Avery Dennison Corporation

Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. Welcome to Avery Dennison's earnings conference call for the fourth quarter ended December 28, 2019. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time February 1st. To access the replay, please dial 800-633-8284 or plus 1-402-977-9140 for international callers. The conference ID number is 21930677. I'd now like to turn the conference over to Cindy Gunther, Avery Dennison, Vice President, Investor Relations and Finance. Please go ahead, Madam.

Thank you, Jennifer. Today we'll discuss our preliminary, unaudited, fourth quarter and full year results. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled with GAAP on Schedules A4 to A8 of the financial statements accompanying today's earnings release and the appendix of our supplemental presentation materials. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. On the call today are Mitch Butier, Chairman, President, and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll turn the call over to Mitch.

Thanks, Cindy. Good day, everyone. I'm pleased to report another year of strong adjusted earnings growth, with EPS up 9% or 15% on a constant currency basis, despite lower than usual organic growth of 2% due to challenging market conditions. As you know, our focus in the slower top-line growth environment is on protecting our margins in the base business while driving faster-than-average growth in high-value categories like RFID. We are executing well on both fronts, while investing to drive future growth and further strengthen our competitive position. We are largely on track to achieve our long-term financial targets that we communicated three years ago. Greg will walk you through the scorecard in a moment. Our consistent performance reflects the resilience of our industry-leading market positions, the strategic foundations we've laid, and our agile and talented workforce. Our mission is to create value for all of our stakeholders through innovation, operational excellence, and highly disciplined capital allocation. These fundamentals drive the successful execution of our core strategies, in particular, achieving outsized growth in high-value categories, driving profitable growth in our base business, and attaining our ambitious 2025 sustainability goals. In 2019, we made good progress on all of our strategic priorities. High-value categories in emerging markets remain our two key catalysts for GDP-plus growth across our entire portfolio, with over half of our total sales linked to one or both of these. In 2019, high-value categories in emerging markets again grew faster than the average. High-value categories were up mid-single digits, with RFID alone contributing nearly a full point to total company sales growth. Our base business declined modestly, reflecting LGM market share that we see is at the tail end of the last inflationary cycle that we discussed previously. Importantly, LGM's volume trend improved in the back half of the year as we recovered that share. We expect this volume improvement trend to continue into 2020. Our continued focus on operational excellence, which has long fueled our industry-leading service and quality, was again a key enabler of significant productivity gains. The combination of product reengineering, restructuring, and the deployment of lean operating principles enabled us to again expand margins, further enhance our competitiveness, and continue providing a funding source for reinvestment. Equally important, we continue to make solid progress towards our 2025 sustainability goals. You'll be able to read more about this in our new integrated annual report that will come out in March. Just a few highlights. As of year end 2019, we've reduced our greenhouse gas emissions by more than 30% since 2015. Over 85% of our paper is now certified to be sustainably sourced. Close to 95% of our operations are landfill-free. And we further improved our already top-notch employee engagement scores. Now, looking at how our strategies played out in each of our segments. Label and graphic materials delivered modest organic growth under challenging market conditions. The base business was flat overall for the year, which, as I mentioned, reflects that share loss that we largely recovered by year-end. High-value categories once again grew faster than the base, albeit at a slower pace than we're used to due to softer end-market demand. Likewise, emerging markets also grew faster than average, though slower than usual, with strength in India and South America offsetting weak demand in North Asia. At the same time, LGM's adjusted operating margin expanded another 30 basis points to 13.3% in this already high return business as we completed the restructuring of this business's European footprint mid-year. Over the past couple of years, LGM has successfully navigated through a significant inflationary cycle as well as the subsequent transition to the modestly deflationary cycle that we've been seeing more recently, demonstrating the resilience of our business model. Given our strong leadership position in the industry, we are willing to take some year-term share risks through these cycles, knowing that our superior product quality, service, and cost position will ultimately