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Avery Dennison Corporation (AVY)

February 20, 2013 8:55 am ET

Executives

Dean A. Scarborough - Chairman, Chief Executive Officer and President

Eric Leeds

Analysts

Scott Gaffner - Barclays Capital, Research Division

Scott Gaffner - Barclays Capital, Research Division

All right. Good morning. Welcome again to the Industrial Select Conference. We're going to move on here, we've got Avery Dennison. We've got Dean Scarborough, President and CEO; and Eric Leeds, Director of Investor Relations.

Question-and-Answer Session

Scott Gaffner - Barclays Capital, Research Division

I'm going to open it up with one question for you. And it's really about the transformation that's been going on at Avery Dennison. Obviously, the business has been through a lot over the last few years. Can you just sort of talk about the transformation in the business model from a -- the businesses that you compete in, but also in the way that you actually manage the businesses that are still part of the Avery Dennison Corporation?

Dean A. Scarborough

Sure, Scott. That's a big question actually. I think, I'll talk about it in 2 dimensions. The first is really all about the portfolio. Prior to the recession in 2009, we had a portfolio that wasn't growing very fast. It was actually less than 2% organic growth a year. And the problem with that is that when you're growing that slowly, it's very difficult to generate decent earnings growth because you just keep up with inflation and all your productivity goes just to keep up with that, and it's hard to generate earnings growth. So over the past few years, what have we done? We doubled down on an existing business with the Paxar acquisition, regrettably ill timed, paid the high price at the peak of the market and right before the worst retail recession we've had in 50 years. But I'll come back to this, I think, the fundamentals of that business are good on a go forward basis. And then the office products business, we wanted to exit, that was more of a B2C business than a B2B business. It had limited opportunities for global growth. Obviously, we tried to sell the business in 2012 to 3M, but unfortunately that was blocked, and now we have a deal that we feel confident will go through. So from a portfolio perspective, focusing on our 2 core businesses, Retail Branding and Information Solutions and Pressure-sensitive Materials, are exactly where we want to be. And those businesses will -- can grow at 3% to 5% together, because they're fundamentally packaging businesses. RBIS is for soft goods and Pressure-sensitive Materials is more for hard goods. And those, we have great exposure to emerging markets there. So that 35% of our portfolio that sits in emerging markets actually gives us a nice growth rate, and there's opportunity for margin improvement. The other part of the transformation really has to do with some of the restructuring that we did last year. We, for many, many, many years, have been a decentralized company. And I'd say, 30 years ago, when I started with the company, we had literally hundreds of business units gathered around the globe, very independent P&Ls, and there were more things at corporate to help manage the things where you didn't have scale in a lot of those small businesses, like our corporate research center, which is a great investment 25 years ago. But today, we had 2 big scale businesses, RBIS is $1.5 billion, Pressure-sensitive is $4 billion. Those businesses have more than enough of their own capability. We're investing in R&D, for example, in China and India. We have R&D centers in the U.S. and Europe as well. So when we took a hard look after the divestiture of OCP and said, well all these activities that we're doing at the center, is there a duplication of effort? Do we need to do it anymore? And frankly, a big part of the restructuring was not to do things and also was not to try to optimize things like information technology across 2 businesses that have very, very different needs for IT. So I think our corporate IT spending as a percent of sales is 2.5%. But the average means nothing, it's a lot higher in RBIS, where we manage a lot of data. It's lower in materials, where it's really just to run the back office. So really, eliminating a lot of that sort of centralized functional oversight and pushing those into the businesses, having the businesses prioritize and manage that, we can do it more efficiently and more effectively. And that's why you see the change in the segment structure that we just announced with last quarter's earnings.

Scott Gaffner - Barclays Capital, Research Division

And maybe for everybody in the audience that might not be familiar with Avery Dennison, could you just talk a little bit about -- and I'm asking the question on RBIS to give you a heads up.

Dean A. Scarborough

Sure. Okay. Yes.

Scott Gaffner - Barclays Capital, Research Division

Can you maybe just describe the business a little bit. Where you stand? What are your competitive advantages?

