties, including emerging market growth, the net impact of deflation in pricing, a challenging environment for apparel retailers and, of course, currency rates. Despite these challenges, we expect to deliver another year of solid progress against our long-term strategic and financial goals in 2016.

Adjusting for a roughly $0.18 hit from currency translation, the midpoint of our adjusted EPS guidance reflects a 15% growth rate with further expansion of our return on capital. Our solid free cash flow, combined with a strong balance sheet, gives us ample capacity to invest in our existing businesses while continuing to grow the dividend, repurchase shares and pursue value-enhancing bolt-on acquisitions.

From a balance sheet perspective, while below our targeted leverage range today, we'll remain a disciplined investor. In short, we're committed to hitting our 2018 targets, and I remain confident that the consistent execution of our strategies will enable us to meet our long-term goal for superior value creation.

Now, I'll turn the call over to Anne.

Anne L. Bramman - Chief Financial Officer & Senior Vice President

Thanks, Dean, and hello everyone. I'll provide some additional color on the quarter, and then I'll walk you through our outlook for 2016.

In Q4, adjusted earnings per share declined 6% compared to the prior year, reflecting an extra week in the 2014 fiscal year, as well as the effect of currency translation. EPS was above our expectations in October due to higher-than-expected sales and a lower tax rate. The lower tax rate contributed $0.06 to the quarter and year. Organic sales growth, which adjusts for the extra week as well as currency translation and a small product line divestiture, was 7% overall and was strong for both core businesses.

The impact of currency translation and the extra week were significant. Currency translation reduced reported sales by 8%, while the impact of the extra week represented an additional headwind of approximately 7.5%. Together, these factors had a roughly $0.20 negative impact to EPS compared to last year's fourth quarter.

Adjusted operating margin in the fourth quarter improved 60 basis points to 8.7%, as the benefit of productivity initiative more than offset higher employee-related costs. Restructuring savings, net of transition expenses, were $22 million in the quarter and $71 million for the year, in line with our expectations. Our adjusted tax rate for the fourth quarter was 29% and 33% for the full year, better than expected due to the resolution of foreign tax examinations during the quarter.

Free cash flow was $138 million in the quarter. For the full year, free cash flow was $329 million, representing 103% conversion of adjusted net income.

Combined spending on capital projects and restructuring were roughly in line with our expectations for the year, albeit with a different mix than originally planned. As Dean mentioned, we anticipate a significant increase in capital spending in 2016, partly due to carryover from projects initiated in 2015. Importantly, we have not revised our outlook for cumulative investments in capital and restructuring through 2018.

As Dean indicated, we are committed to returning cash to shareholders. We repurchased 3.9 million shares in 2015 at a cost of $232 million and paid $133 million in dividends. We ended the year with roughly 91.7 million shares outstanding, including dilution, representing a 700,000 share decline compared to the end of 2014.

We did pick up the pace of share buyback in the fourth quarter in part to cover above-average dilution resulting from the rapid rise in our stock price over the course of the year. We have sufficient debt capacity to continue to our share buyback program in a disciplined manner.

Now, looking at the segments. Pressure-sensitive materials sales in the fourth quarter were up approximately 7% on an organic basis, above expectations due to volume improvement in emerging markets, particularly in China.

Sales in both Label and Packaging Materials and combined Graphics and Performance Tapes increased mid-single-digits organically. On a regional basis, sales in North America increased at a low-single-digit rate, while Western Europe was up mid-single-digits.

As Dean mentioned, organic sales growth in emerging markets picked up in the fourth quarter. China was up mid-single-digits, a meaningful improvement from the low-single-digit pace we've seen in the country over the previous five quarters. We saw a surge in demand for e-commerce labels as well as continued momentum in specialty products.

Both India and the ASEAN regions continued to be strong, posting double-digit organic growth rates for the quarter. PSM's adjusted operator margin increased by 40 basis points to 11%, as the impact of productivity initiatives more than offset higher employee-related costs.

