Investor Conference
Marina del Rey, California
  February 27-28, 2006
demand affecting sales to customers; and other
                                                           matters referred...
Dean Scarborough - CONTINUED

  2005 At A Glance                                       How will we “redefine excellence”?
...
Dean Scarborough - CONTINUED
     Three to five years from now, I expect that            while our Retail Information Serv...
Dean Scarborough - CONTINUED
    Competitive advantage drives superior                                                    ...
Dean Scarborough - CONTINUED
                                                       investments for growth. And we’re requ...
Dean Scarborough - CONTINUED
    carton label market, as well as other            the sake of some of those who may be lis...
Dean Scarborough - CONTINUED
generation advance in manufacturing.
    One of the most important advantages we
have is chan...
Dean Scarborough - CONTINUED
                                                        Modest revenue projection for 2006 re...
Dean Scarborough - CONTINUED
                                                                                             ...
Dean Scarborough - CONTINUED
over the last five years. We haven’t talked much                               Wrap-Up: AVY V...
Christian Simcic

    It’s a pleasure to be here this morning. I                                 Today’s Agenda
always enj...
Christian Simcic - CONTINUED

                                                                                            ...
Christian Simcic - CONTINUED

     As you know, 2005 was a surprisingly soft                                              ...
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
2006InvestorConferenceBookFinal
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2006InvestorConferenceBookFinal

  1. 1. Investor Conference Marina del Rey, California February 27-28, 2006
  2. 2. demand affecting sales to customers; and other matters referred to in the Company’s SEC filings. The Company assumes no obligation to update any forward-looking statements made in these About this Booklet presentations or discussions as a result of new This text is an edited transcript of the information or future events or developments. presentations made by Avery Dennison Corporation to members of the investment community on February Dean Scarborough a 27-28, 2006. Information has not been updated to It’s been almost a year since I took the reins reflect subsequent performance or events. Presentations were made by: as CEO, and I have to tell you I am more optimistic than ever about our future. Dean A. Scarborough Last year I focused on two areas. First was President and Chief Executive Officer………………. 2 to get us back on track to deliver our numbers after a very difficult start to the year. My second Christian A. Simcic priority was to do an assessment of our strategy, Group Vice President, Roll Materials Worldwide…..12 our portfolio and our organization. I approached the assessment as an Timothy S. Clyde outsider, although I have to admit that was hard, Group Vice President, Office Products Worldwide…21 given the fact that I’ve been with the company Simon D. Coulson for 23 years. My assessment included Group Vice President, Retail Information Services benchmarking with other companies and Worldwide………...…………………………………….31 discussions with hundreds of employees. I was impressed by what I heard... optimism about our Sandra Beach Lin future and a strong desire to raise the bar, to Group Vice President, Specialty Materials and redefine excellence. Employees want us to Converting Worldwide…………………………………40 preserve personal initiative, the ability to “make a difference” and to be recognized for their Daniel R. O’Bryant Executive Vice President, Finance actions to improve our business. But I also and Chief Financial Officer……………………………50 heard a strong desire for change, to simplify, standardize and eliminate work that doesn’t add Presentations and discussions during this Conference value to customers. contained “forward-looking” statements – that is, The conclusion from my assessment was statements related to future events. These that, while we have substantial opportunities to statements are by their nature subject to uncertainty. improve our position, we generally have the right Actual results and trends may differ materially from portfolio and the right strategies in place to historical or expected results depending on a variety deliver long term value creation. We have set of factors, including but not limited to fluctuations in cost and availability of raw materials; ability of the an internal goal to deliver well above-average Company to achieve and sustain targeted cost returns to shareholders. What you will be reductions; foreign exchange rates; worldwide and hearing over the next day from the leadership local economic conditions; selling prices; impact of group is how we are going to deliver that value. legal proceedings, including the U.S. Department of Let me summarize our overall strategy in a Justice (“DOJ”) criminal investigation, as well as the nutshell. In the near term, we will accelerate European Commission (“EC”), Canadian Department our productivity through better resource of Justice, and Australian Competition and Consumer allocation, modifying our portfolio, and Commission investigations, into industry competitive significantly reducing our back office costs by practices and any related proceedings or lawsuits pertaining to these investigations or to the subject streamlining and simplifying our organizational matter thereof (including purported class actions model. That will enable us to not only improve seeking treble damages for alleged unlawful margins and return more cash to shareholders, competitive practices, and purported class actions but also to invest in new sources of long term related to alleged disclosure violations pertaining to growth. alleged unlawful competitive practices, which were filed after the announcement of the DOJ investigation, as well as a likely fine by the EC in respect of certain employee misconduct in Europe); impact of potential violations of the U.S. Foreign Corrupt Practices Act based on issues in China; impact of epidemiological events on the economy and the Company’s customers and suppliers; successful integration of acquired companies; financial condition and inventory strategies of customers; development, introduction and acceptance of new products; fluctuations in 2 - AVERY DENNISON CORPORATION
