Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison’s Earnings Conference Call for the Fourth Quarter and Full Year Ended December 30, 2017. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded and will be available for replay from 11 a.m. Pacific Time today through midnight Pacific Time February 3rd. To access the replay, please dial 1800-633-8284 or 1402-977-9140 for international callers. The conference ID number is 21857410. I would now like to turn the conference over to Cindy Guenther, Avery Dennison’s Vice President of Investor Relations and Finance. Please go ahead, madam.

Thank you, Dmitri. Today we’ll discuss our preliminary unaudited fourth quarter and full year results. Please note that throughout today’s discussion we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled with GAAP on Schedules A-4 to A-8 of the financial statements accompanying today’s earnings release and in the appendix of our supplemental presentation material. We remind you that we will 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, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. I’ll now turn the call over to Mitch.

Thanks, Cindy, and good day, everyone. I am pleased to report another year of excellent progress towards our long-term strategic and financial goals. Sales grew 8% on a constant currency basis, adjusted operating margin expanded by 50 basis points and adjusted EPS grew 24%. Our Label and Graphic Materials business continues to reach new heights. Retail Branding and Information Solutions posted both strong topline growth and significant margin expansion, and we made progress in expanding the platform for Industrial and Healthcare Materials. This past year marked the company’s sixth consecutive year of strong topline growth, margin expansion and double-digit adjusted EPS growth. This consistent performance reflects the resilience of our industry-leading market position, the strategic foundations we have laid and our agile and talented workforce. Our strategic playbook continues to work for us, as we focus on four overarching priorities; driving outsized growth in high-value product categories; growing profitably in our base businesses; relentlessly pursuing productivity improvement and remaining disciplined in our approach to capital management. Our strong topline growth in 2017 reflected the balance of contributions from acquisitions and organic growth ,driven by our large presence in emerging markets, as well as in our faster growing high-value categories such as specialty labels, industrial tapes, and of course, RFID. Emerging markets and high-value categories are the two key catalysts for growth across our entire portfolio. Roughly half of our total sales are now linked to one or both of these catalysts and we continue to target above average growth from them over the longer term. In addition to the successful execution of our strategy to expand in high-value categories, we also delivered solid growth in our base businesses, by carefully balancing the dynamics of price, volume and mix, by reducing complexity and by tailoring our go-to-market strategies. Now equally important…

Thanks, Mitch. Hello everybody. I will provide some additional color on full-year results then I will walk you through our fourth quarter performance and our outlook for 2018. As Mitch said, 2017 represented another year of great progress towards our long-term financial targets. On slide seven of the supplemental presentation materials, we included our progress against our scorecard for the five-year goals ending in 2018. As you can see here, we are on track to meet or exceed these goals. We have delivered cumulative growth and adjusted EPS of 17% and significantly expanded return on capital, adjusting for the impact of U.S. Tax Reform in Q4. We believe our returns remain in the top quartile relative to our peers, a position we expect to maintain, while increasing our pace of investment for both organic growth and M&A. We continue to have ample capacity for these investments, while returning cash to shareholders in a disciplined manner. Our balance sheet remained strong but our net debt-to-EBITDA ratio on the low side of our targeted range at year end. In last March we introduce a new set of long-term targets, which carries through 2021. Now that we are only one year into this cycle, 2017 performance was on pace to deliver the new targets. Given the diversity of our end markets, our strong competitive advantages and our resilience as an organization to adjust course, we are confident in our ability to deliver to a wide range of business cycles. So let me now turn to more recent performance, our results for Q4. I will first address the transition to the new U.S. tax code, which had a negative impact on reported earnings in the fourth quarter, while improving our outlook going forward. We recorded a tax charge in Q4 of approximately $172 million…

Thank you. [Operator Instructions] Our first question comes from the line of Ghansham Panjabi with Robert W. Baird. Please go ahead.

Hi. Good morning. This is actually Matt Krueger sitting in for Ghansham. How are you doing?

Good, Matt. Good morning.

Good Matt. Thank you.

Good, good. So looking back at 2017, how much inflation did you see across the raw material basket in your businesses? And then what are you baking into your expectations for 2018 as far as raw material inflation goes?

Overall in 2017, as we mentioned, I think, last quarter, we had relatively modest inflation, particularly in the back half of the year and in Q4 it came in pretty much in line with what we had expected it to be. We are seeing some sequential further lift in inflation in Q1. I think, overall, our expectation for the full year in 2018 versus 2017 is probably low-single digits in terms of the rate of inflation versus last year.