Given the headwind from the extra week last year, higher volume did not contribute materially to margin expansion as it had done in the previous three quarters. Similar to the past couple of quarters, we experienced a modest benefit from deflation, net of price. This benefit tends to net out over the long term, so it is reasonable to assume that we'll see some offset to these gains over a full business cycle.

Switching over to RBIS, sales increased by approximately 8% on an organic basis with significant contributions from both RFID products and external embellishments. Consistent with recent quarters, sales growth among U.S.-based retailers and brand owners outpaced their European counterparts.

Adjusting for the impact of RFID sales, we, once again, saw strong growth in the Performance segment globally. And the underlying trend for the less differentiated segments improved, a positive sign that we're beginning to gain traction with our strategy change.

Adjusted operating margin improved 160 basis points to 8.4% as the impact of productivity initiatives more than offset higher employee-related costs.

Sales in Vancive Medical Technologies declined by 13% on an organic basis, due in part to difficult comparisons against the prior year related to a shift in orders from the third to the fourth quarter in 2014. As we said before, given the applications-specific nature of orders in this business, we do expect sales growth to be somewhat volatile quarter-to-quarter. The business was profitable for the quarter in line with expectations.

Turning now to our outlook for consolidated top line growth and earnings in 2016. We anticipate adjusted earnings per share to be in the range of $3.65 to $3.85. We had outlined some of the key contributing factors to this guidance on slide 13 of our supplemental presentation material. We estimate between 3% and 4.5% organic sales growth. Included in this estimate is an assumed slowdown of the 2015 pace of growth for PSM due largely to the loss of a large customer program in the personal care sector of the Performance Tapes business.

Changes to the customers' technology drove the decision to bring this program to a close. The program loss represents a roughly 1 point headwind to PSM's growth in 2016, largely impacting the second half of the year. Note that while the total Performance Tapes business will show a decline in sales on an organic basis in 2016, we continue to expect high-single-digit growth for the industrial side of the business, reflecting progress against our share gain strategy in this high value segment.

At recent exchange rates, we estimate that currency translation will reduce net sales by approximately 3.5%, representing a pre-tax earnings headwind of approximately $25 million or roughly $0.18 per share.

We estimate the incremental pre-tax savings from restructuring actions will contribute roughly $75 million in 2016, about a third of which represents the carryover benefit from actions taken in 2015. Approximately two-thirds of the total savings relates to actions taken in RBIS to drive a more competitive business model.

Combined with the other cost reductions and the anticipated benefit of volume growth, we expect these actions will more than offset pricing adjustments and inflationary pressures in the business, getting us back on the trajectory needed to meet our 2018 adjusted operating margins at 10% to 11%.

We continue to expect the tax rate in the low- to mid-30% range. We estimate average shares outstanding assuming dilution of roughly 90 million shares, reflecting our continued return of cash to shareholders. We anticipate significantly higher than usual adjustments to GAAP net income this year due to non-cash charges associated with the lump sum settlement of certain pension obligations.

This relates to an offer we made to former employees to receive their benefits immediately, as either a lump sum payment or an annuity, rather than waiting until they become retirement-eligible. The purpose of this program is to reduce the financial volatility associated with our frozen defined benefit plan.

You can pick up more details in today's press release, but the short story is that we reduced our pension liability by about $70 million with no increase in required cash contributions to the plan. We anticipate spending approximately $200 million on fixed capital and IT projects in 2016 and expect to incur about $25 million in cash restructuring charges which together represent a $20 million increase over our level of spending last year.

In light of the higher CapEx spending, we expect free cash flow conversion of roughly 100% of adjusted net income. We do, however, continue to expect cumulative free cash flow conversions over the coming years to exceed 100%.

Importantly, while the continued currency headwinds pull our 2016 EPS growth rate below our long-term target, our guidance for the year is consistent with the progress, we believe, is necessary to achieve our key long-term financial targets.