Dean A. Scarborough

Yes. So our largest business is Pressure -- I assumed that we talk about the whole portfolio. So the largest business is Pressure-sensitive Materials. We make multi-layer laminates that we sell to labeled printers all over the world, thousands of them. And for 2 basic types of applications, one is to enhance people's brands. So it's a -- PG is a good example here, where you see a clear label on a water bottle, that's a self-adhesive material that we make. And then the other application is for information management. So think of a bar code label or if you order something off the Internet from Amazon and the box comes in, and if you ever count the number of labels that are in or on the box, it's actually quite a few. And that business, we're the market leader by about 2.5 to 3x. We market -- we sell to literally 10,000 label printers and converters all over the world in thousands and thousands of applications and to end users. But we do market our capabilities to beverage companies, health and personal care companies, durable goods manufacturers, where we talk about our capabilities. We -- about half of all packaged decorations still is not Pressure-sensitive. So we have a growth opportunity there. I talked before about emerging market footprint, about 35% of our sales in Pressure-sensitive are in the emerging markets of Asia, Latin America and Eastern Europe. There, you have not only consumers with more buying power but you have organized retail. So the package itself in organized retail has to sell itself. So again, a big factor for us is to help advocate for a self-adhesive technology in those markets. And we talked to many, many end users and convinced them to use that packaging. So what happens is a consumer-packaged goods company, international brand will upgrade its packaging on the shelf, all the local competitors have to follow, we have the technology, that's a real benefit for us. This business has a lot of benefits of scale, from purchasing to the way we run our assets. Relative market share really matters in terms of returns, and while our average -- our relative market share is about 2.5 to 3 in emerging markets, and some emerging market is as much as 5 or 6:1. So huge advantage for us. We make higher-than-average margins in emerging markets as well. So great business. We've been in it forever, ever since Stan Avery invented the self-adhesive label, and it's a real mainstay business. Our other business is Retail Branding and Information Solutions. It's a business we've been in since the 1960s. Again, we offer 2 main types of solutions for the retail and branded apparel manufacturers. So if you're Nike or Adidas, you really care about the way your brand image looks. If you're sourcing products from 20 different countries around the globe and you would just rely on the local printer to print the tags or labels that go on the garment for branding, you'd have a mess. And what we provide is a relatively small percentage of the cost of the garment. So most major brands and retailers outsource that. So we manage all of that complexity for them. And then, the second major application is all about accelerating the supply chain, so information management. We print, literally, billions of price tickets every year because retailers decide at the last minute what price they're going to charge for garments. Those price tickets are attached at the source, where the garments are sewn, right before they're shipped. So we have service bureaus in about 50 countries around the world to provide bar code information. And this is where RFID plays. RFID, for item-level marketing, solves a big problem for retailers. It's simply a low-cost way to take inventory and improve inventory accuracy. And it's been -- had a nice growth trajectory in the last few years, and we're the #1 player in the RFID market. And again, there, I think, we're -- in RBIS, we're 5 to 6x our largest competitor. We have a very unique network where we literally serve apparel companies all over the planet. Wherever apparel is made, it's an interesting business model. We have a lot of opportunity for margin improvement. It's a high-variable margin business, and we've been challenged a little bit by some of the market volatility in the last few years.

Scott Gaffner - Barclays Capital, Research Division

Did that generated any questions from the audience? Can we just maybe talk about the RBIS business for a minute and really focusing on RFID? Obviously, a lot of interest in RFID these days. I know part of the rationale for the Paxar acquisition was related to RFID. Can you talk about probably what transpired post Paxar that maybe didn't lead to as much growth in RFID as we expected? Talk about what you've seen in RFID recently, and where you think that business is headed as part of RBIS?

Dean A. Scarborough

Yes, I'd say, the main reason for the Paxar acquisition was all about synergy. I mean, RFID was a nice to have. We certainly didn't do the acquisition for RFID. And I think at that point in 2007, you really only had 1 major retailer that had implemented RFID in a decent way, and that was Marks & Spencer in the U.K. And they pretty much, I would say, prove the model in terms of a major retailer, understanding that their inventory accuracy on a SKU level was 60% to 70%. And using RFID, it's a low-cost way for them to take inventory in a 50,000-unit department. You can do it in 2 hours. It doesn't take 2 days in an army of people. And they saw their sales go up, they saw labor costs go down, customer satisfaction went up. So all those factors caused M&S to continue to roll out RFID over time. And you had a number of other retailers over the past few years do a lot of pilots actually. So there was a heavy level of interest, especially in department stores who have to manage a lot of complexity; or vertical retail, because vertical retailers, of course, they design, source their clothes and sell it, sell their own brand. So therefore, they get the full benefit across the entire supply chain. And we've seen a pretty rapid pickup in RFID. I mean, the growth has been 50%, 60% a year over the past 3 or 4 years. On a run rate basis, we were close to $100 million annualized in the fourth quarter. And I'd say, it's a typical new technology. So it sort of grows in fits and starts. So we experienced a couple years of rapid growth, and then it slows down a little bit, and then I expect it to pick up again. So it was a good business for RFID for retailers. But there's a lot of change management that has to happen at the store level to really get the full benefit for RFID.