Okay. That’s helpful. And then, taking a step back, looking at your business, you’ve averaged 4% organic growth since 2013 in what looks like a relatively tepid macroeconomic environment. Are there any factors that you would – that would keep you from accelerating organic growth above this level moving forward, especially as pricing contributes more and the global macro seems quite a bit more favorable?

I mean our guidance of 4% basically just reflects exactly what you said, the organic growth we have had the last number of years and there have been puts and takes over those years as well. So we thought that was the right number to go with from a guidance perspective. As you look into ‘18, clearly with price increase coming through, if the macro were to improve than that would be tailwinds to that number, I think, there is question about how many macro tailwinds are really are and how long they will last, but then second you have got to think about headwinds that we have as well. Greg talked about the World Cup growth that we had in 2017 in RBIS that won’t continue, as well as the pre-buy from the price increases that we announced that we receive the benefit from in Q4 as well, so few things going both ways.

Okay. That’s helpful. That’s it from me. Thanks.

Thank you.

Our next question comes from the line of Scott Gaffner with Barclays Capital. Please go ahead.

Thanks. Good morning, guys.

Hi, Scott.

Hi, Scott.

Hi.

Hi, Cindy. Just a follow-up on the raw material inflation, if I remember correctly, I think it was last quarter, maybe was for the full year, you had about a 25 basis point drag on gross margins from inflationary pressures, is that -- did that continue over into the fourth quarter and how should we think about the underlying inflationary pressure for maybe gross margin perspective in 2018?

Yes, Scott. So I don’t think we quoted a number last quarter, what we had expected in ‘17. I think as we said was relatively modest net impact last year between price and inflation. As I said, we are seeing some sequential inflation as we enter 2018 and as you know our approach is two-fold to deal with that, one, we look at product reengineering, see if we can take material costs out of our products and we also then look at pricing. So across 20 year, at the very end of 2017 we announced price increases or have implemented them in Q4 or early Q1 in all regions across the LGM business. So we are continuing to deal with that and we feel relatively comfortable with our ability right now to manage the inflationary pressures between those two levers that we have. So we do see some net modest impact probably in the first part of the year, but we expect that to be able to manage that. Now if inflation comes in stronger, continuous sequential increase as we move through the year, I think, as you know, as we have said in the past, it takes us a quarter or maybe two quarters to deal with that as it goes, but right now based on what we are seeing right now with the price increases we have announced in the material cost reengineering we feel relatively comfortable being able to manage through that.

Okay. And on the transportation side, obviously, there has been a lot of concern about rising transportation costs both rail and truck-related, I would assume some of your rolls go on trucks and some on rail, but can you sort of give us a breakdown at exposure there and what you’re most concerned about that, if you have the ability to pass through that transportation cost?

Yeah. So we do obviously have some materials that move on trucks and rail, and we do see some increases there over the last couple of years, I think, in North America, some of the factors you mentioned and some of our pricing actions do take into account the either increases in those kind of macro issues on the transportation, perspective, as well as fuel, sometimes we deal with that through surcharges as well. But right now we factor that into how we think about pricing actions across each of the regions.

Our next question comes from the line of Anthony Pettinari with Citigroup Global Markets. Please go ahead with your question.

Good morning.

Good morning.

Good morning.

Mitch, you talked about investment in the Americas to support growth and I wasn’t sure if you were referencing LGM or RBIS or both. Are there any details you can give in terms of product categories or geographies that you’re focusing on in terms of the investments?

Yes. The investment focus overall is what I was commenting was LGM and RBIS, RBIS specifically around RFID and the rest is LGM. And there are – we are looking at some expansions for growth in the Americas particularly in the U.S. and Mexico are some expansion that we are planning right now. We have not invested in the North America region for quite some time, well over a decade and some of the discussion we had around Luxembourg, we are expanding there, we have gone through a period of little investment there as well. We consider the amount of the market and our own growth. It’s time to ramp that up again.

Okay. That’s very helpful. And then you also referenced some early-stage development in non-apparel RFID. I don’t know if you can give any details there and then just kind of related question, there has been a lot of attention paid to Amazon, Amazon Go store that I don’t think is using RFID. Any thoughts on competition potentially down the road to RFID from cameras and just general thoughts there?

