Avery Dennison Corporation (NYSE:AVY) Q2 2019 Results Conference Call July 23, 2019 2:00 PM ET Company Participants Cindy Guenther - VP, IR and Finance Mitch Butier - Chairman, President and CEO Greg Lovins - SVP and CFO Conference Call Participants Ghansham Panjabi - Robert W. Baird & Co. Edlain Rodriguez - UBS Anthony Pettinari - Citigroup Global Markets Bhavesh Lodaya - BMO Molly Baum - Bank of America Merrill Lynch Adam Josephson - KeyBanc Capital Markets Jeff Zekauskas - JP Morgan Securities Chris Kaps ...

Avery Dennison Corporation (NYSE:AVY) Q1 2019 Results Earnings Conference Call April 24, 2019 1:00 PM ET Company Participants Cindy Guenther - Vice President of Finance & Investor Relations Mitch Butier - President and Chief Executive Officer Greg Lovins - Senior Vice President and Chief Financial Officer Conference Call Participants Anthony Pettinari - Citigroup Global Markets Edlain Rodriguez - UBS Securities Scott Gaffner - Barclays Capital George Staphos - Bank of America Merrill Lynch Ghansham Panjab ...

PART I [Item 1. Business](index=4&type=section&id=Item%201.%20BUSINESS) The company specializes in pressure-sensitive materials and converted products, with significant international operations and three main business segments - Avery Dennison Corporation was incorporated in Delaware in 1977, succeeding Avery International Corporation[7](index=7&type=chunk) - The company's core businesses include the production of pressure-sensitive materials and various converted products such as tickets, tags, labels, and RFID inlays[8](index=8&type=chunk) **Sales by Segment (2018)** | Segment | % of Total Sales (2018) | | :------ | :---------------------- | | LGM | 68% | | RBIS | 22% | | IHM | 10% | - International operations constituted approximately **77% of total sales in 2018**, with operations in over 50 countries and approximately 30,000 employees[10](index=10&type=chunk) - The LGM segment manufactures Fasson®-, JAC®-, and Avery Dennison®-brand pressure-sensitive label and packaging materials, graphics, and reflective products, with business generally not seasonal[11](index=11&type=chunk) - The RBIS segment designs, manufactures, and sells branding and information solutions, including RFID, to retailers and apparel manufacturers, experiencing some seasonality but less in recent years due to more frequent apparel industry updates[17](index=17&type=chunk)[18](index=18&type=chunk) - The IHM segment produces Fasson®- and Avery Dennison®-brand tapes and fasteners, Vancive-brand medical pressure-sensitive adhesive materials, and performance polymers[21](index=21&type=chunk) - In 2018, the company experienced raw material inflation but largely offset it through product re-engineering, procurement savings, and price increases[25](index=25&type=chunk) - Research and development efforts focus on new products, operating techniques, productivity, sustainability, and product performance, including patent and product development in printing, coating, adhesive, release, and ink chemistries, as well as RFID and medical technologies[26](index=26&type=chunk)[71](index=71&type=chunk) - The company's principal trademarks are Avery Dennison, its logo, and Fasson, which are considered strong in their respective market segments[28](index=28&type=chunk) - The company uses water-based emulsion and hot-melt adhesive technologies, and invests in solvent capture and control units to minimize volatile organic compound emissions, not expecting compliance costs to materially affect financial results[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [Item 1A. Risk Factors](index=7&type=section&id=Item%201A.%20RISK%20FACTORS) The company faces diverse risks from global economic conditions, raw material costs, competition, acquisitions, and international operations - Demand for products is significantly impacted by worldwide economic, political, and market conditions, with **77% of 2018 sales** from international operations[36](index=36&type=chunk)[37](index=37&type=chunk) - The company is exposed to risks from volatile raw material and energy costs, and its ability to offset these increases through price adjustments and productivity improvements is crucial[41](index=41&type=chunk)[43](index=43&type=chunk) - Competitive pressures, technological advancements, changes in laws (e,g,, related to plastics), and shifts in customer preferences could reduce market demand or market share[45](index=45&type=chunk)[47](index=47&type=chunk)[48](index=48&type=chunk) - Acquisitions, such as Mactac Europe, Yongle Tape, Finesse Medical, and Hanita Coatings (totaling **$560 million** in 2016-2017), carry risks related to integration, technology, employee retention, and achieving projected performance targets[49](index=49&type=chunk)[50](index=50&type=chunk)[52](index=52&type=chunk) - International operations, which are substantial, expose the company to risks including political and economic instability, foreign currency exchange rate fluctuations, and challenges in complying with diverse foreign laws and regulations[57](index=57&type=chunk)[58](index=58&type=chunk) - Product quality issues, product liability claims, or regulatory actions could materially harm the company's reputation, sales, and earnings[61](index=61&type=chunk)[63](index=63&type=chunk) - Failure to successfully develop and market new products and applications could compromise the company's competitive position[70](index=70&type=chunk)[71](index=71&type=chunk) - Significant disruption to the company's information technology infrastructure, including from obsolescence, natural disasters, or cyberattacks, could materially adversely affect business operations and expose the company to