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Paxar Corporation (NYSEARCA:PXR)

Q4 2005 Earnings Conference Call

February 16th 2006, 11:00 AM.

Executives:

Robert Powers, Vice President, Investor Relations

Robert van der Merwe, President, Chief Executive Officer

Anthony Colatrella, Vice President and Chief Financial Officer

Analysts:

Bob Labick, CJS Securities

Eric Autio, SunTrust Robinson Humphrey

Ajit Pai, Thomas Weisel Partners

Deborah Fiakas, Crystal Equity Research

Laud Hales, SMI

Chris Kapsch, Black Diamond Research

Operator

Greetings ladies and gentleman and welcome to the Paxar Corporation Fourth Quarter 2005 Earnings Conference Call. At this time, all parties are in a listen-only mode and there will be a question and answer session following the presentation. If you should require operator assistance during the conference press “*” “0” on your telephone keypad, as a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Bob Powers, Vice President of Investor Relations for Paxar Corporation.

Robert Powers, Vice President, Investor Relations

Thank you, Megan. Good morning and welcome to Paxar’s fourth quarter 2005 conference call. On the line from management, will be Rob van der Merwe, President and Chief Executive Officer; and Anthony Colatrella, Chief Financial Officer. This morning before the market opens, Paxar reported fourth quarter 2005 results. Management will now provide additional commentary on those results as well as a look to the future. At the conclusion of that commentary, any questions you have may be addressed to management.

Please be advised that certain statements above the future outlook related to Paxar Corporation about the number of factors affecting the company’s businesses and operations that could cause actual future results to differ materially and those contemplated by forward-looking statements. Those factors include general economic conditions, the performance of the company’s operations within this prevailing business markets around the world, as well as other factors set forth the Paxar’s 2004 annual report on Form 10-K. Before the explanation, participants are asked to refer to the final paragraph of Paxar’s earnings release. Rob van der Merwe will now begin our management presentation. Rob?

Robert van der Merwe, President, Chief Executive Officer

Thank you Bob, and good morning everyone. I would like to also welcome you to our fourth quarter and yearend results conference call. Today, I will begin by providing a brief overview of our performance then review the status of our realignment plans with you. Tony will then discuss our financial results in more detail, and I will make some closing remarks regarding our strategy and outlook before opening up the call for questions.

First, let me start by saying that despite 2005 being a challenging year, Paxar made significant progress on a number of important fronts. And we are poised to remerge as a much stronger global competitive than ever before. During the year, we witnessed migration of apparel production particularly in North America, but also including the UK and Western Europe to lower labor cost countries at a rate faster than in 2003 or 2004, and faster than we had predicted following the lifting of textile and apparel quarters in January of 2005. Notably, we embarked on a major realignment of our apparel capacity and related support infrastructure to better align our strength with customer needs. We’re seeing encouraging signs that efforts to increase market share and drive organic growth should payoff in 2006 and beyond. We also entered 2006 with a very strong balance sheet, which positions up very well to finance both organic and acquisition growth going forward. Tony will provide you with further details regarding our recently completed refinancing and repatriation programs in a few minutes.

Turing briefly to the fourth quarter, performance was solidly inline with sales and earnings guidance provided to you last quarter. Our Asia-Pacific apparel operations continue to grow at a rapid rate and represented 50% of our total global apparel sales in the fourth quarter. In addition, we saw profitable growth in just about every business and geography in that region. Most of the growth follows aggressive investment to support expansion in existing all new geographies such as India and to cope with the shift in US and European originated business to these locations.

Markets remain mixed in Europe and we saw some adverse currency effect there. However, our prospect list for European based business in 2006 looks considerably better this year than this time last year. Within the Americas Apparel Group, US reported sales in the quarter were down approximately 18% versus the same period year ago due to the continuing shift in business to low labor cost countries. There is some margin pressure here due to the exit capacity as you would expect and this will be addressed by the streamlining initiatives.

Turning briefly to our Bar Code and Pricing Solutions business, demand was strong throughout the year and we saw modest increases in sales on a global basis and in healthy margins. However, we did see lower sales within the quarter compared with prior year, due primarily to a large machine orders that occurred in the fourth quarter of 2005 in the US, and that was essentially a won-off. We continued to generate strong cash flow from the segment and believe we are growing at a rate faster than the industry particularly in North America for the majority of the business as of today.

