Okay, we'll go ahead and get started. Everybody, thanks for joining. My name is Ghansham Panjabi. I'm the Packaging and Coatings Equity Research Analyst at Baird. Welcome to the afternoon session on Day 1. The next presenter we have on our track is Avery Dennison on the packaging side of our coverage list. From Avery Dennison, we have Deon Stander. Deon's been CEO since September of last year, joined Avery in 2007. Then John Eble from Investor Relations. John's been with Avery since 2011, a great source of information for all of us on the sell side and the buy side.
With that, Deon, I think you're going to make a brief overview, and then we'll open it up to Q&A.
Thanks, Ghansham. It's great to be here with everybody. I'm just going to spend a couple of minutes just going through a quick overview of Avery Dennison, and then we'll go to questions there afterwards. Maybe just to start off by saying just a reminder for everybody, Avery Dennison is a materials science and digital identification company. We're about $8.5 billion. Our two primary businesses, our Materials Group , is about 70% of our revenue, and our Solutions Group is about 30%, and we're really focused as an organization on trying to solve some of those significant challenges that customers have by providing branding or information solutions. So whether that's in engaging consumers or helping customers drive down waste or focusing on supply chain efficiency or even driving circularity, and that's where a lot of our value that we create for industries and customers and for ourselves comes from.
As a company, we're really focused on driving long-term shareholder value, and we do that through consistently focusing on GDP plus growth and top quartile returns, which we think for us is a recipe for superior value creation over cycles as well. When I think about the way our business operates, we have, like many other businesses, five strategies that we adhere to very strictly as well, and they evolve in time as markets evolve, but largely, over time, we've been successful because of our strategies, because of our two businesses and the market-leading positions they have in each of the industries, and because of the 34,000 employees and associates we have around the world that have been able to adjust, particularly over the last five years, in a high degree of agility, given some of the market dynamics we've seen overall.
As a business, across both segments, we're largely anchored in consumer staples. So the markets we serve are very diverse, both from a segment perspective, but also from a geography perspective. And you can see the scope of where our business is denominated all around the world. One of the successes that we've had has been really focused on how we execute against our strategies. And the biggest one we have in that, and really where we see a lot of differentiation, is our focus on driving and accelerating our high-value segments. These are categories, products, or markets where we see outsized growth and higher-than-average profit pools, where there's a greater level of differentiation, and where we can improve our portfolios and move forward.
Over the last number of years, we've done a really good job, I think, in moving forward our high-value segment dependency, improving the returns of our business overall. The largest one of those, and where we'll probably spend some time today, is in our Intelligent Labels platform. This is anchored in our market leadership in UHF RFID technology. We've done a really good job over the last 10 years of bringing digital identities to physical items and making sure that you can shine a light on the visibility of an item from its source, through its supply chain, to store, and in the future to end-of-life disposal and consumer engagement.
And we've done that, particularly over the last 10 or 15 years, really in a parallel where we've driven a lot of adoption of leveraging the technology to improve inventory accuracy, drive up gross margins for our customers, and improve availability for consumers. We have been investing significantly over the last five years ahead of that because we believe that fundamentally the technology and the same application will apply in some of the newest segments like logistics, general retail, and food as well. And I've tried to lay out on this chart over here just the scale of the opportunity that lies ahead. I fundamentally believe that in the future, that every physical item is going to have some form of digital identity in life. And I think Avery Dennison is really uniquely positioned that way.
After all, we make most of the labeling materials that brand or identify almost every physical item in the world, and we're the market leader in the UHF technology space as well. When you look at this chart over here, you can see the scale of the opportunity that we believe we're at the nascent stage and lying ahead. A parallel, which we've done a great job over the last 10 years of helping customers benefit from the technology, is about 45 billion units, and we think we're about 40% penetrated. Just recently, over the last couple of years, we've had the first key logistics customer go. That, we believe, is a concentrated industry's order of magnitude bigger than apparel. The largest market is really in food.