Sure. So broadly speaking about the areas outside of apparel, we are seeing a number of small opportunities that are bubbling up, but there is a three end markets specifically that we are focusing on accelerating the development of that, aviation, food and beauty. There has been quite a bit of – we have got a few pilots going on with a couple of end customers in those spaces and we have actually seen relatively small pickup in some of our growth, a lot of that round pilot stage, but we see a tremendous amount of opportunity in the space. And if you think about food, a lot of similarity to apparel in some way, so one is just desire to increase and improve the supply chain and reduce the manual labor involved with managing that supply chain. And then the focus on freshness, in apparel you have season that create a certain level of parishability. Well, fresh foods definitely have an even higher degree of that. And what we see customers trying to do is reduce their cost by reducing waste but also as part of their sustainability drives to reduce the amount of wasted food in the network. So those are three areas where we are seeing progress. As far as your question about Amazon Go, I am not going to comment on any specific company that we work with. But yet that Amazon Go specifically, my understanding does not use RFID. We have been consistent in saying that we actually see the Internet of Things and the connection between the physical and virtual world is going to be huge driver for a number of technologies and with the proliferation of cameras and AI and sensors, we think that all these technologies are going to complement each other. And what RFID really provides is in areas we have a tremendous amount of SKU complexity, parishability and lack of line of sight, RFID really place in that category. So we think there is going to be a complementive technology that support this whole drive towards IoT more broadly. We are also seeing unmanned stores, convenience stores and the like in Asia that are definitely using RFID. So different and companies are attempting different technologies as they look to rollout a more automated customer interface for food and convenience stores.

Our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.

Thanks. Hi, everyone. Good morning.

Hi, George.

Lots of detail and congratulations on the year. I guess, first question I had to the extent that you can comment, the investments that you’re seeing in LGM and U.S. and Mexico, is there way to put a revenue potential to the level investment or quantify the level investment, we are talking about one new code or two new code or something totally different?

Yeah. We haven’t announced the complete extent of the investments that we are making in Mexico. We did announced that we are putting a small coder in that location to serve the Mexican, as well as the export market in Central America to support the growth that we are seeing in those regions and again in the U.S. is the support -- the growth in U.S. and Canada, we have been seeing a good amount growth. We have not articulated the exact amount of dollar investment overall, George.

Okay. But we are talking about two coders here then, correct?

Yes.

Okay. Now second question, thanks for that, can you talk -- and maybe you had mentioned that, I had missed and if I did, I apologize in advance, can you talk about the productivity issue that you’re seeing in IHM and what makes you comfortable that you can apply the traditionally lean approach to what is clearly in some way similar to LGM in terms of the product, but in many ways is more complex in terms of SKUs and for that matter high-value SKUs which could in turn create issues in terms of productivity and spoilage and the like. So any thoughts it would be helpful?

Sure. So when we just look at the plant and supply chain, lot of similarities with LGM, so that’s what give us the confidence from a starting point and we are seeing progress in certain regions from instilling this discipline around lean sigma for example. We have connected the R&D team from this business with the LGM team part of one organization. We are cross pollinating people, pulling people in from LGM, from RBIS, where we also have a strongly lean culture as well and that is what gives us the confidence, both cross-pollination of leadership, as well as taking the process and process technology from elsewhere in the business and instilling it within IHM. That coupled with, we are getting early traction in some regions, but not the amount of traction that we wanted to be at this stage.

Our next question comes from the line of Edlain Rodriguez with UBS Securities. Please go ahead.

Thank you. Just quick follow-up on IHM, like those operational issues that you are having, like how long do you think it will take you to address that, is it something that’s going to take that more than a year or is that something we should see more progress no sooner?

Yeah. We said – yeah, so we said that we would expect to be seeing traction on the middle of the year. I think from the context perspective, when you look at the margins where they are, big portion of that is M&A, as well as growth investments, it’s about a point, so $1 million worth is the upper in the quarter is the operational challenge I am referring to, so I think we will be on a good trajectory by the middle of this year.

Okay. Yeah. That makes sense. And in terms of opportunities you are seeing in that segment for bolt-ons and stuff, I mean, is it still as attractive as you earlier expected?

Yes. What we are seeing with both working through our pipeline, we continue to see attractive opportunities that we are evaluating, as well as just looking our own business, I mean, the industrial tapes business, which is one of the key areas of focus was up almost 10%, the Vancive medical business where we made a small acquisitions this past year also up double digits the second half of this year, so both in the performance of our business, as well as what we are seeing out there in the pipeline give us that confidence that this is right place to keep going.

Yes. Thank you.

Our next question comes from the line of Jeff Zekauskas with JPMorgan Securities. Please go ahead.