In summary, the global apparel market represented our main challenge during 2005. As mentioned before, the industry experts indicate that approximately 97% of all apparels and footwear products consumed in this country are now imported. Since many of our major customers have already moved for, or in the process of moving their production needs offshore, it is essential that Paxar takes advantage of its very strong broad geographic footprints and transition accordingly.

Let me provide you with more details regarding the streamlining that’s occurring within our apparel business. First, the streamlining we announced in the third quarter is not only intended to rebalance capacity, but to better focus and link apparel demands and supply globally and improve service. As we exit our legacy operations in the developed countries, we will do so while stealing up our global responsiveness to customer needs, lowering cost and driving innovation faster than we have done before. All these measures play to Paxar’s inherent strength and will result in positive organic growth commencing in 2006 and beyond.

Execution of the plans is progressing on schedule. We have announced and are in the process of exiting the majority of remaining capacity in United Kingdom and certain other countries in Western Europe and relocating production to Italy, which by the way is an innovation center of excellence for the company and countries in the Eastern Europe and Asia. We will continue to move forward in the US on an accelerated basis over a 12 to 24 month period and at a pace that our customers are comfortable with.

We believe that the timing we have communicated today will be sufficient to take this to all their needs. I mentioned that we were initiating programs to improve our responsiveness globally. We have a unique and one-time opportunity to reconfigure our resources and start introducing more sophisticated processes in systems to meet our customers needs globally for one-touch servers, 24 hours a day. This approach ultimately should become a competitive advantage. These plans are now most specifically included in the numbers and timing we are sharing in our outlook with you today.

We have modified our original plans and have now included a partial modernization of selected manufacturing policies and practices around the world. This will not only result in improved responsiveness but can improve productivity. We will not be sharing the specific details of these productivity plans with you today but then as I said, they are now included in the financial assumptions and the timing we are sharing with you today.

On a separate note, we continue to believe RFID will be a significant opportunity going forward. Accordingly, we will increase our R&D investments in 2006 to further develop new pilot and case solutions and we will continue to lead in working with our customers, like Eminair, Ironair (phonetic), item level RFID solutions.

Finally, I am delighted with the progress of Paxar’s new global leadership team which as know would significantly strengthen during the year. We have modified our intensive compensation plans to ensure the leadership team is solidly focused on driving global solutions and improving return on invested capital. Now while much of the talk has been around the realignment, it is important that we reiterate the fact that growth is very important, it is a very important element of the mix, we will be adding additional planning and analysis resources to assist with this process and the returning to acquisition activity during 2006. I would now like to hand over to Tony to review the financials.

Anthony Colatrella, Vice President and Chief Financial Officer

Thank you Rob, and good morning everyone. It’s certainly benefice and exciting period for the company. As Rob mentioned, we’ve taken a significant step in the quarter to improve the competitive position of our global apparel business. Specifically, we’ve completed the blueprint and are now beginning to execute a comprehensive plan to transition legacy North American and European production to more cost competitive facilities in Latin America, Eastern Europe and the Asia-Pacific rim. While these moves are focused on improving our competitive position, which we are confident will generate significant ongoing cost savings, they are also being undertaken to align our manufacturing and cost associated support resources with global apparel demand and customer requirements. I’ll provide an update on the anticipated cost benefits and timing for the plan in a few minutes.

During last quarter’s call, I discussed the company’s plan to optimally leverage Paxar’s balance sheet by better matching the company’s borrowing capacity with its strong offshore cash flow stream. I’m pleased to announce that we have successfully completed all three of the initiatives outlined during the third quarter conference call. In early December, we completed a new $150 million 5-year multi-currency revolving credit facility which was utilized along with excess foreign cash to complete the repatriation of $122 million of foreign earnings. This amount was in excess of $110 million we originally targeted for the repatriation program.

Further during the third quarter call, we discussed plans to prepay $150 million of 6.74% senior notes that were due August 11, 2008. The prepayment of these notes was successfully completed in early December resulting in a one-time charge of $7.4 million below our initial estimate of $9 million. As previously indicated, we anticipate the refinancing will generate $4 million to $5 million of the annual interest savings commencing in 2006.

Now let’s begin by first reviewing how results compared to our guidance. As you may recall, our third quarter guidance called for sales of 205 million to 210 million in the fourth quarter and pro forma earnings per share, excluding the impact of restructuring and other one-time charges in the range of $0.27 to $0.31. I’m pleased to report results was squarely within that range not withstanding some downing pressure on sales from exchange rate movements due to the strengthening of the dollar during the fourth quarter.