Recently, we've announced a partnership with Kroger that will start to take the same technology approach, value creation, particularly on what we would call perishable items. These are items in bakery, protein, leafy greens, and deli meats and so forth, things that have got perishability, shelf life, and/or also the destination shopping element for consumers when they go to grocery as well. Freshness matters more than anything else. Over the last 10 years or so, while somewhat lumpy in times, we've seen a consistent growth rate of UHF RFID technology and Intelligent L abels in that mid-teens to high-teens growth rate over the years. We fundamentally believe that we're at an accelerated tipping point now, that we have both new segments like logistics and food about to go, that it will continue to grow.
We have anchored our belief in that in around a +15% growth rate over the next cycle. We see this as a multi-decade opportunity for us to not only deliver on the potential our business has in both our segments, but also to expand that potential. I think basically in summary, if you think about our business overall, we have a materials business, very large, high EVA compounding free cash flow business. I will stress that as a business, we are really focused on EVA and growth in EVA or delta EVA across cycles. We believe it's the single greatest coefficient to outsized TSR growth over the period as well. Everything we do is focused around the optimum mix of growth, margin accretion, and capital efficiency as well.
I think the combination of this opportunity and this platform and the strength of our GDP plus growth business that we have in the other segments, plus some of the outsized market growth opportunities we have in our high-value segments, I think positions the company for long-term continued growth and shareholder returns over the long-term cycle as well. Maybe with that, I'll start the questions.
That's beautiful.
Thank you.
Thank you. Session2@rwbaird.com for questions. Maybe we can start off, Deon, with what's been happening in the consumer supply chain. You have the materials segment, touches a lot of different CPG categories, and there was inventory oscillations, destocking last year, consumer affordability issues started to pick up this year. What are you seeing in that segment from a trend basis? And maybe also comment on solutions as well.
So I think you're right to highlight the last couple of years has been very dynamic indeed. The whole inflationary curve, the availability of materials has led to inventory stocking and then destocking, particularly over 2022 and 2023 as well. And I think that what we've seen as a consequence of inflation, at least when it relates to our customers and their end customers, typically the CPGs, is that there hasn't been a significant delta or change in the trajectory of volumes at a CPG level yet. I think that may be approaching a point where we may see some more CPG volumes start to reenergize. And we're seeing elements of that. Typically, in our business, we deal through on our materials side, converting customers are the people who print labels. They deal with CPGs, and they're seeing signs of some more volume return.
I will say at the macro level, I think when I look around the world, I think from an economic perspective, I think there continue to be some challenges in Europe. I think we can see the same information. GDP growth forecast for Europe is now lower than it was even six months ago. European retail volumes are lower than they have been, and so I think Europe's going to remain still a muted growth opportunity at the macro level. Within that, I think we have significant opportunities ourselves to continue to advance. In Asia, I think it's at least outside of China; there's, we think, believe a return to growth profiles that we've seen historically, and in China, I think it's really down to what's going to happen with the latest fiscal stimulus that the Chinese government has put into place and whether that succeeds or not.
I think in North America, post some of the election turmoil, I think we're probably in a position where the economy is in a relatively strong position. We're starting to, even in some of our direct businesses, see a little bit more volume grow. I think as we look forward, we're factoring a more normalized year for 2025. I've said that, by the way. I've said that before. That's not necessarily turned out to be the case, but our assumptions at the moment is a more normalized growth year for 2025.
And then if you look at solutions with all the apparel, the complicated supply chain, and so on and so forth, what does it feel like for the customers as they think about the holidays and next year and so on and so forth?
I think, again, most of our apparel customers, let's take that one, are anchored either in North America or Western Europe. Western Europe's more muted, certainly. I can see consumer sentiment still being low. North America, actually, I think, had a decent back-to-school. And as a consequence, that apparel is largely a sentiment-driven industry. I think there's an anticipation that the holiday season will be better. And I think, given that the whole apparel industry, as we went through this year, started to sequentially improve, I'm anticipating a continuation of that as we go into next year as well, with some of the caveats around the European market as well.
Sure. As you talk to your customers on the materials side, as they talk to their retail partners and the CPGs and so on and so forth, is it your sense that the promotional activity that has had mixed success? Because I think consumer affordability just got worse sequentially throughout the year. Do you sense more optimism in terms of category volume velocity as it relates to next year at the CPG level?
