LehmanBrothers_2607Handout

Lehman BrothersIndustrial Select ConferenceFebruary 6, 2007

Dean A. ScarboroughPresident and Chief Executive Officer

Forward-Looking StatementsCertain information presented in this document may constitute “forward-looking” statements. These statements and financial or other business targets are subject to certain risks and uncertainties. Actual results and trends may differ materially from historical or expected results depending on a variety of factors, including but not limited to fluctuations in cost and availability of raw materials; ability of the Company to achieve and sustain targeted cost reductions; foreign currency exchange rates; worldwide and local economic conditions; impact of competitive products and pricing; selling prices; impact of legal proceedings, including the Canadian Department of Justice and the Australian Competition and Consumer Commission investigations into industry competitive practices, and any related proceedings or lawsuits pertaining to these investigations or to the subject matter thereof or of the recently concluded investigations by the U.S. Department of Justice (“DOJ”) and the European Commission (including purported class actions seeking treble damages for alleged unlawful competitive practices, and a purported class action related to alleged disclosure and fiduciary duty violations pertaining to alleged unlawful competitive practices, which were filed after the announcement of the DOJ investigation), as well as the impact of potential violations of the U.S. Foreign Corrupt Practices Act based on issues in China; impact of epidemiological events on the economy and the Company’s customers and suppliers; successful integration of acquisitions; financial condition and inventory strategies of customers; timely development and market acceptance of new products; fluctuations in demand affecting sales to customers; and other matters referred to in the Company’s SEC filings.

The Company believes that the most significant risk factors that could affect its ability to achieve its stated financial expectations in the near-term include (1) the impact of economic conditions on underlying demand for the Company’s products; (2) the impact of competitors’ actions, including expansion in key markets, product offerings and pricing; (3) the degree to which higher raw material and energy-related costs can be passed on to customers through selling price increases (and previously implemented selling price increases can be sustained), without a significant loss of volume; (4) potential adverse developments in legal proceedings and/or investigations regarding competitive activities, including possible fines, penalties, judgments or settlements; and (5) the ability of the Company to achieve and sustain targeted cost reductions.

Use of Non-GAAP Financial MeasuresThis presentation contains certain non-GAAP measures as defined by SEC rules. As required by these rules, we have provided a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, included in the Appendix section of this presentation.

Balanced strategy for sustained value creation

• Significant investments to drive both top line growth and productivity improvement– Acquisitions in 2002– Portfolio rationalization (divestitures; strategic product

pruning)– Major restructuring program initiated late 2005

• Two major growth platforms continue to draw heavy share of investment today– Emerging markets– RFID

• Core businesses generating solid free cash flow to support sustained value creation ahead

Pressure-sensitive (“self-stick”) technology

Office and Consumer Products

Retail Information Services

Pressure-sensitive Materials

Other Specialty Converting

2006 Net Sales = $5.6 billion

Three operating segments…and “other specialty”

$3.2 B2006 Sales

Adj. Organic Sales Growth(1)

2006 2005Operating Margin(2)

+ 3.1% 9.6% 9.0%(1) Excluding currency, acquisitions, and divestitures – see Appendix for detail(2) Excluding restructuring charges and other items – see Appendix for detail


2006 2005 2004

8.6%+ 3.6% + 9.6%2004


(1) Excluding currency, acquisitions, and divestitures – see Appendix for detail(2) Excluding restructuring charges and other items – see Appendix for detail

$1.1 B2006 Sales 2006 2005

- 0.6% 16.5% 16.9%2006 2005 2004

15.9%- 0.4% - 5.1%2004

Adj. Organic Sales Growth(1) Operating Margin(2)



$0.7 B2006 Sales



+ 3.1% 8.4% 7.2%2006 2005 2004

7.4%+ 4.8% + 9.8%2004

Other Specialty Converting Businesses


$0.6 B2006 Sales



+ 4.9% 3.5% 3.4%2006 2005 2004

7.0%+ 2.3% + 8.2%2004

Full Year 2006 Highlights

• Modest growth in sales on adjusted organic basis (3%)– Continued strength in emerging markets– Good progress against share gain objectives for Roll

Materials business in North America and Europe during second half of the year

– Early signs of improvement in growth trajectory for Office Products branded printable media

– Solid growth in Retail Information Services from continued global share gain

– Mixed results for Graphics and Reflective – solid performance internationally, partially offset by decline in North America, with reduced profitability overall

Full Year 2006 Highlights (continued)

• Gross profit and EBIT margin (before restructuring charges) up 40 basis points and 30 basis points, respectively

• U.S. DOJ and European Union investigations closed with no action

• Board raised authorization for share repurchase to 7.4 mil. shares in late October