In summary, we delivered another quarter and year of solid 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, enable us to expand margins and increase returns and achieve our 2018 targets.

Now, we'll open the call up for your questions.

Question-and-Answer Session

Operator

Thank you. Our first question from the line of Ghansham Panjabi from Robert W. Baird. Please go ahead.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Hey, guys. Good morning. Maybe just, first off, on the macro. Obviously, you sell into many different end-markets on a global basis. Can you just, first off, give us your view of what the global macro looks like from Avery's perspective, the U.S., Europe, Latin America, and also, Asia?

Dean A. Scarborough - Chairman & Chief Executive Officer

Ghansham, this is Dean. Hi. Yeah, it's always hard to put ourselves in that position given our lack of forward visibility. I think, last year, we experienced reasonably strong growth in Europe, again, probably a little bit better than our expectations, but I kind of relate that back to reasonable amount of consumer spending there. The U.S. was not as strong as Europe, but stronger than we expected going into the year. So, I would say those two economies are relatively stable. I don't think any big – we're not expecting any big surprises in mature markets and feel good about the economies there and prospects.

Latin America's been a challenge, but also good for us. I would say, because we're a stable player in the region. We've been able to protect our dollar-based profits in that region through a lot of price increases given the challenges there. And then, Asia has been strong. India, ASEAN, very strong throughout the year. And China was the one area where I think we were continuously disappointed in for the last – well, four of the last five quarters.

Our hypothesis is that inventories in that market were kind of full. And we had customers telling us anecdotally that they just didn't have the sales. We did see some shift in that trend. But we also are tapping into a pretty high growth area in China, something called the logistics label. It's a little more sophisticated than a barcode label. But, fundamentally, its growth driver is the rapid acceleration of online ordering and having things delivered to your home much as we do here in the U.S.

So, in the long run, we're still bullish on China because the Materials business there is really linked to consumer spending, and as that economy begins to shift to a more services-based and consumer spending model, that should bode well for us in the long term. However, I wouldn't be surprised if we see continued volatility in China. But I don't have any specific note on that.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Okay. No, that's helpful. And then on RBIS, it sounds like RFID sort of came in ahead of your expectations for 4Q specifically. Was there any sort of new contract that drove upside for the quarter? Was that a comps issue? Just trying to understand if there's actually a change in the momentum trajectory as it has been over the last few quarters?

Dean A. Scarborough - Chairman & Chief Executive Officer

So a couple of our customers did accelerate their programs. And as I had said last spring, I noticed a big change in mentality from retailers that I hadn't seen before. And I would say almost every major retailer is in some stage of piloting right now certainly in the U.S. We also saw some nice growth from European retailers at the same time in the quarter. So I anticipate we're going to go through a period of time where we will continue to see accelerated growth above that 15% to 20%. That's why we added the plus to the 20%. Mitch was just at the National Retail Federation Show. So, Mitch, maybe you have some insights on there as well.

Mitchell R. Butier - President & Chief Operating Officer

Well, it just really reinforces what we've said before when you started talking about in the last spring, Dean. So a lot of discussion around RFID. And I'd say every retailer we talk to and brand, the big discussion is, again, not really if, but when and how they're going to adopt RFID. And the team has done a phenomenal job; our team. We are the recognized leaders within the space and not just what we provide, but actually helping retailers and brands adopt the new technology.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Okay. Perfect. Thanks so much, guys.

Operator

Our next question is from the line of George Staphos from Bank of America Merrill Lynch. You may proceed.

Alex Wang - Bank of America Merrill Lynch

Morning. It's actually Alex Wang sitting in for George. Thanks for taking our question. First question, can you just remind us, in RBIS, how much DNA rolls off, I believe, related to accounting from a few years ago? And when the timing of that – how that progresses?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

Yeah. So good morning. So really we're going to see the biggest benefit coming through in 2017. It's modest in 2016. It's around $4 million to $5 million. But you should see that ramp up starting 2017.