  3. 3. Dean Scarborough - CONTINUED 2005 At A Glance How will we “redefine excellence”? • Improved underlying profitability • Make a good portfolio better – Raised prices to offset raw material • Execute top-line growth initiatives inflation • Expand profit margins and returns – Continue to simplify operations • Build stronger organizations with – Maintaining focus on value-creating top- line growth talented, motivated employees • Delivered against earnings target… on weaker-than-expected sales • Undertook actions to drive significant improvement in future profitability • Achieved major development milestones for RFID To provide some context for my comments Given our progress to-date, how exactly will this evening, let me just recap some of the we redefine excellence? That’s the question I highlights from last year. want to answer for you this evening. We made significant progress in improving First, I’ll describe how we are going to make our underlying profitability, bringing the year to a a good portfolio better, through crisper resource close with a much improved operating margin. allocation methods and by exiting business lines We accomplished this in an environment of that don’t have sustainable competitive substantially higher raw material costs, by advantage. implementing pricing actions across most of our Next, I’ll cover our top-line growth businesses. Our rigorous approach to pricing initiatives… giving you the highlights from what offset more than $100 million of additional raw you’ll hear tomorrow, as well as spending some material and energy-related costs this past year. time on RFID. I’ll also outline our plans to We also cut operating expenses, with a expand our profitability. focus on simplifying how we do business, while Succeeding in all these areas will require an maintaining our focus on customers. As a organization that not only has the right result of these efforts, we achieved our earnings strategies… it will also require a highly focused target for the year, despite weaker than organization that is structured to efficiently meet expected sales. customer needs. For us, that means a simpler In addition, we initiated a series of actions organization than the one we have today. The that will drive continued margin expansion over resulting organization will be more responsive to the next few years. These actions carried some our customers… quicker to decision and substantial one-time costs, most of which we execution… lower cost, and, ultimately, a more recognized in the fourth quarter; we’ll be rewarding place to work. touching on these initiatives both tonight and tomorrow morning. Overview of Today’s Portfolio And finally, we achieved some major 2005 Segment Mix development milestones in our RFID business, 3-5 Yr Sales Operating Sales Op Profit Growth Drivers Growth Target* Margin Target which I will describe later in this discussion. Pressure- • Emerging markets 5-7% 10-12% sensitive • Increased penetration of PS Materials label technology for product ID (food & beverage) • Share gain in durables • RFID adoption driving carton labeling penetration Office & • Increased penetration of down 18-20% Consumer core products modestly Products • New category innovation; existing product upgrades Retail Info • Global consolidation 6-8% 10-12% Services • New products and services • Emerging markets Other Specialty 10%+ > 10% Converting • New products, niche applications * Excluding acquisitions and divestitures Let’s start with a look at our portfolio. Here’s my view of what it will look like in the future: 3 - AVERY DENNISON CORPORATION
  4. 4. Dean Scarborough - CONTINUED Three to five years from now, I expect that while our Retail Information Services business emerging markets will represent about 30 shares the leadership role with Paxar, these two percent of our total sales, up from a little over 20 companies far outdistance the rest of the pack. percent today. …and we continue to build competitive Roll Materials and Retail Information advantage in these large, growth markets Services will be bigger and more profitable. Office Products will represent a smaller Key Sources of Competitive Advantage share of our total sales, but the segment will be Pressure- • Global and regional scale even more profitable than it is today, due to an sensitive • Proprietary product technology and Materials know-how improved product mix. In the near-term, sales Office and • Ubiquitous software templates and other growth for this segment will be constrained as Consumer consumer use “enablers” Products we reposition our portfolio, de-emphasizing our • Powerful consumer brand less differentiated product lines. But over the Retail • Data management and global Information image/color control systems long term, we expect to see our growth Services • Geographic reach • Superior sales organization for multi-tier trajectory improve. market Finally, as the market develops, RFID • Design expertise and rapid sampling capability should be a business generating well over $100 million in sales. Now, I know that some of you keep very close track of what we say each year, to see We expect to strengthen these leadership where we have changed course. So I will positions by enhancing our already substantial acknowledge right up front that we have lowered competitive advantages. For Pressure-sensitive our sales growth expectations for the roll