Scott Gaffner - Barclays Capital, Research Division

What sort of change actually has to occur at the store level?

Dean A. Scarborough

Well, I mean, if you think about it, the people -- if you talk to folks, who actually work at the store level, who work in an RFID-enabled store, they love it, because their lives are a lot easier, because they're really there to serve the customer not look around for stuff that the consumer can't find. And I think everything gets easier. So you know what you have. When the customer wants that extra large pink sweater, you know you have it, you know where it is. You have the -- receiving the goods is very simple. If the curtains come in and they're scanned and you know now that you've got it in the store, so receiving is better. The assortment is better on the floor. And happy -- customers are happy, instead of the, "Well, gee, you don't have my size." And we've all been through the drill of, "okay, well you don't have exactly my size or my color," so the associate then spends 15 minutes either on the computer or on the phone trying to find the item that you want. I don't how you are, but I've got like a 5-minute time limit, like, it's not worth it anyway and walk out of the store. And this is why associates prefer it because the customer is happy, they get the sale, and life goes on, now they're off to serve the next customer.

Scott Gaffner - Barclays Capital, Research Division

It's probably better to repeat the question.

Unknown Analyst

I was just asking a question about lead times. And if you could talk about the lead times in both of your different business segments and how you managed the business with very little lead times.

Dean A. Scarborough

Right. Well, we have little forward visibility. So in our Pressure-sensitive Materials business, label -- our label customers really run customed businesses for the most part. So literally, about 70% to 80% of the product -- of the orders we ship out in a couple of days. And so it's tough. In RBIS, we might have a little more visibility. I mean, although for doing price tickets in service bureau, our turnaround times are 3 or 4 days. We try to get forecast from retailers about how many garments they're going to buy, but it tends to vary by quite a bit. So the challenge for us is all about not having forward visibility, and that's why our guidance range tends to be relatively large at the beginning of the year in terms of sales. So this year, it's 1% to 4%, which sounds like a pretty wide range, but the reality is, given the market situations in Europe, we just don't know. We just don't have that forward visibility that we'd like to have. It's part of the reason. Frankly, a big part of our management philosophy is all about productivity, driving down fixed cost. A big part of the restructuring plan this year was to do that. We're taking footprint out of Retail Branding and Information Solutions, about 25% of our footprint. Part of it is that, again, lowering our fixed cost in that business is a good thing. And we can respond maybe not right next door, but at least within 500 or 600 miles, and we can use freight to anticipate some of them. Getting your fixed cost up when you have a lot of that volatility or uncertainty makes a lot of sense.

Scott Gaffner - Barclays Capital, Research Division

Maybe we'll switch over to the audience response system for everybody involved. So if we could just go do question number one please? Just a reminder, I'll ready out the question. And if you just -- 'I miss one, you'll just key in which number response you want to go to. So first question, just so we know who's in the room, maybe we should have the done this right at the outset. But you're currently on the stock. One, overweight; two, equal weight; three, underweight; or four, no. We've used the system...

[Voting]

Dean A. Scarborough

What an opportunity here.

Scott Gaffner - Barclays Capital, Research Division

There you go. All right. If we could just go to number two. So what is your general bias towards the stock right now? One, positive; two, negative; or three, neutral?

[Voting]

Scott Gaffner - Barclays Capital, Research Division

Neutral. Got a room of people that don't own a stock, they're neutral. You've got to make them decide. One way or the other, whether they want to go ahead and buy Avery stock right now. Can you...

Dean A. Scarborough

We should talk about free cash flow then.

