Welcome back, everybody. very happy to be having Avery Dennison for our latest fireside chat. The audience is John Ebel from Investor Relations, if you have any questions. Obviously, John, thank you for all you do there. We have Mitch Butier, Chief Executive Officer of Avery Dennison. Mitch, thanks for being here. As you know, Mitch is Chairman and Chief Executive Officer of the company. He was elected CEO in May of 2016 after being Chief Operating Officer since 2014. Mitch has had a number of senior leadership positions within Avery, and he joined the company in 2000 from PricewaterhouseCoopers. Mitch, thanks for being here. Great to have you. I guess, maybe to start, you might have some opening comments. Sure. If we could have the slide for Avery, that would be wonderful. Thank you. Excellent. Well, thank you, George, and thanks for the opportunity to come here and speak with all of you. Just a couple of quick comments, just profile of the company. We're a $9 billion company focused on branding and information labeling solutions. We're leaders in our 2 primary businesses, which are broken between the Materials Group and the Solutions Group that you can see here. We are exposed to large, diverse, and growing end markets, the vast majority of which are in staples. You can see geographically, we are well split across the globe as well. We've got 5 key strategies across the company that have been key to our success of delivering superior returns over time. The first strategy is around driving outsized growth in our higher value categories. What are higher value categories are areas where the market's growing faster, we've got large profit pools, which are important not just because more profit is better, but it shows us higher points of differentiation, and that leverage our core capabilities. Over time, we've been shifting the portfolio mix to being exposed more and more to these higher value categories. Now, the best example of that has been our focus around Intelligent Labels, which we expect to be a billion-dollar business this year. This has more than tripled over the last four years and been growing 20% organically over the last number of years. We are really focusing on being a leader at the intersection of the physical and digital world, leveraging our capabilities and our market presence in a number of end markets, as you can see, our materials science capabilities, our digital capabilities, and our process technology. Last, and very importantly, is our track record. You can see here consistent performance top-line growth and EPS growth. We've been growing double-digit EPS growth over the last number of years. These are overriding focus of ours is to drive GDP plus growth and top quartile returns on capital. That's a recipe for superior value creation over the long run and something we've continued to deliver and will continue to deliver going forward. Now, most recently in the fourth quarter, early part of this year, we commented on we're seeing some inventory corrections downstream from us that's causing some near-term disruptions to our financial performance. Overall, as you can see, though, in 2022, we grew our EPS and on a constant currency basis, it was up double digit again in 2022. When we're looking at 2023, we're expecting the second half to be at a run rate of more than $10 a share. Again, continuing that double-digit EPS trajectory. With that, we'll open up to questions. Thanks, Mitch. lots to go through there. to the extent that you can comment, you know, when you've gone through past destocking periods, and I don't remember it happening at this scale for a long time. I think maybe the last time would have been early 2000s after Y2K. I think this is larger. From your experience, your observations, maybe smaller destocks that we wouldn't have necessarily seen, how long does it take to get through? Yeah. The last time we saw it, was the financial crisis, 2009, basically. We had seen that. It took 4 quarters to get through, but it was less pronounced than what we are seeing today. One of the reasons it took 4 quarters is each region was operating at a different, you know, started to impact each region at a different time horizon. We're seeing both North America and Europe occurring at the exact same time. That is due to just the fact that supply chains are more global. That's what we're seeing right now. If you look at the cumulative effect of what we've assumed in our guidance and what we experienced in Q4, we're actually our guidance assumes a greater impact from inventory reductions this cycle than we saw in the financial crisis. That's due to two reasons. One, we think we started with more inventory in the system at the beginning of the cycle than we did in the financial crisis. We called that a year ago. We said that there was extra inventory in the system, we believed. That's basically due to when you have a period of scarce supply, so all the raw material constraints, constant price increases. We were raising prices every couple of months. Customers wanna get ahead of that and forward buy. One of the reasons our guidance assumes more inventory correction this cycle is because of that. That's counterbalanced by no one's expecting a recession of the magnitude we had in the Great Recession, if you will. Would it be fair to say that because in some ways, the destocking cycles are synchronized this time, that it may, you know, you may be able to get out of it more quickly? Recognizing no guarantees in life, but. Yes, that's our expectation. It's more pronounced for a shorter period of time. As we think about it, perhaps correctly, perhaps