• Emerging markets• New products, niche applications

Growth Drivers

Overview of Today’s Portfolio


Office & Consumer Products

Retail Info ServicesOther Specialty Converting

3-5 Yr SalesGrowth Target*

• Emerging markets • Increased penetration of PS

label technology for product ID (food & beverage)

• Share gain in durables• RFID adoption driving carton

labeling penetration• Increased penetration of

printable media products• New category innovation;

existing product upgrades • Global consolidation• New products and services

Long-Term Operating

Margin Target

5-7%

~ flat (with improved product mix)

6-8%

10%+

10-12%

18-20%

10-12%

> 10%

* Excluding acquisitions and divestitures

Margin expansion is key near-term priority

• Maintain our pricing rigor

• $90 to $100 million of annual savings from restructuring actions completed in 2006

• Productivity improvement initiatives across all businesses

• Enterprise Lean Sigma to drive continuous improvement

• RFID still costing ~ $25 to $30 mil. pre-tax; losses will decline as revenue ramps up

International operations growing faster-than-average… and profitability is expanding

2006 Revenue by Region(before intergeographiceliminations)

* “Other” includes Canada, Australia, and South Africa** Excluding restructuring charges

Operating Margin**, International Operations

U.S.

Western Europe

Eastern Europe

Asia

Latin America

Other*

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

2003 2004 2005 2006

We’ve increased our participation in the rapidly growing emerging markets

Local Management Leveraging Global Capabilities

Emerging Markets

Emerging Markets Share of Total Sales

Contribution to Overall Growth: 2.7 pts. 2.9 pts. 3.9 pts.

2001 2006 2011

Key Growth Priorities By Business

• Grow materials businesses through expansion in emerging markets, increased service leadership, and innovation in new applications

• Invest in new marketing programs to accelerate growth of Avery-brand printable media products

• Accelerate growth of RIS business with new products and continued geographic expansion

• Expand new RFID business through share gain of rapidly expanding carton label market and innovation in new applications for selected markets

OpportunitiesEmerging marketsBeverage market conversionDurables share gainRFID adoption driving carton labeling penetration

Market leader

Global scale advantages… technology development, raw material sourcing, global customers

Regional scale advantages… superior service (Exact, Next Day Delivery, Fasson Optimum Performance), lower cost asset configuration and utilization

Pressure-Sensitive Materials

ChallengesSlower domestic market growthOptimizing volume / price / mix equation in more competitive market

Competitive advantage drives superior performance

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2003 2004 2005 2006AVY PSM BMS PS Sector UPM Converting

Operating Margin*AVY PSM Segment vs. Peers

* Excluding restructuring charges

Branded Printable Media –innovator of highly differentiated, proprietary productsManage for Growth

Filing and Other – low cost providerManage for Margin

OpportunitiesNew sources of growth for Branded MediaExpansion of under-penetrated categories Cost reduction for Filing business


ChallengesKey growth drivers have slowedCustomer concentrationPrivate label growth eroding share

OpportunitiesIndustry consolidation driving share gainRapid growth in Asia (China, India, other countries in region) Leveraging full portfolio of products and services

One of two global providersComplex supply chainLabels and tags low cost/high value to retail/apparel companiesCustomers demand:• Global quality, data

integrity, color consistency• Fast, reliable sampling and

order fulfillment


Challenges

Increased vendor power

Retailer consolidation

Achieving scale in Latin America and Europe

RFID Is Avery Dennison’s #1 growth opportunity

Where We Play In RFID Value Chain

Avery Dennison RFID, RF IDentics

Avery Dennison - Retail Information Services

Converting/Printing Partners

ChipDesign

ChipManufacture

Antenna Design

Antenna Manufacture

Inlay Assembly

Label Conversion

Distribution & Service End user

Partnerships with all major chip suppliers Sales through value-adding converters aggregates volume, facilitates

better customer service

RFID… fundamental improvement in competitive position vs. a year ago

• Manufacturing speeds, yields beating internal targets

• Customers, other partners recognize our technical capabilities

• Continue to target significant share gain for carton labeling applications (market share objective of 30%+)

• Sufficient progress to begin broadening reach:– Develop and commercialize HF products– Increase pharmaceutical, apparel, other item level

engagements– Expand activities in Europe / Asia

2007 Earnings Guidance

$4.00 - $4.35

$3.77

$3.44

$3.04

$2.70$2.82

2002 2003 2004 2005 2006 2007Guidance

Pro-forma earnings per share, fully diluted*

* Excludes restructuring charges, gains on sale of assets, and other items – see Appendix for detail.

Capital model provides significant flexibility for funding requirements

2007 Capital Allocation

Over $600 mil. in “unallocated” cash

Available Cash

> $1 bil.+

Cash Flow from Operations

~ $550 mil. +

Debt Capacity$500+ mil.

Acquisitions

CAPEX/Software~ $210-$225 mil.