win out. So, while 2019 proved more challenging, reflecting both market-driven headwinds and some missteps on our own part, we are well positioned for profitable growth in 2020 and beyond, with excellent returns in this business. Retail branding and information solution sales increased by more than 5% on an organic basis, driven by over 20% growth in high-value categories, that is RFID and external embellishments. The base apparel business declined modestly, reflecting market demand that was impacted by trade-related uncertainty. While there are signs of potential resolution of this uncertainty, some customers may further rebalance their supply chains. Our global footprint, along with our differentiated product and service capabilities, gives us a significant competitive advantage to win over the long term as we partner with our customers to support their evolving sourcing strategies. Enterprise-wide, RFID products and solutions grew by more than 20%, generating roughly $365 million of sales, reflecting ongoing penetration of apparel, as well as expansion in relatively new verticals, including food, beauty, and logistics. our total pipeline of customer engagements continues to expand. Compared to this time last year, our number of customer engagements, from business case to rollout, is up 50%, driven primarily by categories outside of apparel. As the leader in ultra-high-frequency RFID, we are positioned extremely well to capture these opportunities with industry-leading innovation and manufacturing capabilities and the best, most experienced team in the space. and we continue to build out this platform, increasing our levels of investment to drive growth both organically and through acquisitions and external partnerships. To that end, our purchase of SmartTrack's inlay business, which we expect to close late this quarter, represents an excellent strategic fit for us. Combined, RFID becomes a more than $500 million business, expected to grow 15% to 20% annually over the long term. SmartTrack's capabilities complement our existing product offerings and process technologies while expanding our intelligent labels platform to better serve industrial and retail segments. And their global manufacturing footprint, likewise complementary to our own, strengthens our inlay manufacturing capacity and capabilities. Turning to profitability, RBIS's adjusted operating margin expanded another 120 basis points for the year. The team has done a tremendous job transforming RBIS into a simpler, faster, and more competitive business over the past four years, and we're pleased with the performance we're seeing here. Shifting now to industrial and healthcare materials. Although sales growth was modest for this segment, we believe we outpaced the market across most categories. And, importantly, we made substantial progress towards our 2021 profitability targets, driving 140 basis points of adjusted margin expansion. We've strengthened our management team here and fine-tuned our strategies. We remain confident that this segment will deliver significant value over the medium to longer term. All in all, 2019 was another solid year. As we reflect back on the last few years, we are pleased with how we have leveraged our foundational strengths in operational excellence and innovation to consistently make progress towards our long-term goals to deliver GDP plus growth and top quartile returns on capital. We have driven outsized growth in high value segments while also growing profitably in our base businesses. We have substantially reduced the environmental impact of our operations while focusing increasingly on the development of innovative, more environmentally friendly products. We have continually driven productivity that has enabled us to ramp up our pace of investments in high value segments, particularly RFID, while also expanding margins. And importantly, this progress has been made possible by our amazing team that's dedicated to delivering for all of our stakeholders in a dynamic environment while upholding our longstanding commitments to integrity and excellence. As we look to 2020, we are confident we will continue to make progress on our strategic fronts, including the next evolution of our leadership structure and wave of productivity initiatives. As you know, we have had a theme over the last few years to move more and more decision making closer to our markets, both to increase speed and lower costs. Along these lines, we are now consolidating our corporate and group functions for LGM and IHM. In addition to making the leadership structure nimbler, this and other productivity initiatives we've recently launched will yield significant savings through 2021, enabling us to continue to increase our pace of organic investments while also expanding margins. So, once again, we're pleased with the progress we've made toward our long-term goals over the last few years, and in 2019 specifically, and we expect to make continued progress in 2020. As for guidance, we expect adjusted EPS of $6.90 to $7.15, with our outlook reflecting improved volume growth and continued productivity gains, partially offset by incremental investments and transition costs associated with our next wave of restructuring actions. I'll now turn the call over to Greg.