Materials, our scale – on both a global and regional business. Our value creation expectations for basis – drives advantage in many important respects. the business are still very high, as we have We have an unrivalled manufacturing and raised our targets for profitability and return. distribution platform that drives both cost and But, in light of the slower growth we saw in North service advantages. Our technical capabilities America last year, we feel our adjusted top-line and innovative, proprietary new products are the targets are appropriate. reasons we lead in films, the fastest growing I won’t walk you through all the growth segment of the roll label market. drivers and sources of margin expansion for Our Office and Consumer Products each of our key businesses – you’ll be hearing business benefits from software templates that about all that tomorrow. But let me give you drive consumers to demand Avery-brand some of the highlights. products for mass mailings and other desktop printer applications. We are market leaders in our key businesses… Likewise, our Retail Information Services business benefits from a set of strong competitive advantages. One of the most Global Business Market/Categories Market Position important of these is fulfillment speed and Pressure- Paper/film roll #1 consistency of brand image and data across sensitive materials for labels Materials multiple apparel manufacturing locations. And Office and • Printable media #1 we have an industry leading infrastructure and a Consumer (labels, dividers) Products • Binders, sheet #1 or “close #2” strong, multi-location presence in China, which protectors (North America only) is the most important market for this business. Varies by product, • Other products region Retail Tickets and tags for One of two global Information retail apparel players Services We are strong market leaders in each of our key businesses. Our global Fasson roll materials business is three times the size of its largest competitor. Our flagship office product categories – mailing labels and index dividers – command over half of the global market. And, 4 - AVERY DENNISON CORPORATION
  5. 5. Dean Scarborough - CONTINUED Competitive advantage drives superior We’ve increased our participation in the rapidly performance growing emerging markets… Operating Margin* Emerging Markets Share of Total Sales AVY Segments vs. Peers 2000 2005 2010 Pressure-Sensitive Materials Office & Consumer Products AVY PSM BMS PS Sector UPM Converting AVY OCP ABD Office Products 10.0% 20.0% 8.0% 16.0% 12.0% 6.0% 8.0% 4.0% Contribution 4.0% 2.0% to Overall 0.2 pts. 2.4 pts. 3.5 pts. Growth: 0.0% 0.0% 2004 2005 2003 2004 2005 Emerging Markets Local Management Leveraging Global Capabilities * Excluding restructuring charges The proof of our competitive advantage is You’ll hear a common message across evident in our superior performance relative to many of the presentations tomorrow, which is our peers. Our two largest businesses have the important role of emerging markets. We’ve consistently outperformed the competition in more than doubled our share of sales coming terms of profitability. from the emerging markets over the past five Although we didn’t include a slide on this, I years, and we expect to see another roughly 50 want to point out that Retail Information Services percent increase in the proportion of our sales is just on par with its primary competitor in terms from these markets by 2010. of operating margin. That’s because we have Historically, these regions consistently been investing ahead of growth in this business, delivered over 20 percent annual growth. Now, which has constrained our profitability. As we given the size of the businesses today, we do grow into our investments, we do expect a expect that pace to moderate. Nevertheless, the significant expansion in operating margin. opportunities for growth in these markets remain outstanding, and we have made significant International operations growing faster-than- investments to capture that growth. average… and profitability is expanding 2005 Revenue 2005 Operating Margin**, … and these markets are contributing by Region International Operations significantly to our profit growth and returns (before intergeographic eliminations) 10.0% Operating Profit from Emerging Markets* Latin Other* America ($ millions) 9.0% > 200 Asia 8.0% U.S. Eastern 7.0% Europe ~ 115 6.0% 5.0% Western 2003 2004 2005 ~ 40 Europe * “Other” includes Canada, Australia, and South Africa ** Excluding restructuring charges 2000 2005 2010 * Figures are approximate. Estimates do not include allocation of expenses incurred in North America and Europe for direct support of businesses in emerging markets (particularly significant for RIS). Largest single growth platform today Another important element of our portfolio is geographic reach. Our international operations Importantly, emerging markets aren’t just have been growing faster than average, and contributing to our top line… they are adding profitability outside the U.S. has expanded significantly to our profit growth as well. We dramatically with the completion of the Jackstädt generated roughly $115 million of profit from acquisition integration in Europe. emerging markets last year, and we expect continued solid growth and margin expansion ahead. 5 - AVERY DENNISON CORPORATION