incorrectly, our sense would be there may be more likelihood of the solutions business having a bit slower ramp out of the destocking period just because some of the inventory that might have stocked up last year missed a season. Mm-hmm. And your customers or their customers will hold it until the next season, whereas materials will be more likely to come in and come out, based on, you know, just ongoing demand. Yeah. On the Solutions Group side, it's a little harder to call because the largest piece of that business is tied to apparel, and because that, the inventory in the system is seasonal, exactly when that'll come through is a little bit more of a question mark. Our assumption is, like the rest of the business, second half, it'll be back at a normalized run rate. That business has two seasonal peaks, Q2 and Q4. Q2, we would see in the coming few weeks what that ramp would look like, that is a bit of a question. That's why when we talked about our guidance, overall, we're confident in our ability to deliver the guidance we provided, but we gave more color on Q1 and second half. Mm-hmm. Q2 is gonna be somewhere in between. Got it. Is there anything in the public domain that you would point us to relative to the materials business and the pace of destocking? Again, not trying to get you to get into anything that's forward-looking that you can't comment to. No, there's not a whole lot of information out there about how much inventory is in the system. What we look at is we know what end markets our products and solutions go into, so we look at end consumption patterns and relative to our own direct demand, and that's where we spotted. A year ago, we said we think there's extra inventory in the system. It built up further through the middle of the year, and now the inventory's being pulled back out. There's nothing specific that we can point to. We do customer surveys, work it through. We said Q1 of this year would look like Q4, and so we basically expect this year to be a bit mirror image of 2022, but obviously, with higher growth and revenue. Sure. You know, I ask this question periodically. Would the pace of the box business give us an indicator for what you might be seeing in the, in the materials business, i.e., if boxes are finally starting to flow again and there's shipments, there's some incremental demand, or is that, you know, George, directly that's right, but that's such a sliver of our market, it's not, it's not really indicative? It's an indicator, but one of many. Our market saw much more inflation and some more supply constraints than other markets, and it's because of that, we had more inventory build than other ones as well. Got it. Those are really. You gotta think about why is inventory where it is, and it's those two drivers. We had, you know, a large paper manufacturer was on strike a year ago. There was some down capacity middle of the year in North America in paper. Those constraints drove customers to wanna build inventory as well as our price increases were significant throughout the year to offset the inflation which we successfully achieved. At this juncture, the operational constraints, forgetting about demand, those are largely now behind you from what you can see? Yes, yes. The operational constraints, what George is referring to is with all the demand, and some of that was for inventory build, when you were basically operationally you had some constraints basically 'cause you're constantly switching over various runs in your manufacturing process 'cause you're running what you can based on available material, and that's, that's all through the system. We just avoided a long strike in Finland just recently again, you know. A different one, but yes. Yeah, exactly. Any questions from the audience to start? Linda's waiting in the back with a microphone. We welcome your questions. If not, we'll keep forging ahead. In 2023, you're up against some challenging organic growth comps, particularly in pricing. Now pricing you had to get through because of the inflation tidal wave that was coming at companies last year, yourselves included. What are you assuming for pricing? What would you have us consider as we, you know, continue to refine our models over time? Yeah. Our guidance assumptions, if you look at the high end, 5% organic revenue growth, majority of that is pricing, and that's carryover pricing. We're not implementing really too many new price increases. That's a carryover which will impact more at the beginning of the year, and the rest is volume. Yep. you know, we've seen this before. I think I know what the answer will be, but I'll ask it nonetheless. you know, after through a period where there's pricing increases driven by input cost pressure, you start to see the input cost pressure decelerate. Frequently we see others in the market begin to deal that back. Do you think this cycle will be much different? There's usually the hue and cry about whether Avery's losing share or not for a quarter or 2. How do you feel about your ability to maintain and grow share over time through whatever chop we get out of that? Yes. Well, we feel confident in our ability to maintain and grow share. As leaders in our industries, we see an overall focus is, the health of the industry, not just the health of our business, so that's being the innovation leader in our space, growing into new markets, new categories, as well as obviously growing profitably in our base businesses. Yep. leveraging our scale advantages that we have. To your question about what the outlook is, we didn't assume any big shifts around raw material costs