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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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