  6. 6. Dean Scarborough - CONTINUED investments for growth. And we’re requiring Resource Allocation Philosophy more rigorous screening early after idea • Divesting businesses with limited generation. competitive advantage This same, more disciplined approach to our • Enhanced discipline with respect to organic growth agenda applies to our acquisition internal growth initiatives strategy. I’m happy to say that we have a good – Increased visibility on spending; more centralized control of investments track record in this area. In particular, I’m – More rigorous “opportunity assessment” confident that the JAC and RVL acquisitions are • Acquisitions must demonstrate proving themselves key to our competitive strong strategic logic advantage and growth potential. – Close to “bullet-proof” Given the odds against acquisition success, – Must create economic value (return to shareholders) under conservative though, our philosophy is that we won’t buy a assumptions business unless it is fairly close to “bulletproof”. We proactively identify and prioritize candidates. We have to see a very strong, strategic logic to any deal. And, of course, we are highly You know, one of the most important things I disciplined about not overpaying. do as CEO is to allocate resources. That includes capital spending, people and Key Growth Priorities investments for growth. Let me tell you about my philosophy towards • Grow materials businesses through resource allocation. First of all, I believe expansion in emerging markets, increased service leadership, and innovation in new strongly that we don’t belong in any business applications where we don’t have a relatively strong source • Invest in new marketing programs to of sustainable competitive advantage, accelerate growth of Avery-brand printable media products particularly if we are competing in a market with • Accelerate growth of RIS business with limited growth potential. You have two options new products and continued geographic for businesses in that category…divest, or expansion manage for cash. The divestitures we • Expand new RFID business through share announced in the fourth quarter all fell into that gain of rapidly expanding carton label market and innovation in new applications first category. for selected markets Second, I believe that effective resource allocation requires highly disciplined decision- making. Our experience in implementing our That summarizes our portfolio outlook. Now Horizons growth program taught us some I’d like to spend some time on our growth valuable lessons on that front. This program priorities. At the 50,000 foot level, we’ve got has been – and continues to be – a great four primary areas of focus: success. • We’ll grow our materials businesses – that We took an inward-focused culture and is, Roll Label, Graphics & Reflective, and forced it to look outside… to seek unmet Specialty Tapes – primarily through customer needs, to creatively respond to those expansion in the emerging markets, as well needs, and to quickly drive results through an as through service leadership and product innovative, 100-day process of execution. We innovation. unleashed a tremendous amount of creativity in • We’ll grow the Printable Media category of our employees, and our pipeline of growth ideas our Office Products business by investing in swelled. proven marketing programs, driving demand But we didn’t get everything right. As we for existing products that we believe are allowed our highly decentralized businesses to significantly underpenetrated. We’ll pursue new growth agendas, we invested in too enhance our existing products with features many places… and it took us too long to kill that consumers value, and develop some some projects. But I’m happy to say that we exciting new categories as well. learned as we went along, and we modified our • New products and continued geographic course. expansion will accelerate growth for our We expect our next wave of longer-term Retail Information Services business. growth initiatives to be more effective than the • And, finally, we’ll gain share of the rapidly first. We are maintaining greater central visibility and control of both operating expenses and expanding market for RFID, both for the 6 - AVERY DENNISON CORPORATION
  7. 7. Dean Scarborough - CONTINUED carton label market, as well as other the sake of some of those who may be listening emerging, high volume applications like on the internet and may be new to the pharmaceutical. Company, let me provide just a bit of background. We participate in a few areas of this Horizons continues to support growth initiatives industry, but the most important one is the • H1 process… the way we do manufacturing of what’s called an inlay – the business today combination of a very small silicon chip, and an • H2/H3 process has evolved… more antenna. selective Thanks to vendor mandates from Wal-Mart, • Former H2 projects now represent other key retailers, and the Department of ~ $200 mil. of sales… anticipate Defense… not to mention interest from the FDA $40+ mil. of incremental sales and pharmaceutical companies, RFID is from these products in 2006 emerging as a multi-billion dollar market. RFID tags allow manufacturers and retailers to automatically locate and identify stock, and record the movement of inventory. This technology is expected to significantly reduce costs in the supply chain, and improve sales by eliminating stock-outs. Horizons is the key process we use to The projected pace of industry development execute our top-line growth strategies. The is highly uncertain – but when it does ramp up, Horizon 1 process that I described earlier is we’re targeting a 30 percent share of the market, now, quite simply, the way we do business which should eventually translate into a today. business contributing hundreds of millions of The Horizons 2 and 3 process has evolved. dollars of revenue annually. We’re more selective about the projects we’ll invest in now. But our probability of success has We’re developing multiple sources of competitive increased. And we’re now seeing the fruits of advantage that leverage our strengths our investments in longer-term growth initiatives. Products from this pipeline now represent about • Outstanding product performance and $200 million of sales for us, and we expect testing capabilities about $40 to $50 million of incremental sales • Good linkages to all from these initiatives in 2006. points in value chain • Superior roll-to-roll manufacturing RFID remains #1 single growth opportunity capability • Superior commercial approach • Corporate credibility / financial