Scott Gaffner - Barclays Capital, Research Division

Let's do it. Talk about free cash flow.

Dean A. Scarborough

Okay. I mean, one of the nice things that -- I think, one of the advantage of the company is that we -- these businesses throw off a tremendous amount of free cash flow. So last year, we generated a little over $300 million of free cash flow. We're committed to doing that every year. That's after investing $150 million to $175 billion a year in our capital base. We pay about $100 million in dividends, so we have quite a bit of cash leftover to return to shareholders. And our balance sheet is in great shape. We've kept -- we paid down a lot of debt after the Paxar acquisition. Took us a couple of years to do that. So our debt to EBITDA, very simple, ratio was less than 2. Again, solid balance sheet. We've got plenty of cash, and we believe the best thing that we can do with a business like this is to return this cash to shareholders. We have good organic growth opportunities. But again, it doesn't require a whole lot of investment. We've got the footprint that we need in emerging markets, for example, and spent quite a long period of time developing that capability in those markets. And there aren't a lot of opportunities for us actually in the acquisition front, I mean, given our market share and our position. And so that's a big part of what we've been doing. Obviously, the sale of Office and Consumer Products and our Designed and Engineered Solutions should net us $400 million in cash this year. We'll -- in net cash. and we plan on to use that to pay -- to make a pension funding decision, which is the equivalent of reducing debt, pretty high-cost debt, and then we'll use the rest to return cash to shareholders. So if you look at our business model from -- over a period of time, I think we had said back in the May meetings when we came up to New York that over the period of 2012 to 2015, we'd have $1 billion to $1.5 billion worth of cash that we could return to shareholders. Last year, we returned over $300 million. In fact, between stock buyback and dividends, we returned almost, I think, $340 million of free cash -- or of cash to shareholders last year, which is just about equal to our total free cash flow. So I think that's a -- the most consistent metric we have is free cash flow. It doesn't vary all that much from year-to-year. We don't have a lot of needs for additional funding, again, for acquisition or capital expenditures. These businesses are relatively short-cycled businesses. And especially in Pressure-sensitive, there's not that much volatility. I mean, even in recession, people wash their hair, right? And they've got labels on their bottles. So that's one of the things I really like about these businesses.

Unknown Analyst

[indiscernible] to create value. When it comes to the Pressure-sensitive Materials business, it's more about enhancing the growth rates. The margins are already in pretty good shape. Can you talk about that as far as accelerating growth? And then in the RBIS and converting businesses, it's more about margin accumulation or appreciation. Can you talk about those measures in the margin appreciation on the RBIS and converting businesses?

Dean A. Scarborough

Sure. Well, on Pressure-sensitive, that's exactly right. The Pressure-sensitive Materials businesses operate within our targeted range. The returns on capital are actually quite good in that business at multiples of the cost to capital. I'd say there's 2 major vectors enhancing the growth rate in the business. One, and I talked about this before, is emerging markets. So in emerging markets, about 35% of sales, we're growing in the high single, low double digits in those markets as consumers are buying packaged goods at organized retail. And our margins in Pressure-sensitive in emerging markets are actually higher than the average because our relative market share is higher in those regions. So we get a nice tailwind on the margin play as well. So part of it is just the footprint we've established, the marketing that we do to get companies to use Pressure-sensitive labeling technology as a preferred form of packaged decoration. The second vector is really all about innovation. And we have increased our R&D budgets and technology budgets, as well as marketing budgets over the years in Pressure-sensitive Materials. We use a vitality index in that business, which is a measure of the percentage of new products that are less than 3 years old, and we've moved that number from the low-teens to the mid-20s this year. And if you ever get the chance to go to a Labelexpo, I realized probably not high on most people's list, but we tend to be the most innovative supplier there. And we launched our -- I think 17 new-to-the-world products at Labelexpo last fall, things that range from a new film and adhesive that enhances the bottle recycling process because there were some technical issues before with previous products that we've had, new thin film materials that are not only less expensive but more sustainable and help us open the market to other types of packaging to some very unique constructions in the durable goods area. So it's really all about emerging markets and being innovative and driving a lot of new product demand out there for our customers. I mean, those are the 2 things in Pressure-sensitive Materials that we believe will allow us to grow that business in 3% to 5% range. RBIS, a little bit different story. Those returns aren't where we want them to be. The business is different than Pressure-sensitive in the sense that it's a customed business, as a network business. So again, we have to replicate what we do on multiple countries for major brands and apparel manufacturers. It has high variable margin. So growth is great. Any growth that we get over about 1.5% has about a 40% flow-through. And as you could see in the back half of last year, when we grew, I think, 7% in the third quarter and 10% in the fourth quarter, we had really nice flow-through. So maintaining a good growth rate at the same time, we're doing some restructuring to take our fixed cost out of the business. Literally, reducing our footprint over the next 2 to 3 years by about 25%. And we do that with investments in digital technology, digital printing. We're one of the world's largest digital printers today. And I think almost 50% of our images will be printed digitally by 2015, and that business allows us to respond very quickly. But it takes a lot less space and a lot less overhead to manage a digital workflow than it does for the classical analog printing workflow. RFID is a big driver for us, a big improvement. Last year was obviously the -- not just the flow-through but the cost that we took out of our manufacturing and supply chain process for RFID. So it moved from a drag to a positive for us in RFID. We expect that to continue to grow. And we have some new products that we call it external embellishments. So a lot of the -- most of the products that we make today in RBIS are in the inside of the garment. And we have some unique material science that allows us to move to the outside of the garment. So things like NFL football jerseys, et cetera, et cetera. If you're a runner, we make products that you can put a logo on the outside of the shirt and that logo is breathable. So it doesn't irritate your skin when you are exercising or running. So we're bringing some innovations to that space as well.

