Avery Dennison Corporation (AVY) Earnings Call Transcript & Summary

Good morning, everyone. I'm Mitch Butier, CEO of Avery Dennison. Thank you for joining us today to hear a bit more about our story. The virtual format is not the most ideal settings for such a conference, but it is, of course, one we have all grown accustomed to. Now many of you have the opportunity to interact with Greg, John and myself at times throughout the year. And today, it provides a relatively unique opportunity for you to hear directly from some of our business leaders. Jeroen and Hassan will provide an update on LGM; Deon will update on RBIS, and then we will spend a bit more time with Franciso, providing an overview of one of our most exciting growth opportunities, Intelligent Labels. I will start by providing a quick overview of the company, our strategies and objectives before handing it over to the rest of the team. Before doing so, I, of course, encourage you to review the language on Slide 2 of today's materials and in our SEC filings. We've been on an exciting journey at Avery Dennison over the years. Simply put, we have consistently delivered exceptional value for all of our stakeholders across business cycles and are once again raising the bar with a new set of long-term targets. We are consistently growing faster than GDP while maintaining top quartile returns on capital, a recipe for superior value creation over the long term. We are well positioned in large, growing diverse markets. Our leadership in our primary segments is founded on a strong set of competitive advantages, including a long history of innovation leadership and operational excellence. And as you have seen from our results, our strategic playbook has worked exceptionally well over the years as we focus on 5 overarching strategic themes across the company. First, driving outsized growth in high value categories, that is, product lines and solutions that have a higher growth and margin profile. We will continue to invest disproportionately here, both organically and through acquisitions, which over time, will improve our portfolio mix. We have many exciting high value opportunities. The largest is, of course, our Intelligent Label platform that is being built on our high-growth RFID business. Our second strategy is focused on delivering profitable growth in our base businesses by leveraging our scale advantage, consistently looking to reduce complexity, tailoring our go-to-market strategies and a disciplined approach to pricing. Third, relentlessly pursuing productivity. These efforts not only enable operating margin expansion but are crucial in supporting our first strategies, by providing a key source of funding for increasing investments in high-value categories and ensuring our base businesses remain competitive. Fourth, we are committed to continuing our disciplined allocation of capital. This applies to how we allocate capital for organic growth, distribute cash to shareholders and, of course, acquisitions, for which we closed 3 in the last year or so, the largest of which was Smartrac, an important addition to our Intelligent Labels platform. And our fifth strategy is focused on the continued reduction of the environmental impact of our operations, delivering innovations that advance the circular economy, and having a positive social impact by enhancing the livelihood of our people and communities. The overall objective of these strategies is to deliver superior value for all of our stakeholders over the long term. To that, again, we are once again raising the bar for ourselves by announcing today a new set of long term financial, social and environmental targets. Now before sharing more about our targets, I will provide quick overview of our portfolio. Label and Graphic Materials represents roughly 2/3 of the company's revenue, as you can see on the chart on the right here, followed by retail branding and information solutions, it's roughly 1/4 of the company's revenue, and industrial healthcare and materials with roughly 10%. Importantly, you can see that our high-growth intelligent labels business is now a sizable part of the overall company and with more [Technical Difficulty] Our 2 primary businesses, LGM and RBIS, including Intelligent Labels, are the the leaders in their space and are primarily focused on branding and information labeling products and solutions, consumer goods, logistics and apparel markets, while IHM is a functional application that leverages the strengths of LGM. Across the portfolio, the strength of our company comes from a strong set of competitive advantages that all started with Stan Avery's invention of the first self-adhesive label in 1935. Since Stan's invention, we have been the innovation leader in our space, both in terms of material science, leveraging our unique vertical integration adhesives as well as process technology. We are well positioned with the combined benefits of this innovation process, long history of operational and commercial excellence and our scale advantage. We benefit from broad exposure to a diverse set of end markets, measured both in terms of product segments and geographies. From a product perspective, as you can see on the chart on the left, the majority of our end markets are focused on nondurable goods such as consumer products, retail apparel and logistics and shipping. As you can see on the right, we have a diverse set of end geographic markets as well, relatively evenly split between the U.S., Western Europe and emerging markets. We have 2 key catalysts behind our ability to consistently deliver GDP+ growth. That is, the faster than average growth within the high-value categories and our unparalleled presence in faster-growing emerging markets. We generally characterize a product category as high-value when it serves a market with above-average growth potential, has large profit pools and leverages our core capabilities. Examples include specialty labels, a large portion of our Graphics and Reflective materials, industrial tapes and, of course, Radio Frequency Identification solutions within our Intelligent Labels business. And in emerging markets, we continue to see increased penetration of self-adhesive label materials due to the increased consumption of consumer packaged goods, which is the second key growth catalyst. The emerging