strength Let me tell you why this is such an attractive market for us. We believe we will have a number of sources of sustainable competitive advantage in this business. First off, we offer great products and testing capabilities. Having systems in place to ensure tag readability all the way through the supply chain is absolutely essential to success. Let me spend some time on RFID. Like the We’ve also commercialized a manufacturing emerging markets today, I believe that RFID will capability that is 10 times faster than one day represent an entire platform for our conventional equipment, with high yields. This growth, a fundamentally enabling technology is a proprietary process that will give us an that will span many, many applications. advantage for at least a couple of years, during I know that all of you here today are familiar which time we’ll be developing our next with the business we’re developing here. But for 7 - AVERY DENNISON CORPORATION
  8. 8. Dean Scarborough - CONTINUED generation advance in manufacturing. One of the most important advantages we have is channel access – through our roll label material business, we’re already the largest supplier to the printers who make RFID labels. And we also have size and credibility in the marketplace… as you can imagine with an emerging technology like this, the market is crowded with a lot of start-up players… so big end users like Wal-Mart and the Department of Defense appreciate the stability we offer. 2005 Milestones • Began volume production on industry’s first and only high-speed inlay manufacturing process • Joined Intermec’s Rapid Start Licensing This major strategic move was hailed by program to address an IP barrier for customers RFID Journal as one of the top ten stories in the • Significantly lowered price of world’s first industry last year! This is the only business in high-volume Gen 2 tag to enable the Company where we celebrated lower prices! widespread adoption We’ve been aggressively marketing our • Released white paper to drive industry progress in tag testing advantages, and we’ve been seeing excellent • Chosen as inlay supplier by major end traction with customers following the users announcement of this pricing strategy, especially among those interested in moving quickly to the Gen 2 standard. Importantly, we are confident that we can 2005 was a year of significant make good money at these prices when we accomplishment in the development of this achieve our volume goals. We have a clear business – both for the industry and ourselves. path to profitability at this pricing level. We commercialized our high speed But perhaps the most important milestone is manufacturing process, and we’re continuing to that we have been chosen by major end users drive operational improvement, with the goal of as their inlay supplier. I am particularly pleased achieving and maintaining a cost advantage in to announce that Kimberly-Clark has chosen our this industry. Gen 2 inlay for their RFID program. KC has At last year’s Analyst Meeting, we showed a been a true leader in the development of this short video clip contrasting traditional technology technology. They were the first to ship RFID- with our new high-speed process. Since we’ve tagged cartons to Wal-Mart, and they are one of made considerable progress since then, I the first transitioning to the Gen 2 standard. thought it would be worth showing you an Kimberly-Clark has long seen the potential for updated version of that comparison. RFID to drive efficiency improvements [commentary describing video clip] throughout their supply chain. Another important milestone last year occurred when we joined Intermec’s Rapid Start program, an important step in clearing the intellectual property hurdles for our customers. And we significantly reduced the price of inlays purchased in volume, to less than eight cents each. 8 - AVERY DENNISON CORPORATION
  9. 9. Dean Scarborough - CONTINUED Modest revenue projection for 2006 reflects Fundamental improvement in competitive position reality of market ramp vs. a year ago • Market adoption progressing… meeting • Manufacturing speeds, yields beating internal targets reasonable expectations – Users waiting for Gen 2 • Customers, other partners recognize our – Implementations at minimum to meet customer technical capabilities requirements • On track to achieve share goal for retail – Retailers remain committed… but careful in carton applications making demands • Sufficient progress to begin broadening • Key unknowns continue to affect timing reach: – Infrastructure costs still high – Develop and commercialize HF products – Real implementation experience / expertise not – Increase pharmaceutical, apparel, other widely available item level engagements – Item tagging getting more attention… but HF/UHF question yet to be answered – Expand activities in Europe / Asia In sum, in twelve short months, we’ve Now, with all this said, I do want to fundamentally changed our competitive position emphasize that our outlook for revenue from in this market. Our manufacturing speeds and RFID is quite modest in the short-term… likely yields have been beating our internal targets, not more than $10 million this year. and we continue to make progress towards There are a number of reasons why we achieving our cost trajectory. Customers and believe that demand will remain modest in 2006. other partners in the industry recognize our While mandated programs continue to expand, technical capabilities. And, as they say in there are still only a few distribution centers politics, the early returns are very encouraging. requiring RFID labels. And even the companies Based on our success rate with key accounts so that are already shipping RFID labeled goods far, we’re on track to achieve our share goal on are not labeling all of their SKUs. Further, the Gen 2 carton applications by year-end. true share gain opportunity for us comes as Given the tremendous progress we’ve made companies