in our guidance. We've assumed stabilization overall. If there was deflation, then that would be something that potentially if a number of our price increases, not potentially, a number of our price increase or surcharges, those would unwind automatically. We're an EVA-focused business, as you know, George, looking at the optimal point of growth, margins, and capital intensity. We're confident in our ability to maintain and further expand profitability across the categories. Your comment about share near term, as the market leader, we are willing to risk share near term for a quarter, 2 quarters, to make sure that we are driving profitable growth for ourselves, and we can get that back within a couple quarters is what we've historically seen. You don't have to see that just through cycles. That's through just multiple points will happen every few years, really when you go through an inflationary or deflationary cycle. Thanks, Mitch. Any questions from the audience for Mitch? Okay, we'll keep moving ahead. One thing for you, Mitch, can you remind us to the extent possible, what's embedded in your guidance for China in 2023, and how it would affect the two businesses? Yes. We expect China demand to start to rebound. The question is just really when. It's opening up and everything, so what's the ramp curve? That's a little bit again, the question first half, but we'd expect to see a ramp again in Q2, and then second half. We expect there to be a rebound there. The broader question is what do you, what do you think about the macro in general and macro within China? We're having a rebound from low comps, to be honest with you. Remind us, we're looking at this slide here. Roughly speaking, China, would you say is 10-15% of your sales, looking at the pie chart? I always think about it. We get the question a lot. Emerging markets are kind of 30%-ish of materials from what I remember, and China was probably a third plus of that. Is that a good- It's about 10%, and that's end markets. Yeah. For direct markets, it's a bit more because obviously a good portion of the apparel industry is serviced out of, out of Asia and China in particular. Thanks. A relatively small component overall. Understood. We talked about this already. Is there a time in the past when we could look back where we saw materials seeing double-digit declines in volume? Do we have to go back to GFC then for that, basically? Yes. You have to go back to 2009 to see that, and we saw it for a single quarter. Again, the timing across the regions was different, so individual regions would have seen that for a couple of quarters. Can you remind us what kind of volume run rates you were seeing in both base and Intelligent Labels and Solutions exiting the quarter? Anything that you've already commented to already. Again, not trying to get to what you shouldn't. Same thing for Materials. The Materials was down low double digits, we said overall in the fourth quarter. Expect that to continue into Q1 and then rebounding after that. As far as the Solutions Group, you can see the growth trajectory overall within that business. Intelligent Labels, we do get this. That business has been growing 20%, as you can see here on the slide. Over time, that growth can be lumpy because of the timing of deployments of new programs and so forth in individual quarters, which is why we focus on more of the annualized growth rate. In Q4, it grew low single digits, and that was basically because the largest portion of that business is apparel from the destocking going on apparel was more than offset by growth within new programs. You're still with that slowdown because the programs and what you know is in the pipeline, you feel comfortable about your target for 2023. Yeah. We're expecting more than 20% growth this year. We'd called out the middle of last year. Our target had been 15%-20% growth within this business organically. Middle of last year, we said we expect for the coming few years a more than 20% growth. That is because of the adoption of new programs. We've been investing a lot in market development, new technologies to address the big categories of logistics and food, new capabilities within apparel with new woven in technology. That's something that we've been investing in and developing, one. Two, we also talked about during COVID that it was accelerating interest in our solutions and technology. Now you're starting to see that come through as far as the adoption of new programs. Thanks, Mitch. At this juncture, would it be safe to say that the pipeline is being mostly driven by logistics or mostly driven by food? I was on one of the pie charts that you showed, I think on the last slide deck, the last quarter slide deck, the pipeline for logistics was relatively smaller. I was surprised by that because I thought that's where most of the momentum was going. Correct me if I'm wrong on that. Yeah. If you look at the total addressable market, the largest is in food as far as number of units. Got it. When we laid out our program, our long-term targets through 2025, we said for Intelligent Labels specifically, we said that through that strategic horizon, most of the growth would actually be driven by apparel in $ terms. Percentage-wise, we'd see much more growth within food and logistics, that was gonna be more towards the end of that strategic horizon through 2025 and seeding tremendous growth beyond. What you're seeing now is particularly in logistics, it's been pulled forward. If you talk about the pipeline chart that you can see in our materials, those are based on programs, and so not $. We're not sharing $ revenue. The $ value of that pipeline is a multiple of our current revenue. Got it. Because logistics tends to be a more concentrated space, you'll have lower numbers within logistics, for that reason. It's not representative of the revenue potential. Understood. Understood. I wanna switch gears for a second to materials. It's nothing that we necessarily can model for, but just curious, you know, what sorts of trends are you seeing in terms of technology? What types of, you know, adhesives or applications are gaining in materials, to the extent you can talk, what's, you know, not gaining? The biggest applications that are gaining is, one, within our higher value categories. Just the continued move towards brands wanting to continue to engage their consumers with micro brands, whether they be craft brands themselves or micro brands within larger brand houses. Just more differentiated label, and you're seeing that in wine, spirits, craft beers, and boutique home and personal care products. That continues to grow. Another area is really around sustainable products. Renewable materials, being able to reduce just the environmental footprint and enhance the effectiveness of recyclability of the products. This is an area where we started focusing all of our innovation capabilities within materials around increasing the just availability of sustainable labeling solutions within our categories. That has been, for those who wanna look at our ESG objectives, we're making tremendous progress on the circularity of our products as well as reducing the greenhouse gas footprint of the entire enterprise, and we've reduced them by 40% over the last 7 years, our greenhouse gas intensity. Last is just around e-commerce, so e-commerce labels within materials. We talk about Intelligent Labels, which is where we're actually managing the data and printing data and largely based on ultra-high frequency RFID technology, where we're the market leader. Within the materials business, we provide base materials, and a lot of that is for barcode labels and so forth, which, you know, are supported by the large growth within e-commerce. Mitch, can you sort of dive back into micro brands and You know, give me a for instance in terms of how you're, you know, coming into contact with that and what we should be looking for when we see that and know it's one of the trends that you're talking to right now? Yeah. Just if you're thinking about spirits, for example, you see a lot of the differentiation is at the shelf, but not just at the shelf. It's a brand that people associate themselves with, perhaps. The brand imagery, much of what the consumer interacts with is on the actual bottle itself. It's just people wanting a unique look or feel to what they're providing, and that's something that we work directly with the brands as well as with our converter partners to develop. The material itself, you know, has to be able to be utilized efficiently in a shorter run environment and probably, you know, absorb inks differently, coatings differently and make a more different-. Absolutely. Sometimes it's more innovation to make it look really old, and sometimes it's something to make it look very sharp and more modern. There's lots of different desires. If you think about the cost of the label and so forth is for the amount of information and brand connectedness it provides is relatively low. It's something that they invest their time with. Understood. Can you talk to us about your recession action plan and what's different, what's similar to what you were perhaps doing during the depths of COVID? Sure. What's similar, we're basically implementing temporary cost reduction actions across the board, one. Two, it also, when you're in a lower volume environment, it gives you an opportunity, the bandwidth to implement structural cost reductions. That's what we're doing. That's very similar to what we did during COVID. Even at the time, we had said we're accelerating our restructuring program. Given the low volume environment, particularly in Solutions at the time in our more durable categories within Materials, we accelerated restructuring programs into that timeframe. That's what we're doing again on the structural side. That's what we're doing on the temporary side. The temporary cost reductions are lower than what we called out during the depths of COVID. One, because I mean, we're not talking about a major recession here, isn't what we're looking at, and the duration looks like it'll be relatively, modest overall. That's what we're working through. On that latter point, are you basing that based on what the macro is saying, what the street economists are saying, or to the extent that you can share what your customers are kinda saying about things? It's the macro data. Yeah. We're seeing the same thing everybody else is. Now our particular business we've got, because of the inventory reduction, we're pulling the belt tighter than we would if we were just going through it, like end consumption was. 