Eric Leeds

I would also add on RFID -- excuse me, in RBIS, on the top line, if you look at 2010, 2011, 2012, we've outperformed the market by, at least, 2 points. Even in 2011, which was a down year, we were down well less than the market, I think. And part of it's RFID, as Dean mentioned, embellishments, but we have a very end-user-focused marketing effort in this business, and we believe we've taken share from other competitors. Dean mentioned earlier that we're significantly larger than our next-largest competitor, but I think we're increasing the distance between us and a lot of others. And we're also, the history of this business, right now, is overwhelmingly serving retailers and brand owners based in the United States and Europe. So U.S. and European brands, which, of course, are sold all over the world, but there's also an effort going forward as emerging markets start creating brands that are going to go global and have geographically complex supply chains. They are going to need our services. Not an emerging markets story, but UNIQLO is a good example. In Japan, you now see UNIQLO stores around the United States. That business required our services because of the supply chain complexity, and we'd hope to show you more of that going down. So we're very much focused on reducing the cost in that business. But there's a number of initiatives to grow the top line as well.

Dean A. Scarborough

Yes, I think one of the things, apparel is in a high-growth market. You make a good point, Eric. We're focused on the segments that have a higher growth rates like performance apparel, that's Nike, Adi, Under Armour; or at vertical retailer, that's H&M, ZARA, Marks & Spencer, companies like that, that actually grow faster than the average market segments. So that helps us as well.

Scott Gaffner - Barclays Capital, Research Division

As these emerging brands develop, does that increase the complexity of cost for you? I guess, I'm trying to understand the impact of customer volumes and the ramification on your cost structure and margins?

Dean A. Scarborough

Yes, so -- no, we've actually got the footprint already, I think what Eric was referring to. So let's take Brazil, for example. I think today, literally in -- for Brazilian retailers, they source about 90% of what they sell inside Brazil. So we don't really have much of a value proposition there. But increasingly now, for some Brazilian retailers are starting to source from Asia, other parts of Central America. But now our value proposition is more relevant because they may now be sourcing from 8 different countries. And they need consistency, brand look plus the accuracy of data, it's a lot easier to do domestically than it is with outsource partners all over the world. And that plays right into our value prop. We already have the infrastructure in place, so we don't really have to add anything. One of the benefits that we got from Paxar really was Paxar was an amalgamation of small businesses they had accumulated over the years, but they never really ran the operation. They let every operation run pretty much independently. And we don't do that. So we have a very systematic way of working. We use Lean Six Sigma principles. We have driven a tremendous amount of productivity at all of our sites around the world. And we still -- and I am -- usually I don't like to use sports analogies, but I think we're only in the third inning there. We have a lot of improvement that we can make still in the existing infrastructure. So in fact, that productivity allows us to reduce that square footage that we have, while still generating more units on a year-over-year basis. So we have lot of inherent productivity still available to us in RBIS.