A little bit in North America, less so, at least indicatively in Europe, and certainly in Asia Pacific more over there. And I think it also varies by category, at least what we're hearing anecdotally from our customers, that those categories around, for example, beverage are tending to be a little bit stronger than that. That's where we're seeing volume. We also have a proxy in our solutions business within our Vestcom business, which is a shelf-edge labeling and pricing business built on a data composition engine. We have two elements there. So we provide pricing information that goes on shelf-edge at grocery, drug, dollar, and so forth in the United States. And typically, in inflationary periods, we see a lot of price changes. We also use that space to provide advertising and promotional activity for brands.
We're starting to see a bit more traction on the advertising and promotional activity. And it's a very early sign, but that would point to there being perhaps more volume activity and promotional activity to come in the future as well.
On that, volumes this year were better than last year, but last year was, of course, you're still below 2022 levels, right, for the materials segment?
Materials were now above 2019.
2019.
2019 was the last normalized year. Effectively, at this point, we're now above 2019 levels.
So how does that bode for the competitive backdrop for the segment in terms of pricing and so on?
I think typically, in our materials business across a cycle, Ghansham, as inflation comes in, we saw significant inflation. We have the ability to pass that through pricing on the materials side, and then typically, when we see a deflationary environment, which we started to see during 2024, we sort of return that back to customers with a slight lag over time. Our ambition across a cycle tends to be that we see price neutrality across the cycle. What we hold on to from a margin growth perspective is the productivity, both operating and fixed cost productivity we take, and I think from a pricing perspective, we're not seeing a huge amount of pricing pressure come in materials. If we do see it, we tend to adjust in each region accordingly.
I'd say the measure that I look for success is where is our share relatively in each one of these segments, and so far, our share is either held or slightly improved across the time. It's also as a factor of our continued service improvement that we've done over the last couple of years.
Okay. You had an Analyst Day not too long ago, right, out in New York. I think you called that +5% core sales growth. Maybe take us through the building blocks of that.
So what we see is we break our business apart across that, and this is across the cycle. We see about 1% of their growth coming from our core products, our base products, as we call them. About 2 points of that growth coming from what we call our high-value segments. These, as I've said, grow quicker than average or higher than segment average margins as well. And they reside in both our businesses. IL is an example, external embellishments in our solutions business, but some of our specialty labels, durable labels, energy storage labels in our materials business. And then the last 1.5 or so points of growth we think will come from our intelligent label platform that's growing at that +15% CAGR across the cycle.
So maybe that's a good segue into Intelligent Labels. So take us through this particular year because, as you said, it's not perfect in terms of linearity for that business from a sales standpoint. How has that vertical progressed this year versus maybe your initial expectations?
Certainly lower than we had anticipated when we started the year. I'd actually characterize that as a couple of years ago, we said we anticipated in the near term to be seeing sort of a +20% growth rate over the near term because we knew at that stage apparel had, this is prior to the apparel destocking, and we also knew that one of the large logistics customers coming on board. Two things happened then. Last year, we saw significant apparel destocking, which reduced the overall growth of the industry. While we successfully executed on the logistics customer, UPS, this year, we've had the annualization of that. While apparel has rebounded largely from the second half of the year onwards, our logistics rollout on an annualized basis has been more challenged. We've learned a lot as we've gone through that.
Some of that, Ghansham, has been down to when we typically rollout in a new segment, there's an element of inventory build that has to happen. We have a viewpoint about how much of that is, but in a new segment, it's still a degree of estimation as we're working with the customer. We know now that some of that inventory build is slightly higher as we got into the comps relatively larger in Q3 and Q4. There's also been a couple of pieces where, as the customer themselves have gone through a transition of using the technology from facility to vendor, there's been some challenges in how those RFID packages may have not been tagged during that time. We've learned that as we've gone along, but that's now been rectified.
And then typically, as we get through the cycle, as we go through, as with all the inventories, the industries that we serve, we also see at some point there's always a degree of some share normalization as well. And we've been anticipating this. We know that to be the case because across every industry we serve, at some point in the cycle, we become not only the exclusive provider, but also the largest share provider. We've seen that in apparel. We don't anticipate it being any different in logistics, food, et cetera. And it's the reason that we believe if we drive the adoption in these new segments, we disproportionately bear benefit from having that larger share position. I would contend that much of the industry growth is based on us driving the adoption of the industry to move forward.