transition to Gen 2, the new global on the carton labeling initiative, we’re now technology standard for these devices. Most broadening the reach of our development companies are still in the beginning stage of this efforts. Our high speed strap-attach process and transition. And I have to emphasize that there technical capabilities advantage us in other are some big unknowns that will affect how RFID markets. quickly this technology takes off. But we believe HF represents a particularly interesting that it is only a question of “when”, not “if” this segment of the market right now. It’s actually happens. We said the same thing last year… bigger than UHF in unit volumes currently – but it’s even clearer now, that there’s just no about a half a billion units this year – although stopping this train. UHF is generally expected to surpass HF as carton labeling ramps up. But the jury is still out Margin expansion is key near-term priority for the Company on which technology will be best suited to item level tagging… so HF could ultimately represent • Continued pricing rigor • Targeting $80 to $90 million of annual the bigger market. Either way, we are well savings from restructuring actions positioned to capture a leading share position in currently underway both technologies. • Planning continues for additional savings The nice thing about HF applications today through organizational redesign is that they carry higher average selling prices. We expect to commercialize a number of these applications by the end of this year. I’ve covered our growth strategies in some detail. Now I’ll spend a couple minutes on margin expansion. Dan is going to cover this 9 - AVERY DENNISON CORPORATION
  10. 10. Dean Scarborough - CONTINUED Stronger, simpler organizations will enable topic in much more detail tomorrow, but I would achievement of long-term goals like to make a few big picture comments on this • Achieve best of both worlds… important priority. – Decentralization and customization to First of all, we will maintain our pricing rigor. meet customer requirements As you know, we gave up some market share – Centralization and standardization to this year as we raised prices in response to achieve efficiency significant cost inflation. But our profits are up in • Phased approach… two to three years to fully implement the business where we lost share. And we have • Targeting 50 to 100 basis points not given up share in the high return segments improvement in SG&A as percent of sales of the market, like films and durables. Second, we are targeting substantial cost savings through the restructuring actions we announced in the fourth quarter… worth $80 to $90 million annually when we’re finished. And we believe there remain additional opportunities for increased efficiency through Our aim is to achieve the best of both other organizational changes that are still in the worlds… decentralization and customization of planning stages. the front-end to meet our customers’ requirements… with centralization and General and administrative expenses have standardization on the back-end to achieve been “sticky” efficiency. Trends in Sales vs. G&A Expense We will be taking a phased approach to 6000 12.0% these changes. I expect it to take a few years to 5000 10.0% fully achieve our vision. But, in the end, our goal General & Admin Expenses Net Sales ($millions) is to significantly and sustainably reduce SG&A 4000 8.0% as % of Sales expense as a percent of sales by 50 to 100 3000 6.0% basis points. 2000 4.0% Enterprise Lean Sigma… an evolution 1000 2.0% 0 0.0% 1999 2000 2001 2002 2003 2004 2005 ELS Net Sales (excl. discontinued ops) G&A as % of Sales • Individual excellence • Team excellence • Cost out focus • Quality, Cost, Speed, Here’s why I think there’s room for further Safety • Led by few improvement. Through acquisitions and our • Led by top leadership • Belted community only • Everyone part of ELS own internal growth programs, our sales are up • Manufacturing focused (especially value add by more than a billion and a half dollars since • Aligned to savings employees) targets • Value Stream focused 1999. And yet our general and administrative • Aligned to business expenses have remained about even as a priorities percent of sales. Note that I’m talking general and admin expenses here… I’m not including R&D or marketing expense. It’s clear to me that we simply haven’t leveraged our size in this area In addition to these restructuring-related cost of the P&L. savings, we will also benefit from a number of We’ve generated great productivity in our productivity initiatives spanning all the plants and operations, so it’s time to deliver businesses. You’ll hear more about these from productivity in the back office as well. our operating executives tomorrow. And, finally, we will drive continuous improvement and operational excellence through a platform called Enterprise Lean Sigma. I believe you are all familiar with the great success we have had with Six Sigma. These tools have driven substantial productivity improvement in our plants, year in and year out, 10 - AVERY DENNISON CORPORATION