Scott Gaffner - Barclays Capital, Research Division

And realizing you have a lot of short lead times in your businesses, there's been some discussion in the press around the payroll tax and the impact that's going to have on the North American consumer. Have you seen anything or heard anything from your customers relative to either PSM or RBIS around the impact that they're feeling from the payroll taxes?

Dean A. Scarborough

Yes, we haven't -- I haven't -- I don't think we have seen a big impact. I mean, as I look back to 2012, there were 2 things that surprised me. One, was the U.S. was stronger than I thought it would be. And actually, Europe turned out to be better than I thought it would be at the same time. I think consumer spending, at least, certainly in the segments that we look at, especially in the apparel side, wasn't bad, and even in the fourth quarter for us. And retailers, while still keeping inventories low, seem to be buying more units of clothes. Now part of that is because the pricing on the clothing on a per unit basis have gone down since all of the high-priced cotton has now pushed its way through the system. And certainly, I think consumers are probably buying less expensive clothes, we don't really care. We just care about the units that come through. So far, I haven't -- we haven't seen any sort of warning signals that would say, no, things are going slow down. Now I will say this, we don't have much lead time either. So I'm not sure we're the best benchmark. We may be one of the early benchmarks that come out. But it's hard for us to take a view of what's going to happen in the second quarter for example.

Scott Gaffner - Barclays Capital, Research Division

And Eric, you mentioned in RBIS that you thought you had taken some share -- or you had outgrown the market, '09, '10, I think, '11 and '12 is what you said. How do you measure that market within RBIS? Good to know that you've outgrown the market.

Eric Leeds

It's not an exact science. So it's our -- when we say we've taken share, it's our assumption. So we have the list of retailers and brand owners that we address, both headquartered in the U.S. and Europe, and we look at the size of the business that we have, and we monitor that very regularly and we review it. And we can sort of get a sense as to how much is market versus how much is wallet.

Dean A. Scarborough

We look -- do look at -- you can get data on the number of units of apparel imported into the U.S. and Europe. And for us, that's a proxy for that. And so we know what our sales are, how many units we produce and again, it's not an exact science because you don't have trade association that's reporting all these stuff. But very consistently though, our growth rate, for example, has been 2 to 3 points ahead of the unit growth in apparel or declined over the past 2 years. We do -- I do feel pretty confident that we have taken some market share. And certainly, one of our competitors had a really tough year last year and actually got out of some market segment. So we definitely benefited from that.

Scott Gaffner - Barclays Capital, Research Division

Maybe we'll head back to the audience response system, we'll just go to number three. This question is, in your opinion, the -- through the cycle EPS growth for Avery Dennison will be: one, above peers; two, in line; or three, below peers.

[Voting]

Scott Gaffner - Barclays Capital, Research Division

In line with peers, interesting. I mean, can you just sort of talk about the...

Dean A. Scarborough

We must have a lot of peers with double-digit EPS growth.

Scott Gaffner - Barclays Capital, Research Division

Yes. So, well, maybe S&P is only 8%, right? Can you talk about your long-term strategy? What that is as far as the EPS growth? I think, you mentioned 3% to 5% already for the top line.

Dean A. Scarborough

So 3% to 5% top line growth. We expect 10% to 15% net income growth, that comes, again, for -- quite a bit of a margin improvement in RBIS plus the higher growth rate in Pressure-sensitive Materials. We've got free cash flow. So in our models, we're going to buy back shares. So now we have 15% to 20% EPS growth over that period of time. And we're committing to 300 -- over $300 million of free cash flow generated per year. So the model works really well, again, at that level, 3% to 5%, 10% to 15%, 15% to 20%, and then greater than $300 million. So our EPS growth really accelerates as we get the margin improvement. We have a $100 million restructuring plan that we announced last year, about 70% of the benefit we should see during 2013. So we haven't really seen all the benefits of that program yet as this come through. And again, we're always focused on productivity. So I'm sure we'll find other ways for us to enhance that on a go forward basis. So again, you must have a lot of peers out there with pretty good EPS growth.

Eric Leeds

Your question was about EPS growth, we're very focused on TSR. So it's very important for us to have a competitive dividend yield, which we add to the EPS growth.