Sales in the quarter finished at approximately $207 million essentially unchanged from the record fourth quarter level achieved in the prior year. Organic sales declined approximately 1% due to an unusually large bar code printer order in the fourth quarter of 2004 that did not recur in the fourth quarter of 2005. We continued to experience significant migration of apparel sales from North America and Western Europe to develop a market particularly in Asia-Pacific, where sales increased in excess of 21.3% including organic growth of 15.2%.

Sales from the India and EMCO acquisitions which as you may recall were completed earlier in the year contributed $4.9 million or approximately 2.4% of sales growth. Foreign exchange reduced sales by $3.1 million or 1.5% due primarily to the recent strengthening of the dollar against the Euro and British Pounds. In the quarter, we were encouraged by the strength of EMEA originating sales which on a local currency basis rose 4% when compared to the fourth quarter of 2004.

Gross margin was 37% in the fourth quarter of 2005 compared to 38.7% in the fourth quarter of 2004. While we continue to realize higher gross margins in our growing Asia-Pacific regions, margins were lower in our bar code business, due to changes in product and customer mix, and in the Americas Apparel Group which as Rob mentioned continued to suffer from under absorption of fixed factory overhead costs, due substantially to the impact of accelerated migration on domestic plant volumes as well as somewhat higher material cost specifically on oil another petroleum based products.

SG&A expenses were $59.6 million in the quarter or 28.8% of sales compared to $61.5 million or 29.7% sales a year ago. The favorable quarter-to-quarter comparison in SG&A spending was largely attributable to continued migration in the Asia-Pacific region where we enjoy a much more efficient SG&A cost structure. In addition, SG&A for the quarter also benefited from favorable debt recoveries and lower bonus and sales incentive requirements as compared to the fourth quarter of 2004.

In the quarter, we recorded $10.6 million of restructuring and other charges in connection with the realignment of legacy North American and European manufacturing side. Of this amount, $8.7 million represents primarily severance and certain assets impairment charges related to the global realignment plans that we announced during the third quarter conference call. The balance of the charges representing approximately $1.9 million related to the Joe’s Joe (phonetic) and EMEA restructuring initiatives, which we shared with you earlier in the year. There were no restructuring and other charges recorded in the fourth quarter of 2004.

During the past three months, we continue to refine our global realignment plan and associated timeline. We expect to realize at least $15 million of ongoing cost savings in calendar year 2007 and we remain confident that we will achieve ongoing saving at an annual run rate of $20 million to $25 million by the end of 2007. In addition, we now anticipate total one-time cash cost to be lower than originally estimated, ranging between $20 million and $25 million. This compared favorably to our previously announced range of 25 million to 30 million. We expect to incur as well approximately $5 million to $8 million of non-cash charges largely related to anticipated asset impairments considerably below the original estimate of $10 million to $14 million.

Operating income in the quarter was $6.3 million or 3% of sales including restructuring and other non-recurring charges. Excluding these one-time charges, operating income for the quarter was $16.9 million or 8.2% of sales. There were no restructuring charges in the fourth quarter of 2004 as I said when operating income was $18.8 million or 9.1% of sales. While we did realize substantially higher operating margins in the Asia-Pacific region, 18.9% versus 15.4% for the same quarter a year ago. This increase was more than offset by lower operating margins in the Americas and EMEA regions.

In the quarter, our effective tax rate was 60%, which included the impact of restructuring initiatives and the debt prepayment penalties. The normalized tax rate for the fourth quarter was 24%, again excluding the one-time impacts related to restructuring, the prepayment penalty and a tax charge that we took within the quarter, resulting from the additional earnings we repatriated in the month of December. For the quarter, net interest expense was $9.4 million including $7.4 million in one-time charges related to the early retirement of the senior notes. This compares to $2.6 million from the fourth quarter of 2004.

Turning our attention to the balance sheet, we finished the quarter with $48 million of cash and cash equivalents, down from 92 million as of December 31, 2004. This decrease was due to actions taken by the company in the quarter to utilize excess cash on hand for the prepayment of the company 6.74% senior note. Consequently, total debt as of December 31, 2005 was $101 million as compared to $167 million a year ago and our ratio of total debt to total capital improved significantly from 27.5% at the end of 2004 to 18.1% as of December 31, 2005.