  11. 11. Dean Scarborough - CONTINUED over the last five years. We haven’t talked much Wrap-Up: AVY Value Proposition about our Lean Manufacturing efforts… this is • Industry leader with clear and sustainable basically a complementary tool set that is competitive advantages in large, growth focused on continuous elimination of waste in all markets processes… in effect, learning to do more with • Balanced strategy for value-creating growth less. • Strong balance sheet and cash flow, Enterprise Lean Sigma combines these tool combined with disciplined investment strategy sets and takes continuous improvement to the • Experienced management and high- next level. performance organization focused on creation of shareholder value Constant reinforcement of Company values and ethics is crucial in today’s global environment Growth Productivity Now, I’ve covered a lot of ground tonight, and I know I’m standing between you and a cocktail. So let me just quickly state our value proposition: • We are leaders in our industries with clear competitive advantages in large, growth People Purpose. Passion. Potential. Pride. Our people make a world of difference. markets. Values • We are executing against a balanced Integrity Service Teamwork Innovation Excellence Community strategy for value-creating growth – that is, top-line growth, margin improvement, and When I talk to employees I generally cover capital efficiency. • We maintain a strong balance sheet and three topics -- growth, productivity, and people. Underpinning these priorities is a set of core deliver solid cash flow, combined with a values on which the Company was founded. highly disciplined capital allocation model In light of the investigations of our Company and investment strategy. • And we’ve got a proven management team and industry, I think it is important for you to know how seriously we take these values. To that continues to develop a high- reinforce them, we launched a global program to performance organization, focused on ensure that our employees are informed and maximizing long-term shareholder value. educated on values, business ethics and our code of conduct. We provided training in local languages to help ensure that everyone understands proper business procedures. I have personally spoken to thousands of employees around the world on the importance of this topic. I’ll just take this opportunity to preempt the question on the status of the investigations that are underway. I wish I could provide some direction for you, but I have no news to report. These remain ongoing inquiries, and we’re not in control of the process, so there is nothing I can say by way of update. We will, of course, continue to keep you apprised of material developments if and when they occur. 11 - AVERY DENNISON CORPORATION
  12. 12. Christian Simcic It’s a pleasure to be here this morning. I Today’s Agenda always enjoy the chance to speak with the • The pressure-sensitive labelstock investment community because I have a great market story to tell. • Growth catalysts • Margin expansion strategy The industry leader in every region of the world • Building competitive advantage 2005 Sales ~ $2.7 Billion Roll Materials Worldwide Just a quick outline of my agenda. First, I’ll provide some historical background that I think 1–1.5 X larger 2–4 X larger > 4 X larger than #2 than #2 than #2 will help you understand the industry and our competitor competitor competitor Roll Materials Worldwide position in the market today. I’ll talk about the key growth catalysts for the industry and for our With roughly $2.7 billion in sales, our roll business in particular. And I’ll tell you how we’ll materials business is the global industry giant in win in a more competitive environment – a relatively specialized industrial niche. We expanding our global share position over time have the leading share position in every region and improving our operating margin – by of the world with the exception of Japan, where executing aggressive productivity initiatives, and we don’t play. by building on our already compelling set of But most of you know all that. What you competitive advantages. really care about is one key question, which I’m going to acknowledge right up front… how are We manufacture materials in roll form we going to grow profitably in a more challenging and competitive environment? The market dynamics for the pressure sensitive labelstock industry have undergone significant change over the last few years. We entered a period of rapid cost inflation, requiring price increases unlike anything we’d seen in a decade. And we’re now competing against a more aggressive, global competitor who is focused on share gain, both in the U.S., as well as in China, with an apparent willingness to invest heavily and accept much lower operating margins than ours. Roll Materials Worldwide That seems to suggest that we will either suffer margin erosion or share loss, all else First, for those of you who might be new to being equal. But “all else” isn’t equal. And Avery Dennison, let me start with a quick that’s precisely what I hope to communicate to overview of who we are and what we do. We you in today’s presentation. manufacture pressure-sensitive materials in We will expand our global share with master rolls up to 80 inches in width. We then existing and new sources of competitive “slit” these master rolls into narrower widths, advantage, including service, as well as new typically between 4 to 12 inches, and ship these products and technology improvements, rolls to our label converting customers. These especially in films. At the same time, we will customers range in size from “Mom and Pop” expand our operating margin through new, operations to multi-national converters with over significant sources of productivity improvement. $100 million in sales. They print and die-cut the material into labels for use in literally thousands of different applications. 12 - AVERY DENNISON CORPORATION