So you mentioned 40% adoption in apparel, right? What do you think a reasonable saturation percentage would be?
I think as you get beyond sort of the 60%-65%, it becomes an incrementally more difficult piece. I will say in apparel, it's taken us a while to get there. That's largely because first we had to do the technology proof point, leveraging a technology. That's now behind us, and then it's really just what's the return on investment, and we typically see for most customers, segment agnostic, return on investment less than a year, and it's the reason why it's so compelling because you're either driving supply chain efficiency, inventory accuracy, labor reduction, or removing waste. There are demonstrable benefits that you get. In apparel, we still have customers that are rolling out now, very large apparel brands, and so one of the questions I always get is, why is it taking so long for people to get there? This year, we've had two or three rollouts.
Next year, we've got a couple as we go through next year, scale up and rollout, and it's largely because even though the technology is valid, it's ubiquitous, and it's been proven to drive returns, it comes down to each retail brand or retailer determining what's the most highest priority. I would contend if you're an apparel retailer and you're struggling to get people into your store because your stores are not attractive, it is a higher priority than fixing inventory accuracy. If your sortation, your range that you're providing is not good and you're not selling, that is a higher priority. I don't doubt we're going to see the same when it comes to food. There will always be other things that sit in the hierarchy.
But I think the most important thing for us is that in these new segments where there's general merchandise or now logistics or food, we needed to make sure that we got the first case of a customer and, more importantly, the first ubiquitous case. Because if it's ubiquitous, then it applies across the industry. We saw that in apparel. We're witnessing it now in logistics. And I believe with the Kroger announcement, we're going to see the same in food.
Would you mind going back to the bubble chart? Maybe we can build on some of those comments.
See if I can do this.
There you go. So as you kind of think about those additional categories and each of them have different degrees of challenges, what's been the biggest challenge for food at this point? And how did you get around that? How did the customers get comfortable with that?
In all the work we've been doing over the last couple of years around pilots and trials in Ghansham, the key piece has been getting, can we validate that the business benefit case is there? And each segment is different. Everybody moves at their own pace. And that's one of the reasons why I say across a cycle, I think I'm absolutely convinced we're going to see this +15% growth. But there are going to be times when it's going to be variable. Some will be higher, some years will be lower, some quarters will be higher. And I think that we know, given the adoption curve, can happen as well, particularly with these new segments. In food specifically, there's been a huge focus on the perishable items because that's where you're going to get the most waste. And as I said earlier, it's the biggest draw.
Proving the business benefit case either in waste reduction or, more importantly, in labor efficiency. And labor still remains the greatest cost component of any retail, particularly in grocery retail as well. I think it's been a key point that we've been able to pilot and now get to show. Now, there are other challenges when you get beyond, let's call it bakery, to be a more simple category. It's largely in control within the environment. When you move to things like proteins and you get into leafy greens, then you have a relatively long supply chain. Ideally, you need to go back to source, to the farm, the distribution center. We have a lot of experience. We've enabled apparel by making +50,000 garment manufacturers around the world in very remote locations capable of tagging at source.
And so one of the strengths of us as a global business is that we're able to provide that leadership insight to be able to support not just the technology piece, but the adoption curve. And then actually what we see as a secondary part is the cultural adoption in store. So associates in retail typically do a lot of manual tasks. When you bring some degree of automation that RFID brings, there's a whole change in the way people work. And we help in that regard as well. I think there are going to be some unique technical pieces, particularly in protein, highly densely packed items, very, very dense in water, in different types of fridges and refrigerators, where I think our innovation and a lot of our IP around the design of these will come to bear and continue to support our differentiation.
Okay. As it relates to your partnership that you announced with Kroger on the bakery section, right, very specific to bakery, what does that look like practically from an implementation standpoint? Where would we as consumers also see it?
The way that you'd see it, it wouldn't be overtly visible to consumers because we're typically putting RFID inlays or devices into what you normally see to be a label, a scale label, or a label that goes on the back of that bakery item. We're going to be working with Kroger to roll that out over the next six plus quarters as we go around the geography of their whole estate. Concurrently, at that stage, their ambition that had been stated with us is they want to focus on really driving the freshness experience for their consumer. That's what they're known for. That's what they want to work on. The natural extension, once you go past bakeries, then to get into those other categories like protein, leafy greens, and time. We see this as a multi-year partnership that we can enable there.