markets and high-value categories have consistently delivered outsized growth, averaging 7% and 10% annually over the past decade. As you can see from the charts here, they have increased their share of the portfolio and now on a combined basis, comprise roughly 60% of the company's revenue. These catalysts remain a key enabler of continued GDP+ growth and when combined with the rest of our strategies and competitive advantages, gives us confidence in our ability to further expand margins and maintain top quartile returns on capital. Now, we spend a lot of time with investors talking about how we're going to drive and improve our financial performance and how we're going to create superior shareholder return. Within Avery, we have a balanced approach focused on creating value for all of our stakeholders, our customers, our employees, our communities as well as, of course, our investors. You can see here on Slide 9, some key metrics we use to measure our progress in delivering for each of our stakeholders. We continue to have world-class employee safety rates and employee engagement scores. We continue to provide industry-leading innovation and service to our customers, recognizing our service scores dipped last year due to COVID-related demand surge in LGM, and we have made excellent progress in reducing our carbon footprint, already surpassing our 2025 goals. We are making progress on all fronts. That said, we know we can do more. While we are making progress on the percent of women among our management ranks, as an example, we are still short of our diversity goals. In our ongoing commitment as a sustainable business, we've also announced a new set of 2030 sustainability goals focused on 3 objectives: advancing the circular economy, further reducing the environmental impact of our operations and making a positive social impact by enhancing the livelihood of our people and communities. I encourage you to review our integrated sustainability and annual report, which we released this week for more insights into our strategies and objectives. Now, I have discussed our strategies and goals, financial, environmental and social. Now let me quickly comment on the importance of governance. We have a strong set of governing principles, founded on a deep set of company values that cascade throughout the organization, starting with our Board. Our Board has a diverse set of industry expertise, that provides both the appropriate governance as well as valuable additional insights on our markets and our strategies. In summary, our consistently strong performance is enabled by our clear competitive advantages, our market-leading positions in diverse growing markets, the strategic foundations we've laid and above all, the expertise, dedication and agility of our teams. We are extremely fortunate to have an organization that is focused and committed to the long-term success of the company. And it all starts with our leadership team, an international group with deep expertise that has demonstrated its ability to continue to deliver value for all of our stakeholders. And with that, I will turn it over to Jeroen and Hassan. But first, a brief video showcasing Label and Graphics Materials. [Presentation]

Thank you, Mitch, and good morning, good afternoon, everyone. I'm Jeroen Diderich, leader of LGM North America, and I'm together with Hassan Rmaile, who leads the European region. I have the pleasure to talk to you about our Label and Graphics Materials division. First of all, our business strategies are working. We have been consistently outpacing GDP over the cycle with solid margins and high capital efficiency, delivering higher returns and superior value creation. First, we leverage our strengths to win in high-value product categories or high-value segments, as we call them, by addressing unmet customer needs with differentiated product and service offerings. These segments clearly generate higher-than-average returns and faster growth. We lead in specialty labels, while we are a top 3 player in Graphics, Architecture and Automotive segments and reflect these materials. Second, we drive profitable growth in the base with a strong leadership position in labels being roughly 2.5x bigger than our next largest competitor. And we operate through our global scale, but with local presence and industry-leading quality in service. You will find our labels in every major region and country in the world with an unparalleled presence in emerging markets with attractive growth opportunities. Third, we have a relentless focus on productivity and functional excellence through our continuous improvement program called Enterprise Lean Sigma and our digital strategy. We also consistently maintain our disciplined approach to capital allocation with targeted investments and a strong working capital focus. Fourth, sustainability is forming center in our innovation pipeline, providing industry leadership and developing circular solutions and driving waste reduction. We have innovation teams across the world, working very close with our customers and end users, supporting them in their innovation efforts and sustainability commitments. And last but not least, we drive these strategies by developing an empowered and diverse team, operating in an entrepreneurial and inclusive environment. All these elements combined, give us an excellent competitive advantage around the world, and I'm very proud to be part of this high-performing team. We finished 2020 with $4.7 billion of sales. This translates into 3.1% organic 5-year annual growth compared to an average GDP growth of 1.6% in the same period. Our business is delivering very solid and consistent free cash flow. And with our EBITDA north of 17% and an ROTC of well above our cost of capital, a very healthy EVA generating business. My colleague, Hassan will cover our high-value segments and emerging markets as growth catalysts in more detail. But the high-value segments category is strategically important and accounts for roughly 1/3 of our total sales. As said, these are highly differentiated functional products. Emerging markets cover almost 40% of our size and reflecting truly a global presence. These regions are particularly attractive due to their growth potential and relatively low penetration of pressure-sensitive labels. Our LGM business has