Focusing now on cash flow for a minute, cash provided from operations was approximately $62 million in 2005 versus $86 million in 2004. The decrease of approximately $24 million primarily resulted from lower earnings in 2005 largely due to the weak first quarter performance, increased bonus and incentive payments that were made earlier in the year, higher foreign tax payments and restructuring spending, partially offset by improved collection performance and reduced inventory level.

Depreciation and amortization expense was $33 million for the year compared to $32 million in 2004. Capital expenditures in 2005 were $31 million versus $39 million in 2004. For the year, capital expenditures came in about $4 million below our guidance, as several projects originally slated for completion in the second half of the year were delayed, pending completion of the company’s blueprint for completion of the global manufacturing realignment plan. As the result, in 2006, we do expect capital spending will be somewhat higher than would be typical and likely in the range of $45 million to $50 million. Going forward, we would expect capital spending to be more typically in the range of $35 million to $40 million on a sustainable basis. For the quarter and full year, the company completed share repurchases of approximately $6 million, currently there are no plans to initiate any additional stock repurchases during 2006.

Now let’s turn to 2006 guidance. Going forward, the company will only be providing annual earnings guidance, which Rob and I will update regularly on a quarterly basis. The company believes this change is more consistent with best practices and inline with shareholder expectations to manage the company for consistent long-term growth. For the year 2006, we are estimating sales of $820 million to $840 million; our guidance assumes low single digit market growth continuing migration of global apparel sales to the Asia-Pacific region, accelerated acceptance of RFID for item and cartons and pallet marking, albeit of a very modest space. As it’s been our past practice, we are not including the impact of potential acquisitions but we’ll update our guidance as appropriate for acquisitions once completed.

In 2006, we expect gross margins to increase 20 to 30 basis points partially offset by continuing SG&A infrastructure investments to support growth in the emerging market and RFID market development expenses. We expect margins to benefit from favorable geographic mix as more of our global sales shift to Asia-Pacific. Anticipated cost savings from the restructuring initiatives in 2006 are not expected to be realized until late in the year, thus we do not anticipate any significant program benefits until 2007.

With the completion of our fourth quarter refinancing initiatives, we are forecasting interest expense to be in a range of $5 million to $5.5 million for the year. And we expect the company’s effective tax rate to be in the range of 24% to 25%. Consequently, earnings per share are projected to be in the range of $1.13 to $1.23. As a reminder, our 2006 outlook excludes the impact of expensing of stock options as required by FAS 123R and additional charges related to realignment of our global manufacturing capacity. Including the impact of FAS 123R adoption, earnings per share are projected to be in the range of $1.07 to $1.17. That concludes my prepared remarks on the fourth quarter financial results. Now I would like to ask Rob to present his concluding remarks.

Robert van der Merwe, President, Chief Executive Officer

Thank you, Tony. As stated before, our near-term goal is to grow Paxar into a $1 billion plus company and that will come from organic growth and through modestly sized both on restructuring and strategic acquisitions. In addition, all things being equal and based on the assumptions we have made, the streamlining we have announced will improve our gross profit margins and increase operating profit margin over 10%, while also improving our competitiveness on a number of fronts.

So as I’ve stated on a number of occasions, our objective is to transform Paxar into a truly global company by being the first choice for all our key customers. To continue to win, we will focus relentlessly on being responsive to our customer needs everyday, everywhere, by building lasting and meaningful customers relationships, where we strategically sell across the range and offer value-added solutions by being first with meaningful innovations, by using information technology to our advantage and by having the best leadership and talent in our industry.

We’re focused on driving the long-term shareholder value and we are doing what is necessary now to improve our operations and our ability to generate sustainable and ongoing profits in the years ahead. With that, I will now open up the call for questions.

Questions-and-Answer Session

Operator

Thank you, sir. Ladies and gentleman at this time we will be conducting the question and answer session. If you would like to ask a question please press “*” “1” on your telephone keypad. A conformation tone will indicate your line has entered the question queue. You may press “*” “2” if you would like to remove your question from the queue. For participants using speaker equipment, it maybe necessary to pickup your handset before pressing the “*” keys. Once again, if you have a question press “*” “1” on your telephone keypad.

Our first question is coming from Bob Labick of CJS Securities.

Q - Bob Labick

Good mornings Bob Labick from CJS.

A - Robert van der Merwe

Hi, Bob.

Q - Bob Labick

Hi, first question I wanted to ask was relating to your $1 billion sales goal, I believe you said in the past that, roughly half will come organic and half will be from acquisitions. And if we start on a $800 million base, using that $100 million in organic growth your and your guidance which implies 3% organic growth, it will take us 4 years to get there. What will you be doing to stimulate organic growth to accelerate that process or as the 4-year timeframe what you were trying to suggest?