Share Repurchase

Dividends~ $165 mil.

Emerging Markets

Total Capital Spending & Capital Efficiency

Capital Turnover

(Ratio of Sales to Average

Invested Capital)

2002 2003 2004 2005 2006 2007e

Capital spending… continued shift towards emerging markets

$150 mil.$201 mil.

$206 mil.

$162 mil. $160 - $165 mil.$162 mil.

1.8

2.0

2.1

2.3

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

'75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

Div

iden

ds p

er s

hare

31 consecutive years of dividend increase31 consecutive years of dividend increase

Expect continued modest increase to dividend

Key Takeaways

• Solid progress against near-term goals… balanced strategy for growth and margin expansion

• Net restructuring savings of ~ $50 mil. in ’06, incremental $40-$50 mil. in ’07… near-term earnings growth achievable through actions largely within our control

• Gaining share in the important N.A. market for roll materials

• Emerging markets represent an increasing share of the portfolio… consistent source of profitable growth

• Return on capital is strong and improving

• Significant free cash flow potential, to fund acquisitions and/or share repurchase, as appropriate

APPENDIXReconciliation of Non-GAAP Financial Measures to GAAP

GAAP EPS to Pro-forma EPS*

* Historical figures have NOT been adjusted to remove the contribution from businesses subsequently divested or discontinued.

2001 2002 2003 2004 2005 2006

GAAP EPS 2.47 2.59 2.68 2.78 2.25 3.66

Restructuring & asset impairment, environmental 0.14 0.23 0.26 0.26 1.07 0.33

Gains on sale of business/assets, legal settlements, and other items (0.15) - (0.24) - (0.02) (0.22)

Tax Expense on Repatriated Earnings - - - - 0.14 -

Pro-forma EPS 2.46 2.82 2.70 3.04 3.44 3.77

2006 Organic Sales Growth by SegmentPressureSensitiveMaterials

Office andConsumerProducts

RetailInformation

Services

Other SpecialtyConverting Businesses

2005 GAAPSales* $3,114.5 $1,136.1 $630.4 $592.5

Impact of 2006Currency Changes $15.4 $1.2 $3.4 $0.6

2005 AdjustedNon-GAAP Sales $3,129.9 $1,137.3 $633.8 $593.1

2006 GAAPSales $3,236.3 $1,072.0 $667.7 $599.9

Estimated Impactof Acquisitions &

Divestitures$0.0 ($51.0) $3.2 ($6.6)

Comparability Adjustments ($5.0) ($10.2) $0.0 $0.0

2006 Adjusted Non-GAAP Sales $3,241.3 $1,133.2 $664.5 $606.5

GAAP SalesGrowth 3.9% -5.6% 5.9% 1.2%

Adjusted Non-GAAPOrganic Sales

Growth3.6% -0.4% 4.8% 2.3%

* 2005 GAAP sales have been re-stated for Business Media reporting change from RIS to Other Specialty Converting.



RetailInformation

Services


2004 GAAPSales $2,984.5 $1,172.5 $636.1 $523.8



2005 GAAPSales $3,114.5 $1,136.1 $674.8 $548.1


Divestitures$0.0 $0.0 $17.8 $0.0

Comparability Adjustments ($22.8) ($37.1) ($5.8) ($5.8)


GAAP SalesGrowth 4.4% -3.1% 6.1% 4.6%


Growth3.1% -0.6% 3.1% 4.9%



RetailInformation

Services


2003 GAAPSales $2,572.6 $1,168.1 $552.7 $469.2



2004 GAAPSales $3,008.5 $1,172.5 $636.1 $523.8


Divestitures$0.0 $0.0 $10.1 ($5.3)

Comparability Adjustments $28.3 $30.5 $5.8 $5.8


GAAP SalesGrowth 16.9% 0.4% 15.1% 11.6%


Growth9.6% -5.1% 9.8% 8.2%

Pressure Sensitive Materials

Net Sales $2,984.8 $3,114.5 $3,236.3

Operating income, as reported $221.4 $258.1 $301.2

Operating margin, as reported 7.4% 8.3% 9.3%

Non-GAAP adjustments:

Restructuring costs, asset impairment

and lease cancellation costs $34.4 $23.0 $9.3

Adjusted non-GAAP operating income $255.8 $281.1 $310.5

Adjusted non-GAAP operating margin 8.6% 9.0% 9.6%


Net Sales $1,172.5 $1,136.1 $1,072.0





and lease cancellation costs $0.5 $24.1 ($2.3)



Operating Margin by SegmentFY2004 FY2005 FY2006


Net Sales $592.7 $630.4 $667.7








Other Specialty Converting Businesses

Net Sales $567.0 $592.5 $599.9








Operating Margin by SegmentFY2004 FY2005 FY2006

Economy & Finance

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