  13. 13. Christian Simcic - CONTINUED Our global unit volume growth generally End-Use Applications falls in the 6-10% range Annual Unit Volume Growth • Product decoration • Variable information Roll Materials Worldwide • Brand identification 26% Impact of 22% Jacstädt acquisition, 18% June, 2002 14% 10% 6% 2% -2% 1998 1999 2000 2001 2002 2003 2004 2005 Roll Materials Worldwide Roll Materials Worldwide The vast majority of these labels are used This is a great market to lead. Industry for one of two purposes. Product decoration volumes have long grown at multiples of GDP, and brand identification applications represent sparked from time-to-time by both external and about half of our total business. Our materials internal catalysts. Up until this past year, global are used to promote most of the world’s best- unit volume growth for our roll materials known multi-national brands. Variable business has typically been in the 8 to 10 information applications – bar codes, for percent range, before acquisitions. example – make up the balance of our products. That spike you see in 2002 and 2003 relates to our mid-2002 acquisition of Jackstädt. One interesting note about that acquisition: our Broadest Reach in the Industry… High Relative Market Share on a Regional Basis profitability took a sizeable hit when we purchased • 66 distribution centers • Organized around trade zones in 32 countries this break-even company. Today, we are back at • 47 sales offices • 27 manufacturing facilities pre-Jac profitability levels, without losing the new customers we gained through the acquisition. And we now have the opportunity to further leverage our new scale in Europe, driving additional margin expansion there. In North America, industry volumes have grown at a compound annual rate of approximately 4% Headquarters Distribution Centers Manufacturing Facilities Annual Unit Volume Growth*: All Products North America -- Fasson vs. Total Market 1–1.5 X larger 2–4 X larger > 4 X larger than #2 than #2 than #2 competitor competitor competitor 1.5 Roll Materials Worldwide CAGR = 4% (unit volume indexed to 1997) Impact of 1.4 Spinnaker/ Nashua consolidation One of the critical success factors for profitable 1.3 growth in this industry is the achievement of scale 1.2 and high relative market share on a regional basis. 1.1 No competitor matches our global footprint nor has 1.0 the resources to invest in technology and innovation 1997 1998 1999 2000 2001 2002 2003 2004 2005 that we do. Total Market Fasson And this is a business where regional scale * Growth rates normalized for 2004 extra week and other irregularities Roll Materials Worldwide really matters. Specifically, our scale drives sustainable competitive advantage in three key North America is still our largest region areas which I’ll touch on a bit later: technology, today, representing about 40 percent of our total service, and productivity. sales. So it’s worth looking at the trends here. Even in this mature market, unit volumes have grown at a compound annual rate of 4 percent, although with a fair amount of volatility from year to year. 13 - AVERY DENNISON CORPORATION
  14. 14. Christian Simcic - CONTINUED As you know, 2005 was a surprisingly soft growth driver. As the chart here demonstrates, year for this market. I know that Dean spoke in pressure-sensitive labeling remains relatively the last teleconference call about some of the under-penetrated in these markets, driving rapid factors contributing to slower growth in this growth as a rising middle class creates new region, most notably, relatively weak consumers for packaged goods. The race for manufacturing output. We do expect to see a premium brand recognition and awareness is pick-up in industry volumes this year, and increasing, driving the need for more believe that the long-term domestic market sophisticated packaging. growth rate will be in the range of 2 to 4 percent. China is now the third biggest advertising market in the world. P&G has been the highest New applications continue to shift to bidder for ad space for each of the last two pressure-sensitive technology years in China Central Television’s annual Est. North American Penetration of auction. Pressure-Sensitive Technology Pressure Sensitive Other Labeling Technologies Retailing is evolving rapidly in India 75% 73% 73% 70% 56% Malls 35% 29% 19% 5% Food Wine Beer O ther Durables Personal H ousehold Pharma Variable Beverage Care Info Roll Materials Worldwide One of the key drivers of volume growth has New Retailing Traditional Retailing been the penetration of pressure-sensitive Roll Materials Worldwide technology at the expense of competing labeling technologies. This has long been a factor in our industry, but we continue to see new India is emerging as the next China story, applications shifting to pressure-sensitive. with per capita GDP rising rapidly as companies For example, the overall beverage segment outsource services and software development to still remains largely untapped, and there’s a long that part of the world. Likewise, the evolution of way to go in the food segment as well. As the the retail industry in these markets is working in chart demonstrates, there are still significant our favor. Retailing is being redefined – opportunities to increase pressure-sensitive’s transitioning from small shops, where packaging penetration of labeling, even in mature markets is of little importance to consumers, to like Western Europe and North America. superstores in modern shopping centers. I have seen more changes in the last two years PS labeling remains underpenetrated in the than in the five years before, with shopping malls emerging markets blossoming everywhere and companies like Wal- Mart negotiating their entry into this new market. PS Consumption/Capita relative to GDP/Capita In this environment, where consumers face 14.0 United Kingdom tens of thousands of items from which to Netherlands 12.0 New Zealand choose, the label acts as a silent salesperson at PS/Capita (m2) Australia United States 10.0 Germany/France/Sweden the “moment of truth”. With most buying Spain Japan/Finland/Italy Taiwan 8.0 decisions being made three feet from the shelf Singapore 6.0 Czech Republic and on impulse, labeling is a key product Canada Malaysia/South Africa/ South Korea Poland/Chile 4.0 Hungary Indonesia/ Greece differentiator. Vietnam/ Phillipines Turkey/ 2.0 Argentina Venezula Thailand/Russia/Brazil/Mexico India China/Columbia 0.0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 GDP/Capita Sources: 1) GDP / Capita – CIA – The World Factbook 2) Population – Population Reference Bureau 3) Market Size Estimates - RMWW Roll Materials Worldwide Emerging markets – Asia, Latin America, and Eastern Europe – represent another key 14 - AVERY DENNISON CORPORATION

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