Thanks very much. You took $172 million tax charge and I guess there’s $29 million in repatriation tax that’s included in that. Are your -- how does this change your cash taxes payable? In other words, I guess, the first quarter or second quarter, how much cash will come out from this charge and how does that compare to say previous years when you have taxes that you need to pay in the first quarter or first half of the coming year?

Yeah. So, overall, Jeff, with the tax code, the transition tax to the new tax code, you basically have seven years or eight years to pay that, so we do not expect anything more than a modest cash tax impact certainly in 2018. Overall, I think, as I said, we are looking at roughly mid-20s effective tax rate. We think our cash tax rate will be somewhere in the low 20s on a go forward basis as well.

Okay. And your accounts payable was a little bit more than a $1 billion up from about $850 million last year. Is there something unusual there or you are happy having a higher level of payables or what you -- what accounts for that lift? And your inventories are up about $100 million year-over-year at 20%. Can you comment on that lift as well?

Yeah. So on both of those pieces, fair amount of that is related to acquisitions, so we brought on a number of acquisition this year and added of course the working capital related those, as well as currency. So currency has had an impact particularly in Q4 versus prior year, last year was one of the -- Q4 was one of the lower rates in 2016 and one of the higher rates in 2017. So I think those two pieces overall had a big impact on that dollar increase. I think, overall, from a working capital efficiency perspective, we ended the year fairly well within our expectations, maybe actually a little bit better and our operational working capital pretty much in line with where we ended the prior year in 2016 from an operation working capital percent perspective. That’s despite the fact that as we have said before, we have some higher working capital ratios in the emerging regions, where we are growing a little bit more. So overall we feel pretty good about the progress we made from a working capital perspective in the year.

Okay. Thank you so much.

Thank you.

Our next question comes from the line of Adam Josephson with KeyBanc Capital Markets. Please go ahead.

God morning. Thanks everyone and congratulations on another really good quarter.

Thanks.

Mitch or Greg, just one on North America, I think, you said it was up mid-single digits in the quarter and I – if memory serves, it’s been accelerating throughout the year, correct me, if I am wrong there. Is this as simple as the economy has gotten steadily better or is there anything more that you would point to and then what are your expectations for that region in ‘18?

Yeah. So, I think, Adam, overall, as we said, we also had some pre-buy in the fourth quarter relate to some of the price increases we’d announced for January, but even with that we had grown kind of that low to mid single-digit range in North America in the quarter. That’s relatively consistent I think what we saw in the third quarter as well. So, overall, we have just seen a relatively good market situation there in the U.S. over the last few quarters, but no major changes that I’ve seen in the fourth quarter from a macro perspective.

Yeah. Correct me if I am wrong, in years past, Greg, it was growing quite a bit lower than that, right, maybe 1%, 2% max?

Yes. It was growing less and part of that the market was growing a little bit slower than Europe, it was something that commented on the past. If you recall, Adam, we also had some share challenges couple years ago and we basically made some adjustments and have regain that share late last year early this year and share has been stable since.

Thanks. But just a couple others, the uses of capital, can you just go over what your preferred users are be it M&A, buyback, et cetera, at this moment?

Yeah. So our capital allocation approach hasn’t really changed from what was communicated in the past. We typically look to spend about 30% of our available cash reinvesting in the business through CapEx and restructuring, about 20% through dividends and then the other half we have available essentially for both M&A and buyback. So that’s a way we look at it and that’s how we have communicated in the past, we are remaining relatively consistent with that.

Thanks, Greg. And just one housekeeping one, tax rate, excuse me, FX rate assumption for ‘18 euros specifically?

Yeah. Pretty close to $1.20 in the high one teens.

Got it. Thank you.

Our next question comes from the line of Chris Kapsch with Loop Capital. Please go ahead.

Yeah. Good morning. I had some questions about the – just the price increase initiative and the implementation. I think you said that you are acknowledging raw material inflation as we enter ‘18 and you also said, I think, it takes maybe a quarter to successfully implement broad-based price increase efforts? And then presumably we are talking about LGM segment, just wondering if -- are you suggesting that margin in that segment will be down for the first quarter? And then also what I’ve seen or heard from context in the industry is that some competitors came out with sort of high single-digit price increases, yours is probably at least announced more mid-single. Can you just talk about like maybe the delta versus what the industries pushing for and where you guys really expect to net out?