Alex Wang - Bank of America Merrill Lynch

Understood. And just as a follow-on, I know you mentioned in the slide deck relatively immaterial, but you spoke or alluded to some product line divestitures. If you could just provide some color around that that'd be helpful. Thank you.

Anne L. Bramman - Chief Financial Officer & Senior Vice President

So we had a very small product line divestiture back in the spring timeframe in Europe. So it was in the RBIS segment, and it was – very duly impact EBIT on very small sales dollars.

Alex Wang - Bank of America Merrill Lynch

Okay. I'll jump back in the queue. Thank you.

Operator

Our next question is from line of Scott Gaffner with Barclays. Please go ahead.

Scott Louis Gaffner - Barclays Capital, Inc.

Thanks. Good morning.

Dean A. Scarborough - Chairman & Chief Executive Officer

Good morning, Scott.

Mitchell R. Butier - President & Chief Operating Officer

Morning.

Anne L. Bramman - Chief Financial Officer & Senior Vice President

Hi, Scott.

Scott Louis Gaffner - Barclays Capital, Inc.

Just looking at the CapEx for a minute, the $200 million, Dean. I think you mentioned some growth projects as the main reason why the CapEx is ramping up year-over-year. Can you talk about those projects and why the investment in 2016?

Dean A. Scarborough - Chairman & Chief Executive Officer

Sure. So I think, typically, the way we'd characterize our CapEx is a third growth, a third productivity, a third IT maintenance capital. And actually it's going to move to about 50% of growth capital spending. We started a number of projects later in the year. We need some new Graphics capacity in the U.S. So we're going to be investing in some new capability there. We're also going to get a productivity benefit from that investment. It's going to take us a while to play it out. It's a fairly decent size investment.

We need new coating capacity in Asia, and so we're going to be in the process of building a new water-based coating line there. And then we've got some IT projects in North America. We've got a fairly old system in the U.S. that we're going to upgrade and replace. So those are some of the key investments in pressure-sensitive materials.

In RBIS, clearly, RFID with its rapid growth, we're continuing to invest there as well with some of the heat transfer technology. We also are spending some capital on automation in that business to continue to drive better labor productivity. It's a more labor-intense business than Materials, as well as to help us facilitate a more efficient footprint.

Scott Louis Gaffner - Barclays Capital, Inc.

Okay. And the return on invested capital on these projects, what are return on total capital, how do you kind of look at it?

Dean A. Scarborough - Chairman & Chief Executive Officer

Well above our hurdle rate.

Scott Louis Gaffner - Barclays Capital, Inc.

Okay. And then, Dean, on pressure-sensitive materials, I think, if I heard you correctly, the long-term operating margin target was 11%. And then...

Dean A. Scarborough - Chairman & Chief Executive Officer

Or greater.

Scott Louis Gaffner - Barclays Capital, Inc.

Or greater. I think if I have the number right, we were up well above that in 2015. And then I think Anne mentioned some raw material price cost benefits in 2015 and then the comment was around over the business cycle expect that to normalize. So as we move to 2016, how difficult is it to get margins up in pressure-sensitive materials in 2016 given that commentary?

Dean A. Scarborough - Chairman & Chief Executive Officer

I think, as you might guess, most operating plans for businesses always look for improvement every single year. So, we're not really different than anybody else. So, we're not going to give specific guidance for operating margins by segment. I think the team has done a good job driving mix, growing faster in high-value segments, and at the same time, getting more competitive in some of the more competitive segments frankly, and driving improvement there. For us, Pressure-sensitive materials is a high-return business. It is at a multiple of our cost of capital. And driving growth, top line growth is also an important goal for us. So, I feel good about the position of the business.

And, again, it's – right now with oil prices low, I know a lot of people are saying, well, that should really help you. And, to be honest, we haven't seen that much change in the commodities we buy over the last 90 days to 120 days. As you know, a lot of the things we buy are several steps down from crude oil. And then there's still some economies where we're seeing inflation.