A - Robert van der Merwe

Bob this is Rob, now we are; the plan is to do that faster than the 4 years. Many of the programs that we’ve initiated will stimulate organic growth. There are new products that will be introduced sometime during 2006 that are not yet included in our assumptions.

A - Anthony Colatrella

Bob, can I add that the - what we are suffering from slightly in ’06 is, with the recent strengthening of the dollar is actually a bit of an adverse year-over-year comparison in foreign exchange rate, we try to take into consideration our guidance as well. So it has an affect to bottomline but it does have the modest impact on the topline Bob.

Q - Bob Labick

Bob, on that, I mean; I think we could take you a little more color on that, the 840 would imply $830 million give or take that includes the assumption that the current currency affect that we are seeing in the recent past will continue through 2006. I think that’s prudent for the very conservative assumption. Tony, do you want to comment further on that?

A - Anthony Colatrella

Yeah, well I mean, again, none of us are foreign currency experts, but just to take the, the current run rate, the current foreign exchange rate then apply them to our local plans, the fact is, the results come in moderately lower than they would have had rates remained as they were 3 months ago. And so, we think to manage consideration on our guidance.

Q - Bob Labick

Okay now that makes perfect sense, I understand, so basically you are saying that organic growth through new products acquisitions and other initiatives should be greater than 3% going forward on a equal currency basis?

A - Robert van der Merwe

Now that’s correct Bob.

Q - Bob Labick

Great. And then just for the second half of that billion dollars through acquisitions, could you give us a sense of your potential product areas, or geographies, or any further idea of what you would be looking at in terms of acquisitions?

A - Robert van der Merwe

Bob, the only thing we can do at this point is just confirm that we will continue to execute both on or tuck in acquisitions that would fall under the current definition of our business today. We are not, in that I am not including any transformational activity and will return to that in 2006, it could occur anywhere and at this point, I wouldn’t want to comment further on the strategy acquisitions, the acquisition strategy.

Q - Bob Labick

Okay, I guess two more questions, regarding the realignment, it sounds like you’re making the moves in Europe faster than the US, I guess, there is more pressure on the US in terms of under-absorption in gross margins impact. Could you just walk us through the reasons for the timing of, your first, your second?

A - Robert van der Merwe

Bob, Europe started earlier and Europe is smaller. Now, I think that’s probably any comment that I can make, US is much larger of course, there is a different mix of customers and a different mix of geography that that business needs to transition to.

Q - Bob Labick

Okay, my final question would be the plans obviously since logical and straight forward. Can you tell us what milestone we should look forward to gauge your progress and what you are looking for throughout the year?

A - Robert van der Merwe

We will report on progress each quarter. 2006 is an executional year for us as we move the production capacity, so we will be giving you quarterly updates on, on our progress there. As we said, we were much more advanced in Europe and we provided more details on that. As we make acquisitions, we will report on those and as our assumptions for 2006 changes, we just told currency for example; we will update you on those changes as it relates to the outlook that’s currently provided for the year.

Q - Bob Labick

Terrific, thank you very much.

A - Robert van der Merwe

You’re welcome.

Operator

Our next question is coming from Eric Autio of SunTrust Robinson Humphrey

Q - Eric Autio

Good morning, I wondering if you could comment on the US China trade factor, I guess in about, in November, does that improves the clarity as far as the manufacturing movement, and how you’re in, the move your basis is more towards China or you still, in other areas in Asia and how that’s all working out?

A - Robert van der Merwe

Yes there is more visibility, that said our customers have changed their buying behavior not to put all their pens in the China box but you’re seeing Paxar expand on a much broader front in a multitude of areas, we will continue to do that. That said, the migration continues to move, customers continue to make decisions, so I think as we get closer to our customers decision-making process, we’ll get better clarity now going forward than we ever had before as to how they are going to switch those decisions within their supply chains. It is a new game for the apparel industry, I think we learnt a lot during 2005 and we’ll be a lot better added in 2006. And, one of the things that we’re very good at is being flexible within our supply chain and we have a great footprint globally to be able to cope with that. So I think we’re well positioned from 2006 along with.

Q - Eric Autio

Do you get the feel for where you think margins in Asia can go, and say once all this movement has been in, I could say 2007, 2008 as far as percentage gains to these competitive environments keeping them roughly around where they are now?