Specifically on bakery, we're going to learn a lot as we go through this. It's a more simple category. And there are elements of the bakery items that are, as we go through, we'll also decide if they're also going to be included or not. But at the moment, the scope of what we've got laid out, I think, is a clear path for rollout. We've already started on that. And over this next couple of quarters, we're going to make significant inroads into that as well.
As you think about the cost of RFID relative to the selling price point of the item, is it sort of $5 plus price point that it makes more sense for? Thinking out to protein and leafy greens, to use your words.
It used to be when the technology, go back 8 to 10 years, the cost of technology was much higher than it is now. Chip costs have come down. Manufacturing costs for us have come down. And that's a good thing because it's opened the aperture up for what other items can be adopted. I don't think we're at the stage now where the price point of Intelligent Labels is really a barrier to any item adoption. If you go into a Walmart store today, you'll find items being tagged that are less than $1. If you go to Decathlon, a European sports retailer, every item in this store is being tagged at the moment. And that's for two reasons. Because I think the emphasis has shifted less from what's the cost to what's the value creation.
If I can get store labor down or I can drive better last-mile fulfillment accuracy, reducing reroutes, the value created by having that is significantly more than the cost. That's one element. And the second element is, as a retailer, if you're only tagging or using IL for, let's say, a percentage of our items, it ultimately means that your store associates are doing two different processes in store. One, a very manual historic one. One, a more automated one. And that's sustainable for a period, but not sustainable long term because you're running two different processes in what should be a more efficient. And that's why we've seen retailers say, you know what, I'm going to tag every item because I get store efficiency, labor consistency across my estate when I do that as well.
Okay. Got it. As it relates to, actually, we'll take a question from the audience. And session2@rwbaird.com by the way, as a reminder, the question's on IP and what kind of IP do you have for RFID Intelligent Labels? How do you protect yourselves from commoditization?
So the way I'd always characterize is if you think about the supply chain in RFID, you start with the chip semiconductor manufacturing, not us. We're not building fabs. We buy those from leading semiconductor manufacturers. We take that and we put that and design an inlay specifically that's attenuated for a purpose, whether it's in hanging garments, tightly packed merchandise categories on protein. There's a very specific piece. A lot of our IP is around how we design and then how we manufacture. The world leaders in that. And then you take that and you put it into some form of form factor label, the tag. Again, we're the world leaders in that. And we have some IP that also goes to that example. And I'll give you a real example. We've been recently working in an apparel category where we've been using the same technology for a while.
We're now leveraging it not just for inventory accuracy, but we worked with Zara (Inditex Group). They own Zara worldwide to use it for loss prevention, a critical issue for many retailers. We've taken that technology and actually not just out of the label, but actually put it into the seam of a garment as well. We have patent protection around that that helps us differentiate as we move forward. Then there are elements as you move forward for different hardware, software, et cetera. Software is a very large category, but we built a digital identity platform because we knew at some stage every item's journey would have to be housed. There wasn't something in the market, so we built atma.io. It's one of a number out there, but we believe it's a really strong part of our managing data.
The more data we manage, the greater our differentiation in the market. We've also developed a couple of pieces of software that also help in that regard. That's a secondary piece for us at the moment.
Okay. As you think about the evolution of RFID, so you started off with you already had customers on apparel, right? And then you added the RFID component to it. You bought Vestcom a few years ago on the grocery side. Now you're making progress in grocery. As we think about these other bubbles, are there any, as you think about capital allocation from acquisitions, et cetera, do you need those to sort of penetrate any of these other categories, food service, for example, or anything else?
The way I've always thought about and consistently, as a company, we have a track record of doing this. We tend to be very good stewards of capital, and we only think about capital allocation, at least as it relates to M&A. Around 50% of our capital available goes to M&A or share buybacks, and we only do that as an execution of a strategy. This is not just picked off the list and saying we need to do something. We look at it hard as it helps us execute a strategy, either from a technology reach, capability build, market access, any one of those over there, and we're deploying from an M&A perspective more towards where we see these high-value segment growths. IL is a very clear example.