So, I think the team has done a good job. We're going to continue to pursue our strategy of driving productivity, driving top line growth and mix. And we have the expectation to continue to drive for more improvement. Those targets that we have that we had set for 2018 are not a cap. They're simply a long-term sort of guidance range, but we feel confident today that we can operate at 11% or over.

Scott Louis Gaffner - Barclays Capital, Inc.

Okay. Well, congrats on the quarter, but more importantly, congratulations on hitting the targets from 2012 to 2015. Not that many companies put out these long-term targets and actually hit the numbers, and you guys did a great job. So, good luck on the next five-year plan.

Dean A. Scarborough - Chairman & Chief Executive Officer

Thank you.

Mitchell R. Butier - President & Chief Operating Officer

Thank you.

Operator

Our next question from the line of Anthony Pettinari from Citigroup. Please go ahead.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Good morning.

Dean A. Scarborough - Chairman & Chief Executive Officer

Good morning.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Regarding the organic sales growth guidance, you referenced the loss of a large customer in PSM. Understanding that you may be limited in what you can say, can you help us understand, is that customer going to a different technology or a different – to a competitor, or are there any read-throughs for the rest of your business? Or if you can give us any color there, it would be helpful.

Dean A. Scarborough - Chairman & Chief Executive Officer

Go ahead, Mitch.

Mitchell R. Butier - President & Chief Operating Officer

Yeah. So, Anthony, I'll answer the last part of your question first. There's no knock-on effects or implications to the rest of the business in PSM. This is specifically within the Performance Tapes business, which is an application business. And one application is not losing share, if you will, to another competitor. There's a technology change in the handset. So, our focus when we've talked about investing in this business, it's really been the focus on the industrial tapes side where we did continue to see growth in Q4 and it's going to be a key focus for us going forward.

So, we look at this as an application we got a few years ago, team did a great job in driving value in achieving our objectives on this application and we knew eventually we'd have a sunset and it's coming in 2016.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And then just a follow-up on Scott's question on PSM margins. I guess last year you saw PSM margins up 150 basis points. Is it possible to bucket that roughly between productivity versus variable flow-through on volumes versus price cost? And then thinking about PSM margins in 2016 maybe potentially being down a bit kind of asking the same question backwards, where are you giving up the margin versus productivity, volumes, price cost?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

Yeah. So, when we look at PSM for 2015, by and large by a multiple of two times to three times the benefit in margin came from net productivity and restructuring. So that really was driving the margin improvement that we saw for the year.

Mitchell R. Butier - President & Chief Operating Officer

And your question going into 2016, when we laid out this business, if you look at 2012 when we laid out long-term targets, we said 9% to 10% operating margin target. We passed and exceeded that. We've now set 10% to 11% as the operating margin for this business. And it's really, what we've said, is those are proxies for what would make a high return on capital business here. And that is our focus. And we've been testing and getting achieving new heights.

And we don't, as Dean said earlier, see this as a cap in any way. We all have operating plans to look to see how do we test this to even further new heights. But the reason that we're saying we're confident we can hold the 11% or more in this business is, one, we feel that's a very high return business, we've got to continue to focus on growing it then as we've done a great job over the last few years. And two, just macro uncertainty as far as what's out there within the economy and all the headlines everybody's reading.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. I'll turn it over.

Operator

Our next question from the line of Adam Josephson with KeyBanc Capital Markets. You may proceed.

Marc Solecitto - KeyBanc Capital Markets, Inc.

Hi. Good morning. It's actually Marc Solecitto on for Adam. Thanks for taking our questions.

Dean A. Scarborough - Chairman & Chief Executive Officer

Sure.

Marc Solecitto - KeyBanc Capital Markets, Inc.

First question we had, you're projecting a modest slowdown in organic growth. I know you talked about the customer loss in your tapes business, but were there any other factors in that modest slowdown?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

No, there really wasn't. That was a component when we looked at the total guidance.

Marc Solecitto - KeyBanc Capital Markets, Inc.