A - Anthony Colatrella

I guess I can try and fill that question. As we said, our margins for the apparel business in Asia-Pacific are considerably higher than they are in the Americas; our margins are also very good still in EMEA. But within the Asia-Pacific region, where obviously a lot of the volume is shifting to, we do expect to see continuing benefits from that. And, again our goal is to get our margins above 40% as result of the migration of business to the Asia-Pacific rim, and obviously as a result of the streamlining initiatives that we’ve announced last quarter and providing further clarity on today. So when all this said and done which you should assume is we’re going to have a substantial amount of business migrating to Asia-Pacific where our customer base is. And our goal is to drive margins north of 40%. And I think, you can probably connect the dots from there.

Q - Eric Autio

All right, thanks. I’m just turning to RFID, can you give us what sales were in 2005 and then what your expectations are for 2006?

A - Robert van der Merwe

Well we haven’t broken our sales out, and at this point we don’t plan to do so, we’ll tell you that sales were within the range we expect it for 2005; we expect that to be substantially up in 2006, inline with what you’re reading about in the marketplace, that said, as that occurs we will report on it on a quarter-to-quarter basis.

Q - Eric Autio

And then just quickly on, what was the reason for the cost reduction as far as the streamlining initiatives was it fewer locations or it used to be able to do more efficiently?

A - Robert van der Merwe

When you say cost reductions…

Q - Eric Autio

About, from your prior guidance, sorry.

A - Robert van der Merwe

But I think we’ve just firmed up on our product guidance, we expect the ongoing savings to be exactly as we said in the previous calls, any tiny differences now as we get deeper into the detail and start speaking directly with customers or based on customer’s wishes and the plans that they’re making. I also mentioned that partial modernization of the way we approach manufacturing, investing in new technologies there to improve productivity. So those are included and for that reason.

Q - Eric Autio

Okay, thank you very much, congrats Rob.

A - Robert van der Merwe

All right.

Operator

Our next question is coming from Ajit Pai of Thomas Weisel Partners.

Q - Ajit Pai

Good morning, couple of quick questions. The first one will be by the gross margins, I think you mentioned, you expected to 20 to 30 basis points improvement, is that for the full year or is that the improvement in the run rate by the end of the fourth quarter?

A - Anthony Colatrella

Now that would, Ajit that would be for the full year.

Q - Ajit Pai

That’s for the full year. Okay and then just looking at, rather than look at Asia-Pacific overall, could you give us some further color into those numbers in terms of what percentage was China and India and what’s the growth rates in those two countries were?

A - Anthony Colatrella

Well, we don’t typically break that information out, despite this effect. I think the way I would describe it is our business is growing nicely in across the board in the Asia-Pacific rim; we are in the process of modernizing and adding additional capability into our Indian business. So we haven’t seen the growth rate there yet that we would expect going forward. And so the growth is relatively speaking fairly consistent across the board, obviously we have a much larger base in Hong Kong and China and therefore that’s sort of influence is pretty much tracked with the overall growth in, within the region.

Q - Ajit Pai

Right, but when you look at your Hong Kong growth, is that purely sales in Hong Kong or there’s Hong Kong shift to China would you regard that as the Hong Kong growth?

A - Anthony Colatrella

The answer to your question, I think it’s safe to say that we do, there’s business fulfilled in Hong Kong as well as China, its all managed through the Hong Kong office. Some of the orders that come to Hong Kong get filled at Hong Kong, the others get fulfilled at China and we report them wherever the production occurs.

Q - Ajit Pai

And is it fair to assume that your China business is actually growing more rapidly than your overall Asia, the 21.2% that you just reported, and that your India business currently is growing slightly slower than that average?

A - Robert van der Merwe

All right, this is Rob, I think we’re going to be careful with those conclusions because in some cases you’ve got a large sites from which to calculate and in other cases they are still relatively businesses. So the growth rate will be very different.

Q - Ajit Pai

Okay, then moving on to some of the RFID pilots that you had in place on the item level in the apparel industry. Could you give us some color as to how successful they have been and, going forward some of ROIC that you might have seen on some of the issues you might have a seen. And at what point you actually expect some of those broader trials not just pilots but slightly broader trails, do you sort of become store wide or chain wide?