liability[94](index=94&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk) - The company's stock price may be volatile, influenced by overall market conditions, financial performance, and industry growth, which can also affect tax rates due to stock-based compensation[110](index=110&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk) - As of December 29, 2018, the company had approximately **$1.97 billion of debt**, and increased indebtedness or credit rating downgrades could make obtaining financing difficult and increase costs[115](index=115&type=chunk) - The company terminated its U,S, pension plan in September 2018, contributing **$200 million** and settling **$152 million** of liability through lump-sum payments, with the remaining **$792 million** expected to be settled in H1 2019[120](index=120&type=chunk)[122](index=122&type=chunk) - Goodwill, with a carrying value of **$941.8 million** as of December 29, 2018, is subject to annual impairment review, which could negatively impact results of operations and net worth[127](index=127&type=chunk)[128](index=128&type=chunk) [Item 1B. Unresolved Staff Comments](index=21&type=section&id=Item%201B.%20UNRESOLVED%20STAFF%20COMMENTS) There are no unresolved staff comments from the SEC - No unresolved staff comments were reported[146](index=146&type=chunk) [Item 2. Properties](index=22&type=section&id=Item%202.%20PROPERTIES) The company operates numerous suitable and adequate manufacturing facilities globally, with most principal properties being owned - As of December 29, 2018, the company operated manufacturing facilities exceeding 100,000 square feet in various domestic and foreign locations for its LGM, RBIS, and IHM segments[148](index=148&type=chunk)[149](index=149&type=chunk) - Principal properties are primarily owned, with some facilities leased, and are considered suitable and adequate for present needs[150](index=150&type=chunk)[151](index=151&type=chunk) [Item 3. Legal Proceedings](index=22&type=section&id=Item%203.%20LEGAL%20PROCEEDINGS) The company has an accrued liability of $20 million for environmental remediation and does not expect legal matters to be material - As of December 29, 2018, the company was designated as a potentially responsible party (PRP) at thirteen waste disposal or recycling sites concerning alleged soil and/or groundwater contamination[152](index=152&type=chunk) - The accrued liability for environmental remediation as of December 29, 2018, was **$20 million**[155](index=155&type=chunk) - The company believes that the impact of resolving current legal and regulatory matters will not be material to its financial position, results of operations, or cash flows[156](index=156&type=chunk) [Item 4. Mine Safety Disclosures](index=23&type=section&id=Item%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant[158](index=158&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on the NYSE, and it actively repurchased shares during the fourth quarter of 2018 - Avery Dennison's common stock is listed on the New York Stock Exchange under the ticker symbol **'AVY'**[160](index=160&type=chunk) **Repurchases of Equity Securities by Issuer (Q4 2018)** | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share | Approximate Dollar Value Remaining Under Plans (millions) | | :---------------------------------- | :------------------------------- | :--------------------------- | :-------------------------------------------------------- | | Sep 30, 2018 – Oct 27, 2018 | 318.9 | $100.72 | | | Oct 28, 2018 – Nov 24, 2018 | 1,023.2 | $91.62 | | | Nov 25, 2018 – Dec 29, 2018 | 1,004.0 | $91.61 | | | **Total** | **2,346.1** | **$92.85** | **$232.4** | [Item 6. Selected Financial Data](index=24&type=section&id=Item%206.%20SELECTED%20FINANCIAL%20DATA) Selected financial data is incorporated by reference from the 2018 Annual Report - Selected financial data for the last five fiscal years is incorporated by reference from the 'Five-year Summary' in the 2018 Annual Report[161](index=161&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) The MD&A is incorporated by reference from the 2018 Annual Report - Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated by reference from the 2018 Annual Report[162](index=162&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=24&type=section&id=Item%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Market risk disclosures are incorporated by reference from the 2018 Annual Report - Quantitative and Qualitative Disclosures About Market Risk are incorporated by reference from the 'Market-Sensitive Instruments and Risk Management' section in the 2018 Annual Report[163](index=163&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=24&type=section&id=Item%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) Financial statements and supplementary data are incorporated by reference from the 2018 Annual Report - Financial Statements and Supplementary Data, including Consolidated Financial Statements and reports on internal control, are incorporated by reference from the 2018 Annual Report[164](index=164&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=25&type=section&id=Item%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) There were no changes in or disagreements with accountants - No changes in or disagreements with accountants on accounting and financial disclosure were reported[169](index=169&type=chunk) [Item 9A. Controls and Procedures](index=25&type=section&id=Item%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2018 - As of December 29, 2018, the CEO and CFO concluded that disclosure controls and procedures were **effective**[170](index=170&type=chunk) - Management concluded that internal control over financial reporting was **effective** as of December 29, 2018, based on the COSO framework[171](index=171&type=chunk) - The company is investing in IT system upgrades for its RBIS and LGM segments, which may involve reviewing and changing related internal controls[172](index=172&type=chunk) - No other material changes in internal control over financial reporting occurred during the most recent fiscal quarter, apart from the system implementation[173](index=173&type=chunk) [Item 9B. Other Information](index=25&type=section&id=Item%209B.