Okay. Thanks. And second question, as far as FX rates, what FX rates are you assuming in your 2016 guidance?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

So, right now, we've got the euro pegged slightly under $1.09.

Marc Solecitto - KeyBanc Capital Markets, Inc.

Okay. Great. Thank you. I'll turn it over.

Operator

Our next question from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Hi. Good morning.

Dean A. Scarborough - Chairman & Chief Executive Officer

Hi, Jeff.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Hi. How are you?

Dean A. Scarborough - Chairman & Chief Executive Officer

Good.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

How large is your RFID business now?

Mitchell R. Butier - President & Chief Operating Officer

About $150 million in 2015.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

In the RBIS segment, you took about a $16 million charge. Where is that geographically? That is, what part of the RBIS operation are you restructuring? And can you describe that a little bit more closely?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

So, the charge is primarily in the SG&A line. There is a portion that goes through the gross profit line. But I would say it's probably an 80-20, 75% to 80% going through SG&A. There's a number of initiatives going on. First, there's a footprint – we're looking at footprint consolidation to get efficiency in the business. And then, secondly, we also, as we've talked about in the prior quarter, looking at driving more efficiency in the regional basis, getting out some of the layers of management in the business. And so, that's a big component of the SG&A line as well.

Mitchell R. Butier - President & Chief Operating Officer

Yeah. So just to add on to that, Jeff, so the footprint consolidations Anne talked about, we've announced in Eastern U.S. as well as Western Europe. And then, one of the overall objectives here is to lower costs so we can be more competitive in all segments. And so, we're cutting SG&A across the board, if you will, on a number of areas. But it's not just about lowering costs, it's actually about streamlining the management structure to move decision points closer to the customer and close to market, so we can be faster and more nimble in the market.

So, that's what we're doing. So, the SG&A is kind of broad-based. But it's, again, not just around cost reduction, it's also around getting quicker in the marketplace.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Okay. And could you talk a little bit about Pressure-sensitive Material pricing trends? Are prices up year-over-year or down or up a little bit or down a little bit?

Mitchell R. Butier - President & Chief Operating Officer

We're talking about this generally on a net basis. So, when you look at the net impact of pricing and deflation, as we've commented, we saw modest benefits in Q4 again, as we've seen in the previous couple of quarters. If you look at kind of where we fit now flowing into 2016, it's essentially neutral, the net impact between pricing and raw materials.

And it's hard to give a very broad comment on those trends globally because it depend region by region. And some regions were raising prices quite dramatically, double-digits, to offset inflation. Other regions, clearly, in some regions we have some big deflation and it's a competitive environment. And we're working through that.

One thing I do want to say is we talked last year about a couple of course corrections we're making and one of them was rebalancing the dynamics between price volume and mix within PSM. I think, largely, what you're seeing is, we've done a good job of doing that of rebalancing those dynamics. And we talked about getting more disciplined in the less differentiated segments within PSM, and we've done that as well. And the focus is how do we continue to drive growth profitably across all the segments?

Jeffrey J. Zekauskas - JPMorgan Securities LLC

I mean, not on a net basis. On an absolute basis, how are your local prices?

Mitchell R. Butier - President & Chief Operating Officer

We don't provide commentary on that.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Okay. How much did you contribute to your pension plan this year?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

We didn't make any contributions to the plan.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Is there any inflation in paper prices in PSM?

Mitchell R. Butier - President & Chief Operating Officer

We're seeing some pressure in Europe, generally because of the currency shifts that you're seeing there, but that's the only place we're really seeing pressure.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

The last question is, once you get through the big spending in 2016 on capital, what happens in 2017? Where is your more normalized level of CapEx?

Anne L. Bramman - Chief Financial Officer & Senior Vice President

So when you look at our long-term goals, we've really had set the target of around $175 million to $200 million a year for CapEx spending...

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Okay. Great. Thank you so much.