A - Robert van der Merwe

Ajit, the M&S work which is where the leading activity in the world is occurring today is in the process of rolling out into stores so it is real, their stated plans are to continuing to expand into additional categories and to rollout into more stores progressively during 2006. That would indicate to me that is a while it’s a pilot it is real test in-store with consumers. So that is the current plan. And we’ll have to wait and see what that program yields but at this point I think M&S is planning on to continue to expand.

Q - Ajit Pai

Right and when if you look at Marks & Spencers and your involvement with them, there are other partners with Marks & Spencers in the rollout. Could you give us some color as to what kind of contract or how committed is the relationship right now, is it from contract that you’ll be the only parties working, is it the status quo continue, or is that something that might come up for biding again in a year or two?

A - Robert van der Merwe

Well, Ajit we can’t comment on the contract itself. We’ll tell you that what’s been published before is that there are other players involved, other consultants and companies that participate either in the computerized infrastructure, the middleware, or some of the hardware, we are the exclusive supplier in the areas that we are experts in. But there are to your point other partners. At this point, I do expect that the rollout will continue well into 2006.

Q - Ajit Pai

Okay thank you so much.

A - Robert van der Merwe

You’re welcome.

Operator

Our next question is from Deborah Fiakas of Crystal Equity Research.

Q - Deborah Fiakas

Good morning, earlier in your prepared remarks you mentioned that your customers are making up faster than predicated transition to lower cost markets and I wonder if that what impact that might have had on your customer relationships, were you able to meet the orders that came to you, and if not, do you believe that that might have damaged in your relationships or will you be able to recover that business in months going forward?

A - Robert van der Merwe

Deborah, that’s good question, the net effect was that our customers had to source from a broader set of geographies and as they were dealing with time pressures, so their order sizes and turnaround times decrease. Now, that is I think now, the game going forward and out of modernization we referred to earlier will accommodate that. The earlier then predicated comment was really geologic set of Paxar related comment. Well now, no one could have foreseen that, as you now during the earlier part of the year there was not much visibility of the impact of the listing of the apparel sector of course, as to anyone in the industry. So we were all second-guessing, I think that’s clarifies to a large degree. And as we go forward, I think, we are just as confident that we can club with, dealing with our customers, their requirements. I think we did a reasonably good job during 2005, not withstanding those dynamics.

Q - Deborah Fiakas

Very good, and also this is I guess a somewhat relating question if you could comment on your position relative to the competitors in terms of moving to the locations where your customers are?

A - Robert van der Merwe

Well, I can’t speak for them I would tell you that our customers are dealing with these dynamics and continue to make those decisions that best suit their organizations. So we obviously know that our competitors are dealing with it, I think we are somewhat unique, in that we are much larger and or more broadly geographically based than any of our competitors. So it’s difficult to make comparisons. Many of those competitors are more regionally based as opposed to globally, so they would to some degree or another have seen change, the cost have been lots of the degree plans are they.

A - Anthony Colatrella

Although one of our competitors has recently announced some additional restructuring of our global competitors so, and it was after we announced our plan.

A - Robert van der Merwe

Yeah I think its difficult to second guess whether companies are making moves to improve on one front or another, or moving internally directly as a result of the listing of quarters, its always difficult to calculate.

Q - Deborah Fiakas

Okay and then in regard to competition now, specifically in the RFID areas, where are you seeing yours most significant competitions maybe name them?

A - Robert van der Merwe

I think we are leaders in the, at the item level. As far as the pallets in place aspects are concerned, we are not market leaders in that area, we are growing, we are excited about the prospects in retail and apparel and of course as Wal-Mart and other retailers bring their requirements forward. We are going to see a lot of activity in the consumer product area. We are pretty excited about some of the prospects we have to grow in that space, but I wouldn’t say much more than that at this point, we will provide you with more color on exactly how we are going to participate in the CPG verticals during 2006.

Q - Deborah Fiakas

Thank you.

Operator

Our next question is coming from Laud Hales (phonetic) of SMI.

Q - Laud Hales

Hi, good morning guys.

A - Robert van der Merwe

Good morning.

Q - Laud Hales

Maybe some thoughts on the model going forward, Rob you mentioned a few times 40%, rolls on the growth side, and 10% EBIT margins, it sound like as longer term goals etc., does that imply that we should be expecting sort of a SG&A number that’s, can be higher than you guys are running currently to sort of, fund product initiatives growth etc. Is that what sort of mindset or is there anything else in terms of the model that I’m missing?

A - Robert van der Merwe

I think for now that’s probably right, I mean we are holding in our assumptions the SG&A percentages, sorry the absolute dollars will go up as we grow. But I think they are just spot on, for now.