Scott Gaffner - Barclays Capital, Research Division

And then question number four. In your opinion, what should Avery Dennison do with excess cash, bolt-on M&A, larger M&A, repurchases, dividends, debt paydown or internal investment?

[Voting]

Scott Gaffner - Barclays Capital, Research Division

All right. Well...

Dean A. Scarborough

Well, it's pretty consistent with our strategy.

Scott Gaffner - Barclays Capital, Research Division

That's good. That's good.

Dean A. Scarborough

Yes. Yes.

Scott Gaffner - Barclays Capital, Research Division

Number five, so in your opinion, what multiple of 2013 earnings should Avery Dennison Corporation trade? Less than 10, 10 to 12, 13 to 15, 16 to 18, 19 to 21 or higher than 21?

[Voting]

Scott Gaffner - Barclays Capital, Research Division

13 to 15. I guess, you know the S&P's rating in a 13 to 14x range, and people think you're going to grow in line with peers. Maybe that's the right multiple. But again, you're saying your metrics get you to something that's probably above peers, so.

Dean A. Scarborough

Well, we're -- again, I think, Eric makes a point. We're focused on getting our total shareholder returns up, and I think it takes time. We've -- last year was a big year for share buyback. We raised the dividend. And I think what investors are looking for is consistency over a multiple period of time, and we had a good run last year. Our total shareholder returns were in the 20% range for 2012. But we need to consistently and continually -- I think, you've got to earn your way into those multiples.

Eric Leeds

Right. If I may ask you a question. So I know you came to the name about a year ago just before this conference, and thanks for having us here.

Scott Gaffner - Barclays Capital, Research Division

No problem.

Eric Leeds

So you're trolling us, right?

Scott Gaffner - Barclays Capital, Research Division

Correct.

Eric Leeds

If we continue to execute our strategy as articulated, is that enough to increase your enthusiasm, or do we need to be doing something different?

Scott Gaffner - Barclays Capital, Research Division

I think, look, the company has been in transformation for many, many, many years. And when I joined the name, I think, there was pre-analyst day, you hadn't necessarily articulated the new strategy, how you were going to grow the business going forward. Office -- the office products business was still part of Avery Dennison at the time. We were still in flux. And now sort of we're coming out of the other end but had a great run, right? We sort of missed that run. But look, if you can hit the EPS metrics that you've talked about, that is above average, so then you're in a position where you could get an above average P/E multiple. I think, for me, reputation or momentum, it takes time, right? You've got to build that sort of history within -- new history with investors about saying what you can do and doing what you say. And then over time, you get back -- I mean, Avery Dennison has historically traded at above average P/E multiple, right? I think if I go back in time, there was 17, 18x P/E multiple at various points in time. So there's no reason that Avery couldn't possibly get back there. It's just a matter of continuing to hit on the targets that you've outlined I think.

Dean A. Scarborough

Right, yes. I think that's right, and those were the years where essentially we're the same. We didn't have a high top line growth, but we had good earnings growth. We were returning cash to shareholders in those years. And again, the portfolio transformation has been more difficult certainly than I anticipated. And we've obviously had a lot more volatility in our end markets, but we're committed to delivering these numbers. And 2012, I think, was a great start.

Scott Gaffner - Barclays Capital, Research Division

And just one last audience response question, number six. What do you see as the most significant investment issue for Avery Dennison? One, core growth; two, margin performance; three, capital deployment; or four, execution/strategy.

[Voting]

Dean A. Scarborough

I mean, I guess, that goes back to where we were just talking about. You just got to execute on the strategy. Obviously, the core growth -- the mid 3% to 5% core growth is a pretty -- I would say, a lofty goal, right? It's a 3% to 5% is a good number if you go back...

Dean A. Scarborough

Yes, but it's above world GDP growth is how I look at it. So yes, it's good.

Scott Gaffner - Barclays Capital, Research Division

Well, with that, unless there's any other additional questions, I want to thank you for coming. Really appreciate your participation, and look forward to rest of the conference.

Eric Leeds

Thank, Scott.

Dean A. Scarborough

All right, very good. Thank you.

Scott Gaffner - Barclays Capital, Research Division

Thanks.

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Source: Avery Dennison Corporation Presents at Barclays Industrial Select Conference, Feb-20-2013 08:55 AM
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