Anne L. Bramman - Chief Financial Officer & Senior Vice President

...on average. Yeah.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Yeah.

Operator

Our next question is from the line of Chris Kapsch with BB&T Capital Markets. You may proceed.

Christopher J. Kapsch - BB&T Capital Markets

Yeah. Good morning. I had a follow-up on the margin discussion in pressure-sensitive. I think your formal comments were that despite the organic volume growth that that did not benefit mix because of the absence of the week of sales. And I'm just trying to understand why that would matter. And also if there's some mix effect here maybe becoming more pronounced on a seasonal basis with the e-commerce sort of being concentrated in the December quarter. Is there any adverse effect from stronger demand in e-commerce related labels on mix in this quarter? And if so, would that inflect starting in the first quarter?

Mitchell R. Butier - President & Chief Operating Officer

Yes. So there are several questions in there. So let me try to take a couple of them. So one is if you look at our margins, you asked about the 53rd week impact and what's the variable flow-through from volume. So we did see what you'd typically expect from a volume flow-through from the growth. But if you think about the lack of the extra week that we had, that was pure variable flow-through from (43:47) last year. And we commented about the benefit that it gave us to 2014 earnings, and we expect it to come back down more than $0.10 in Q4. So that's...

Christopher J. Kapsch - BB&T Capital Markets

There's more shipping days than really just running the coaters. Got it, okay.

Mitchell R. Butier - President & Chief Operating Officer

And you've got your fixed cost structure which stays solid for the quarter, and you've got an extra shipping week. So that was what that item's about. But no shift on the volume variable flow-through. So that's what that is.

As far as the mix, so typically Q4, the mix is lower if you're looking sequentially versus Q2, Q3, because we have more Graphics sales, for example, in Q2, Q3 than we have in Q4. So you would typically see Q4 be somewhat lower than if you're looking on a sequential basis. And as far as the...

Christopher J. Kapsch - BB&T Capital Markets

Is that – yeah.

Mitchell R. Butier - President & Chief Operating Officer

Go ahead.

Christopher J. Kapsch - BB&T Capital Markets

Is that mix shift becoming more pronounced as e-commerce just continues to boom?

Mitchell R. Butier - President & Chief Operating Officer

No, because those are very different markets. Graphics are more for the durables markets. So long-lived labels, if you will. So nothing to do with the e-commerce trends. And then the e-commerce we talked about what the key points of growth, particularly in Asia, and that is, well, it's not just classic variable information labels like Dean said earlier. And actually, within China, with this growth that we've achieved, we've actually gotten margins back to where they were before the slip (45:23) we saw in 2014.

Christopher J. Kapsch - BB&T Capital Markets

Okay. And if I could follow up also just on, sort of, capital allocation and notwithstanding your continued healthy return of capital to shareholders, you have a good problem here, you're below your targeted leverage, it's a function of EBITDA growth as well as your continued just strong free cash flow generation. But it sounds like you do have more of an appetite because of this situation for bolt-on acquisitions. And I just want to understand like the nature of potential target. Is it still focused in the Graphics and Tapes portion of PSM or would there also be potential bolt-ons, say, to augment your RFID platform or even in Vancive Medical?

Dean A. Scarborough - Chairman & Chief Executive Officer

So I would say, yes, we have an active pipeline going for M&A. We talked about it. And I would say it definitely includes the Materials businesses, all the Materials businesses. Vancive is also an area that we are looking in.

RFID is an interesting question. I would say the answer is yes, but I would say there's not just a lot out there. We're one of the biggest entities out there for RFID. And really our focus there, other than driving the great growth that we had, is looking for applications outside of a core apparel business because we have a really unique capability in the marketplace. And I think in the long run that will bode well.

Christopher J. Kapsch - BB&T Capital Markets

And if I could just follow-up on that point, on your unique capability, and you have sort of a turnkey approach to retailers I think that are adopting RFID and you mentioned capital investment in that businesses. Is the investment you're making sort of upstream like an inlay capability, or is it more downstream perhaps to augment the part of the turnkey solution that you're offering those retail customers? Thanks.