So when we see an opportunity, like we have in a particular area for a piece of software, we may go out and do that. We have a very strong balance sheet at the moment, deliberately so, so that we can lean forward when the opportunities are there as well, Ghansham. But I do think that there's an element of us continuing to be focused on how do we maintain our competitive differentiation and that we'll build ourselves through innovation, but also through M&A if we needed to do so as well.
Okay. As it relates to, obviously, your confidence that you have on your financial targets you outlined at the Analyst Day, right? You're growing faster than your peer group. Your balance sheet's already in pretty good shape and so on and so forth. How do we think about capital allocation in light of maybe the pullback in the stock recently and so on and so forth? Is a share buyback going to be part of that equation more significantly going forward?
I think about our capital allocation in three buckets, so one is just what we do internally from capital allocation for assets, but also for restructuring, and that's typically 25%-30%. We allocate then for dividends. We've been a 10% dividend compound over the last decade, and we typically tend to, and that will continue as we move forward as we drive a 10% earnings growth over the years to come, and then the rest goes for share buyback or M&A, and we see share buyback as just an M&A of our own business where we see dislocations in share prices relative to our assessment or the market values, then we will lean into that, and we've historically proven that to be the case as well.
Okay. In terms of more recent events, something we're asking all the companies that we host. On the election, the impact on tariffs and so on and so forth. You have a distributed business with your customers on apparel, for example. How do you see that playing out for you?
I will say, first of all, next year is our 90th year. So we've been through a number of administrations over that time, just not only domestically, but internationally as well. And I think one of the hallmarks of our business over these years has been our ability to plan through scenarios and understand what's likely to happen both fiscally and monetarily and from a geopolitical perspective. Under this next administration in the United States, I sense, and I'm not an economist nor am I a political advisor, I sense there's going to be a higher focus around tariffs. And I suspect that's going to be largely orientated towards places like China. Just for context, our China business is around 17% to 20% of our revenue. About half of that is anchored in our materials business, which is locally selling materials to local Chinese converters who support local Chinese brands.
It will not be affected. The other roughly half is we provide apparel tags and labels to apparel garment manufacturers who manufacture for Western European and North American brands. All of that gets exported. If there is a tariff implication there, then one of our great strengths is we have manufacturing in all of the markets that are apparel sourcing markets, whether it's Bangladesh, Cambodia, Taiwan, Vietnam, Honduras, Turkey, et cetera, and so as brands over the last 10 years have moved sourcing around, we've been able to manage that for them. I will remind everybody that in the first Trump administration, there were already tariffs put on apparel. The Biden administration maintained those, and we'll see what happens, I think, collectively as we move through this next sort of six months or so, what the outcome of those tariffs will be.
So for us as a business, we don't necessarily see as a decrement. We actually see opportunities for ourselves. Should tariffs change, sourcing moves switch around the world? It's one of the advantages of being denominated around the world in the way we are.
Okay. In the last minute we have, we actually have another question from the audience on the QSR component and Chipotle's RFID initiative specifically. And have there been other QSRs following as you would have anticipated? And then maybe just tie this in, given that we just have a minute left, in terms of your position in the current economic environment, which seems very, very complex and probably will get even more complex with tariffs next year. Why should investors consider Avery Dennison?
So yes, on quick service restaurants, we think about food as both grocery and then quick service restaurants. We made progress in QSRs. Chipotle is a very visible customer of ours. The business benefit case there is not dissimilar. It's around availability and accuracy of inventory coming inbound, very low labor availability to deal with that. And so accuracy matters as well as timeliness. And then also, specifically in QSR, freshness and avoiding fines for food that you cannot trace back has come to bear. And we're seeing more interest from other QSRs. I think about, I suppose, my final message for everybody. As a company, I think we provide an interesting investment thesis. We have on one side a materials business, which is a very high EVA generator across multiple cycles, broadly distributed into consumer staples. So cyclically very resilient as well.
And on the other side, we have a solutions business with one particular platform in Intelligent Labels at the nascent stage, what I think is a significant growth factor. And on the other side, it's got very high margins for the general group. And so it's an interesting mix of these two that I think allow us to deliver that +5% growth over the cycle and +10% earnings as we move forward as well.
Okay. We are at time, so thank you, Deon, for your valuable time.
Thank you.