Continued economic weakness has caused Avery Dennison to announce a decrease in its quarterly dividend from $0.41 to $0.20, a result of second quarter volume declines across all of the company’s segments.

The company reports that its operating margin contracted, which it sees as the impact of lower volume rather than offset pricing, productivity improvements and restructuring. In addition to the dividend reduction, the company says it will expand its fixed cost reductions, particularly in its retail information services division and in its specialty converting businesses. Also, the company plans to invest in emerging business opportunities, and remain highly focused on free cash flow.

“We know how important the dividend is to our shareholders. The board is committed to paying a dividend and we did not take this decision lightly,” said Dean Scarborough, president and CEO of Avery Dennison, at a recent press conference. “Given the uncertainty about the timing and extent of an economic recovery, and given the increased cash requirements of pension contributions, we have a responsibility to take this action. The dividend reduction is prudent and in the long term interest of the company.

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

Reported sales for the second quarter were down 20 percent. Dan O’Bryant, executive VP and CFO, said that sales on an organic basis (results before the impact of acquisitions, foreign currency translation and an extra week in the company’s 2009 fiscal calendar) were about 14 percent, a decline attributable to lower volume. “The slowdown is impacting us globally, with the emerging markets declining substantially as well, with the exception of our raw materials business in Asia, which was up in the quarter,” O’Bryant said.

Addressing the dividend reduction again at the press conference, Scarborough said that he wanted “to reemphasize we are not doing this because the company is in a crisis, but in fact, it is a difficult but sensible business judgment. I think the question is ‘why now’. As we looked at the second quarter we got thrown a number of curveballs. First of all, volume continues to be low, and in fact the only upside we see in earnings is coming from cost cutting and restructuring, not from volume improvement.

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