%20OTHER%20INFORMATION) There is no other information to report under this item - No other information was reported[173](index=173&type=chunk) PART III [Item 10. Directors, Executive Officers, and Corporate Governance](index=26&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) This section details executive officers and incorporates director and governance information by reference from the 2019 Proxy Statement - Information concerning directors and corporate governance is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held on April 25, 2019[175](index=175&type=chunk) - The company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers, and a Code of Conduct for all directors, officers, and employees, available on its investor website[176](index=176&type=chunk) **Executive Officers of Avery Dennison** | Name | Position | Age | Served as Executive Officer Since | | :----------------- | :------------------------------------------ | :-- | :------------------------------ | | Mitchell R. Butier | President, Chief Executive Officer | 47 | March 2007 | | Gregory S. Lovins | Senior Vice President, Chief Financial Officer | 46 | March 2017 | | Lori J. Bondar | Vice President, Controller, Chief Accounting Officer | 58 | June 2010 | | Georges Gravanis | President, Label and Graphic Materials | 61 | May 2015 | | Anne Hill | Senior Vice President, Chief Human Resources Officer | 59 | May 2007 | | Susan C. Miller | Senior Vice President, General Counsel and Secretary | 59 | March 2008 | | Deon Stander | Vice President and General Manager, Retail Branding and Information Solutions | 50 | August 2016 | [Item 11. Executive Compensation](index=29&type=section&id=Item%2011.%20EXECUTIVE%20COMPENSATION) Executive compensation information is incorporated by reference from the 2019 Proxy Statement - Executive compensation information is incorporated by reference from the 2019 Proxy Statement[182](index=182&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=29&type=section&id=Item%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Security ownership information is incorporated by reference from the 2019 Proxy Statement - Security ownership information is incorporated by reference from the 2019 Proxy Statement[182](index=182&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=29&type=section&id=Item%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information on related transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Proxy Statement[182](index=182&type=chunk) [Item 14. Principal Accounting Fees and Services](index=29&type=section&id=Item%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) Information on accounting fees and services is incorporated by reference from the 2019 Proxy Statement - Principal accounting fees and services information is incorporated by reference from the 2019 Proxy Statement[183](index=183&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=30&type=section&id=Item%2015.%20EXHIBITS%2C%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists all financial statements, schedules, and exhibits filed with or incorporated by reference into the report - Financial statements filed as part of this report are listed on the accompanying Index to Financial Statements and incorporated by reference from the 2018 Annual Report[183](index=183&type=chunk)[187](index=187&type=chunk) - All financial statement schedules are omitted as the required information is either not present, not sufficient to require submission, or included in the consolidated financial statements and notes[184](index=184&type=chunk) - Exhibits filed as part of this report are listed on the Exhibit Index, including management contracts or compensatory plans[185](index=185&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk)[193](index=193&type=chunk)[194](index=194&type=chunk) [Item 16. Form 10-K Summary](index=30&type=section&id=Item%2016.%20FORM%2010-K%20SUMMARY) No Form 10-K Summary is provided in this report - No Form 10-K Summary is provided[185](index=185&type=chunk) [Signatures](index=39&type=section&id=SIGNATURES) The report is duly signed by the Senior Vice President and Chief Financial Officer on February 27, 2019 - The report is signed by Gregory S, Lovins, Senior Vice President and Chief Financial Officer, on behalf of Avery Dennison Corporation[197](index=197&type=chunk) - The report is dated **February 27, 2019**[197](index=197&type=chunk) [Power of Attorney](index=40&type=section&id=POWER%20OF%20ATTORNEY) A Power of Attorney is granted to designated officers to sign and file the Annual Report on behalf of directors and executives - Gregory S, Lovins and Susan C, Miller are appointed as attorneys-in-fact to sign and file the Annual Report on Form 10-K and amendments[198](index=198&type=chunk) - The report is signed by the President, CEO, and Director (Mitchell R, Butier), Senior Vice President and CFO (Gregory S, Lovins), Vice President, Controller, and Chief Accounting Officer (Lori J, Bondar), Chairman (Dean A, Scarborough), and other directors[200](index=200&type=chunk)[201](index=201&type=chunk) - All signatures are dated **February 27, 2019**[200](index=200&type=chunk)[201](index=201&type=chunk)