'Cause our products, as you know, as you can see from the charts here, are vastly tied to staples. Our end markets don't move all that much in a recession. During the Great Recession even, it was only down a couple points. It was the inventory where we see inventory reduction through it, and then we call it post-recession bounce. We get a huge surge when people replenish their inventory. So yeah, that's what's informing our thinking is just what we're seeing in the macro. Just as you know, we always like to be prepared. We've seen that over the last, you know, decade or so. In terms of the inventory reduction and the, and the stocking up, was it more done more at the customer level and at retail or you also have the roles of material that from your intelligence, you know, back in November, December, had to have been worked down? Where was more of the inventory that was in excess from your vantage point? Our direct customers within materials, so the converter base. Yeah. also the consumer packaged goods companies had extra as well. Okay. Even we had extra material because when you've got a multi-construction products, you're procuring whatever you can, and so you sometimes have a mismatch of your different categories. Does there come a point where that roll of material, I know it's gonna vary by technology and customer and what have you, degrade with time such that it doesn't really matter that, you know, at some point that roll is no longer usable, and you need to order that next roll? Not within the timeframe we're talking about. Okay. It's one of the advantages of our technologies. It allows package goods at high speeds on high-speed packaging lines, but also for you to be able to quickly switch from one brand to the other, just switching a reel. That's one of the reasons that the cycle time between when our materials are printed and converted to the end CPG, there's not that obsolescence of just printing the wrong material before maybe a new product launch or something else. No, our peer products don't have that kind of short shelf life, and, you know, one place you would see is maybe in high humidity environments and so forth with more paper, but that's not what we're talking about here. To the extent that you can comment or remind us, you know, what will be the larger cash uses in 2023 in terms of where you're investing? Specifically in IL, is there anything you need to add to build out the product suite or the service offering that you can share that we should be watching for, if not, you know, dollar by dollar or line item by line item, more categorically? Yeah. You know, we think about capital allocation, we've got a whole spectrum of different businesses, product lines, where they fit, and within the Intelligent Labels scenario, we are investing and investing ahead of the curve. This is a business that you can see growing 20% and it has above average EBITDA margins. That's after all the investments in future growth for which we don't have revenue right now. We continue to invest within Intelligent Labels, and that's both in OpEx. We commented on $25 million of incremental investments... Yep. -this year. That's OpEx investments, and that vast majority of that is Intelligent Labels around developing new markets, continuing to enhance our innovation capabilities, and enhancing our scale. From a capital perspective, we are also ramping up our pace of investment just as far as manufacturing capacity. We announced a large investment in a new plant within Mexico. That's more for growth second half of 2024 and beyond. We have enough capacity already for the growth that we were planning on for this year. Is there much technologically different to the outside observer for an application that would be in logistics versus apparel versus food? Yeah. This is another key area of our strength, similar to what we see across the rest of the company. Our innovation prowess and just leadership enables us to not only innovate the materials, but know what innovations are required in each different type of environment. Reading through a shirt is different than reading through a 1-pound steak in a retail store. Understanding what the antenna requirements are, where the label should be placed to get great read rates, is paramount to the adoption of the technology. Those are areas, whether it's understanding the antenna design, we have a tremendous amount of patents around that. If it's understanding, you know, having RFID enabled microwave safe labeling solutions, we have patents around that. If you think about sewing in RFID, which is a newer trend, we've got a new technology where it's basically like a thread where it can just be sewn in the garment. That allows us to expand beyond the traditional use cases of enhancing consumer engagement and managing supply chains for the apparel brands. It also moves into electronic article surveillance as well. There's a tremendous amount of technological innovations here. One of our key areas of strength is we've actually brought together the scientists from our Materials Group with our Solutions Group about 5 years ago to work to develop unique end capabilities because we are uniquely vertically integrated within this space. With our more than 50% share, we can leverage that scale advantage, not just in production, but in industry know-how, market access, and innovation capabilities. Thanks, Mitch. Somebody was asking us recently where what your comments have been about, chip supply and how much of a constraint that's been. Is there a need, assuming there was one, to, or constraint to bring chip manufacturing closer or shortening the supply chain to you? How would you have us think about that relative to what Avery can bring to bear and what Avery's not gonna spend capital on? Yeah. This is, you know, you can see the resilience of the business. We've had quite a few challenges over the last number of years and the resilience of the business in our numbers, and that's something we provide to our end markets is resilience. We leverage our scale, and we were able to secure chip supply for our ambitions this year and beyond. That's something that we know that once you adopt our technology, each of our customers are dependent upon it. We