Q - Laud Hales

And maybe back to an earlier question, the growth rate for, for this year sort of implied in a low single digit rate and I guess, I guess you maybe answer that a little bit more but with the currency impact, but could you just, I’d guess that’s probably below what you expect longer term? Is that fair?

A - Robert van der Merwe

Well, absent acquisitions, which are not included in there, any new innovations that we bring to market which are not in there, that’s correct.

Q - Laud Hales

Okay thank you.

Operator

Our final question is coming from Chris Kapsch of Black Diamond Research.

Q - Chris Kapsch

Yeah hi, I just had a follow up on the gross margin guidance for ’06. The 20 to 30 basis point improvement, if you’re restructuring programs, you don’t expect the benefits from that really until 2007, I’m wondering in this environment, with the modest organic growth, where you anticipate the gross margins improvement is just a matter of mix of business shifting more to Asia-Pacific?

A - Anthony Colatrella

Yeah, that will certainly help us Chris in 2006. We are also; yeah we’ve got programs in place to mitigate some of the pressure under absorption within the Americas as well, to the deeper margins sort of where they are in spite of continuing migrations. So that in combination with the mix benefit we fairly see when we move business to the Asia-Pacific rim are the two fundamentally the two reasons why we believe just to improve our margins by 20 to 30 basis points this year.

Q - Chris Kapsch

Okay, but I mean the real mix benefit with business shifting over there is kind of the SG&A leverage it sounds like, but I guess its also on the gross margin line?

A - Anthony Colatrella

As I said our gross margins in Asia Pacific are higher than our…

Q - Chris Kapsch

Okay.

A - Anthony Colatrella

Consolidated gross margin so there is a benefit there. You are also correct that our SG&A structure is, quite a bit more efficient in Asia-Pacific and then it is elsewhere. And so we do benefit there as well.

Q - Chris Kapsch

Okay and then a follow up on the discussion around on migration, I’m just wondering is, is do you guys have any confidence or any sort of metric to track your share as this is happening with your customer base?

A - Robert van der Merwe

Well, we do our best, I mean it’s a very fragmented industry relatively speaking, so we do make estimate, as always our internal estimates that, we typically don’t, we don’t publish because of the nature of the underlying daytime and some markets we have better information and others you can imagine in the emerging markets we have no external information, we rely on internal information to calculate those numbers.

Q - Chris Kapsch

Okay, I just had a follow up also on RFID, so I was just wondering if you could talk a little bit more specifics about the increasing investment in that space this year. Or is there going to be any, if you could you just talk about the nature of the investment, and will it be expanding your Miami’s apparel production capacity at this point. And any plans for that?

A - Robert van der Merwe

That’s good question the increase emphasis on RFID includes additional training for sales we are going to invest in partnerships. There are engineering investments and then marketing type of investments to bring new products to market, so that are included in that.

A - Anthony Colatrella

And Chris we don’t have at this time any plans to increase the production capacity.

Q - Chris Kapsch

Okay and then one follow-up on that the, early days as this Wal-Mart initiatives which ramping on the CPG side. And I guess also its logical on the item levels side one perceived advantage, from your efforts to commercialize RFID with your apparel customers would to be leverage the service bureau networks. So I’m just wondering there was kind of conceptually an argument that to be made say 18 months. So I’m wondering is that still the cases is it still a potential source of competitive advantage as RFID commercialization sort of gains momentum which it really I guess in ’06 or ’07?

A - Robert van der Merwe

Yeah I think you are right I think it is, it’s an exciting area, I don’t want to comment too much further on that now, what I would tell you though we have some great prospect that we are working with that hopefully when that come, well it will come to solution soon some of those contracts we’ve won and we will come out into the market if we can we feel those with dealings in the month ahead. This is in CPG I’m talking about.

Q - Chris Kapsch

Okay, all right well thanks guys.

A - Robert van der Merwe

Thank you.

Operator

Gentlemen, there are no further questions at this time, do you have any closing comments.

Robert Powers, Vice President, Investor Relations

Thanks Megan, I would thank you again for your interest in participation in today’s conference call; we are very excited about our prospects in the future and look forward to speaking with you during next quarter’s conference call thanks very much

Operator

Thank you, ladies and gentlemen for your participation in today’s teleconference you may disconnect your lines at this time, and have a wonderful day.

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Source: Paxar Corporation Q4 2005 Earnings Conference Call Transcript (PXR)
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