Yeah. So, Chris, traditionally it’s taken us a few months, as you say, to pass along price increases once we see the inflationary trends. So that that definitely has been the trend about four months. We think it’s probably less than that, less of an impact usual specifically on Q1. And then as far as the level of price increases, you sound like you have seen some of our letters. We have – we are not going to comment on where our competition specifically came out and it’s different by geography, and perhaps, customer set, so I don’t want to comment on what their actions are overall. But we are putting in through price increases that are necessary for us to offset the inflation after consideration of our material reengineering efforts which reduce the raw material cost of our products. And given our strength of our R&D group and capabilities around innovation here, we would expect our ability to continue to be have a greater offset, if you will then perhaps others may.

Okay. Then if I could follow up on just the opportunities in RFID focused, I guess aviation, food and beauty. When apparel started adopting item level RFID, the case from apparel companies basically inventory accuracy in preventing stock outs that sort of lift sales, not just help with their inventory, but lift sales and the ROI was pretty compelling. I am just wondering how parallel are the cases for adoption in these other segments for item level -- I guess, aviation sort of unique, I am assuming you are talking about baggage tags, but in these other areas, if you could just compare and contrast the ROI for just from adoption?

Aviation, yeah, absolutely, so aviation is unique, but follows some of the same principles around high degree of SKU complexity and perishability, you have got to get the bag to the customer pretty quickly once they disembark from the plane. And as far as, if you look at beauty, a lot of parallels to apparel and if you think about beauty, a lot of it’s sold within the department stores, the same place where apparel is so forth and so the value proposition is very similar. And with food it’s equal, but probably weighted heavier toward reducing waste overall and ensuring freshness. And we have all seen some large brands that have been impaired from having safety concerns around fresh foods and so forth. So ensuring safety and quality, as well as reducing waste, both for cost reasons, as well as for sustainability drives.

Thank you for the color.

Thank you.

We have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.

Hi. Thank you for taking the follow on. I will ask them in sequence and leave you to get onto the rest of your day. So, first of all, in terms of the 15% growth in RFID, could you give us some additional color perhaps in terms of how much might that have been new customers, new launches, trials, organic growth with existing customers? Secondly, Greg, I would imagine or Mitch that, with tax policy change or and given where your stock price is that and given your history as an EVA company that would tend to put more focus in the future investment on M&A and organic growth versus buyback, but if you have any additional color there? And then, lastly on the productivity issues and IHM where you’re not necessarily where you want to be, not to make too big a deal relative to the size of the segment also of Avery, since it’s mostly about cross-pollination and training, why hadn’t that already been done to your satisfaction? Thanks guys and good luck in the quarter?

Thank you, George. That’s a three-point question. So RFID, your question about what’s driving the adoption, it’s basically continued trends from what we have seen in the past and there is a few big retailers or brands that have moved one or two a year and then a number of smaller ones as well. So we are seeing major retail moving into full adoption, number of others moving in the pilot and then in addition to that many specialty retailers and brands various state of pipeline. So each stage of the pipeline, whether it’s from assessment in business case through piloting, partial rollout or full rollout, each day the pipeline has increased from where we were a year ago. And that – add to that the level of activity we are seeing which is very early in that pipeline for the areas outside of apparel. From a tax standpoint, just high level, how does it change our thinking being an EVA company, I think the biggest thing about M&A is it makes us more competitive against international companies, who don’t -- because it’s moved to the territorial tax system that’s no longer a drag as we go through our evaluation of M&A targets, also we look at financial buyers there’s some changes in there that basically make U.S. headquartered multinationals, I’d say more competitive on the standpoint. So we are an EVA company, all that goes into our assessment of how we think about this and that will be the key drive for us continuing going forward. As far as IHM, the amount of cross-pollination that occurred before, we call this is a collection of businesses in the number of different areas and we just did not make the link in the past and we see a significant opportunity for doing so, so we are doing it. I think the key message to take from this is, we have had phenomenal performance over the years and we keep finding opportunities whether it’s around commercial growth, around M&A, around productivity to continue to improve ourselves and this is just the next step in doing so, so that’s should be the takeaway there.

Mr. Butier, I will now turn the call back to you for any closing remarks.

All right. Well, thanks everybody for joining the call and for your interest in the company. The fourth quarter capped another great year here at Avery Dennison and we are well-positioned going into 2018 to continue the momentum you have seen over the last two years. I really just would like to take the opportunity to thank the entire team for their commitment and focus on continuing to deliver for our investors, our customers and our communities. So thank you everyone.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.