take that very seriously, and we make sure that we've got the capacity, both in terms of raw material supply, including chips, as well as our manufacturing capacity. Thanks, Mitch. Any questions from the audience for Mitch? No questions. Thanks, Linda. Sorry about that. Switching gears a bit. Oh, we have a question in the back. Hang on one second. Thank you. Hi. Just a quick question on the competitive landscape right now. How are you seeing competition with your competitors, market share changes? Kind of speak to that a little bit. Overall, in these periods of change, you always have a few pieces moving around. Share perspective. We only have the good information in North America and Europe, and I'm talking about within the Materials businesses right now. Share pretty stable North America, and in Europe, we think we've ceded a little bit of share with all the price increases and so forth, and that's one of the things I commented earlier, willingness to endure that for 2 quarters to continue to provide the market leadership that we need to. We're expecting to recapture that share here in the next 2 quarters, but all within the normal band of what you'd expect. Thanks for the question. Mitch, I just want to go back. Aside from the fact that you are, and maybe this is the answer, again, 50% of the market, and you've been the leader in terms of developing RFID and Intelligent Labels for apparel first and now the next markets. Aside from that, what do you do to make sure you have the components and the chips relative to commitments that you keep making, not just for 2023, but beyond? Is there anything else that you do to make sure that that 20% growth curve continues? It's continuing to innovate, continuing to invest in market development, continuing to invest in our capacity. We are investing for the business to be multiples of what it's been. We see tremendous opportunity. The total addressable market we've laid out is well north of $10 billion. That's. Every place we look, we see opportunity, so we continue to invest in it. We're excited for all the opportunity that is happening real time. What are you finding on Vestcom and how that's helping you penetrate food with RFID and IL? Yeah, the Vestcom acquisition, great standalone business, similar to what we had had on RBIS in apparel side, but more for in grocery or retail drugstore, managing data, providing shelf labeling solutions. Great standalone business, good growth trajectory, above average margins. When we acquired it, we also saw an option to catalyze growth for Intelligent Labels within food, they had C-suite access to a number of key retailers in food and drugstore, and so forth. Yeah, we've got some active pilots going on right now where we're seeing significant opportunity to unlock tremendous value for our customers in those spaces, and it's reducing costs, but not just reducing costs, it's freeing up time of people in the store, employees in the store to engage more with consumers. It's also enabling a huge unlock for these companies to achieve their own ESG objectives for reducing food waste. Key objective of ours is to reduce food waste. If you think about how much bread is thrown away from the fresh bakery section, how much beef and so forth is still thrown away, and you think about the greenhouse gas intensity of beef production, it's quite significant. Right. This is around, again, improving consumer engagement, in reducing costs and reducing the environmental impact of the food supply chain. Can you remind us within IL overall and perhaps to the extent it may vary across the categories that you're trying to promote, is there much of a service component and data management component to the actual business itself or the component portion of the business? Yeah, there's different levels of solution. Some of the categories within Intelligent Labels are more of a materials play. If you think about logistics, some of their specialty material handling and so forth, we're providing a solution play around that. If you think about the vast majority of what you'd get from a logistics company and overnight courier, a lot of that we're providing the base material. We're providing solution know-how for initiating the program, but the actual revenue model is a little bit more material. Areas like food, it looks a little more like apparel, where you're getting data, managing data, as well as providing the material. There it's often much more of a solution set. There, within apparel, you have more of a controlled supply chain, whereas in food it's a more fragmented supply chain. When you look at, you know, being able to do track and trace from farm to table and providing that information, that's a key area of opportunity, which is why we've been investing in more and more software and digital capabilities to build on the strength we already have within the apparel and the Vestcom businesses. Still feel like logistics could be $1 billion plus by 2030 in terms of revenue opportunity for you in IL? the logistics and others. Yeah. Logistics and others. We expect. Well, again, the total addressable market's... Ten. North of $10. Yeah. You take that and how we're looking to grow, what exactly which product category will be by 2030, but we expect this to be a multi-billion dollar business. You got 50% share, so we will just take 50% of $10 billion, so $20, $35 billion. I didn't say 2030. I'm kidding. Any last questions for Mitch before we wrap up here? If not, Mitch Butier, thank you very much. Please join me in thanking Mitch for a great presentation on Avery Dennison. Thank you, George. Thanks, everyone.