Dean A. Scarborough - Chairman & Chief Executive Officer

So, Chris, most of that – I mean, from a capital point of view it's basically in the equipment to make not – if what I would characterize as integrated inlays. One of the advantages that we have is being able to offer the retailer form factors that are very similar to what they use today; and it makes the incremental cost of adopting RFID even lower than it was before. So I think the team has been very innovative and creative driving both lower cost for inlay production, but also, at the same time, giving the retailer almost a seamless and lower cost transition. So we're really kind of changing the game there.

We have invested a little more in the front-end, but that's actually been in place for quite a while. And we have a really experienced team that understands – I would say, we don't have so much a turnkey approach, I think we have probably the most knowledge in the business on how to effectively execute a program when we can help guide retailers in a number of areas as they rollout their programs.

Christopher J. Kapsch - BB&T Capital Markets

Okay. Thanks for the context.

Operator

Our last question is a follow-up from the line of Scott Gaffner from Barclays. Please go ahead, sir.

Scott Louis Gaffner - Barclays Capital, Inc.

Thanks. Just a couple of quick follow-ups. On the RFID acceleration, you mentioned, Dean, can you just walk us through that a little bit? I mean, was there anything in the fourth quarter? I mean, obviously, when we look at the retail data, e-commerce grew a lot faster than brick-and-mortar. I mean, did the pace of inquiries increased in 4Q or is this just been a steady increase throughout the year around interest in RFID?

Dean A. Scarborough - Chairman & Chief Executive Officer

I would characterize it this way; the folks that have invested in RFID are accelerating what they're doing. So, we had a couple of large customers ask us, can we go even faster? I think the team did a great job of accommodating that pretty seamlessly. I mean our growth in the quarter was almost 90%. I mean that's a lot for any operations and supply chain team to execute.

And as retailers continue to understand the need for really accurate inventories to play in the omni-channel world, I think it's becoming – I won't say a no-brainer, but it's becoming an essential part of being competitive. And that's the discussion that's going on. And so, retailers are talking mainly about how and not if. So, I think this will be a great growth platform for us for the next few years.

Scott Louis Gaffner - Barclays Capital, Inc.

And how do you see your ability to continue to reduce the cost structure in the business as RFID grows? I mean, can you take a significant cost out of the chips or where would the cost savings come from, I guess, maybe is a better question as you ramp this business up?

Dean A. Scarborough - Chairman & Chief Executive Officer

Yeah. It comes from a combination, so it's sort of all what I would characterize as all levels, right? We have scale in purchasing chips. We have an ability to integrate the manufacturing of the antenna, the making of the inlay and integrating that into the final tag in a seamless process, which reduces materials and reduces process steps. I would literally just in Asia a couple of weeks ago looking at our operations and talking to the team and they've already figured out a way to double the productivity that we're getting on our newly installed equipment. So, I get pretty excited about that. And so far, I don't see a limit to what we're doing.

We also have some longer-term programs, and I mean, in the next two years to four years where I do think we – there is an ability to take another step change in the cost reduction of an inlay, but I can't, due to confidentiality, get into the details. But we're all-in on this business and I feel really good about both our short-term and our long-term prospects.

Scott Louis Gaffner - Barclays Capital, Inc.

Great. Thanks again.

Operator

And Mr. Scarborough, there are no further questions at this time. I'll return the call back to you for your closing remarks.

Dean A. Scarborough - Chairman & Chief Executive Officer

Thanks, Franz. Well, our focus in 2016 will be the same as it's been for the last four years to deliver exceptional value for customers, our employees, and our shareholders. We're going to continue to pursue the broad strategic priorities that we've communicated, fine-tuning where appropriate, and we look forward to seeing that strategy and execution translate into superior total shareholder return over the long term. So, thanks for joining us, and we'll talk to you at the end of the next quarter.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation today. Have a great day, everyone.

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