been very resilient, demonstrating consistently above GDP growth and solid profitability improvement even in a year like 2020, serving essential industries with our label materials. In addition, we've been able to add some inorganic growth in recent years, like the acquisition of ACPO, the leading producer in North America of solvent over laminate materials used for labels and flexible packaging. Key margins have been mix improvement and delivering productivity with a focus on continuous improvement and disciplined spending. Our scale further enables us to continue to generate efficiency benefits and fixed cost leverage. In the total global label landscape, Pressure-sensitive labels sends out as an attractive value proposition, and the decoration technology with above-average growth. Well, Sleeves are also gaining ground, mainly from wet glue. Pressure-sensitive labels offer more decoration capabilities and can be applied to almost every packaging type, and therefore, addresses a larger space. Pressure-sensitive labels are, however, mostly applied to rigid packaging formats, and it's worth mentioning also outpacing the growth of flexible packaging. And just looking at the Pressure-sensitive industry, you will see that we operate in the $16 billion industry, Labels being about $10 billion and Graphics and Reflectives combined roughly $6 billion. In Labels, we are clearly the second leader in all regions. It's important to know that about 70% to 80% of our Pressure-sensitive label Materials go into essential applications like primary packaging for food & beverages and home & personal care products or variable information applications like retail, pharma and logistics processes, in particular, e-commerce. Key trends that are impacting the demand for Pressure-sensitive labels are the importance for brands of premium look & shelf-appeal, the emerging e-commerce, and an increased consumer demand to have information regarding authenticity, safety and hygiene of products. During the pandemic, the increased consumption from home had a favorable impact on the demand for Pressure-sensitive labels. And the expectation is that post-COVID, the priority for sustainability will further accelerate, balancing safety and hygiene requirements with an effort to reduce waste. For the coming years, we see a strong growth opportunity in Intelligent Labels within RFID inlays, which is starting to gain more and more traction outside of apparel and where we can leverage our converter access from LGM. RFID is creating a new pool for smart variable information labels with clear benefits, such as improving the productivity of supply chain, reducing food waste or, for example, supporting the circularity of packaging. All in all, an exciting growing industry to be part of. Within the Pressure-sensitive label space, we are well positioned to win on the basis of our key competitive advantages. One of the key reasons customers prefer working with Avery Dennison is our industry-leading quality and service with very experienced local commercial and technical service teams, the broadest portfolio in the industry, as well as short delivery times through global presence and robust regional supply chains. Our operational excellence is enabled by Lean Six Sigma principles, state of the art technology and automation, and a team that really knows how to work with coating and adhesive technologies. We have innovation research centers in every region in the world, and we work very closely with our customers and industry partners. This allows us to identify and invest in future growth platforms and at the same time, drive product optimization and portfolio expansion across regions and segments. Our materials, process engineering and adhesives team drive IP protected patents while we leverage vertical integration in adhesives and films, and we use M&A and partnerships to acquire new or adjacent capabilities. Our focus on sustainability is a key cornerstone that is ingrained in everything we do. We develop and deliver solutions that are made of recycled materials, consume less materials, and offer recyclability solutions for packaging. We also recently invested in matrix and liner recycling programs to redirect waste from landfills. And in addition, I'm very proud of the great progress we've made in energy management and waste reduction within our own operations. As mentioned before, sustainability is critical for our industry, and we're leading the way. Our focus areas are split into key categories: reduce circular solutions, enabling recycling as well as recycled contents and responsible sourcing. And all those are part of our clear intent portfolio. In addition, we work on extending the life duration of our product materials. And as mentioned before, we facilitate liner recycling programs to avoid landfill. So to achieve our ambitious targets, we are continuing to focus our resources towards sustainability, including it in our innovation stage-gate processes and leveraging our material science capabilities and our engagement with stakeholders in the ecosystem. So as a result, by 2030, we set ambitious goals. We wanted our sustainable solutions become the standard in our portfolio. 100% of our core film and paper products will contain recycled or renewable content. All regions will have labels that enable circularity of plastics. And we continue to lead the industry towards regional circular solutions for matrix and liner waste. And we are uniquely positioned to expand the adoption of intelligent labels to reduce waste and create smarter shorting and recycling processes. To conclude our sustainability focus, I wanted to show you a few examples of great products and solutions that we offer. And on the slide, you see some examples of our sustainable product portfolio, which is the widest range in the industry. And includes our in-house made, next-generation MDO film, and PE and PP products with recycled contents. And on the right side, you see one of our industry-leading solutions named CleanFlake, which is helping to return bottles and create recyclability for bottles, pet and HDPE bottles. To illustrate how this works, returned bottles are first ground into Flex, then washed in a barth where the labels are separated from the flakes through our special adhesive formulation. And as a result, the clean flakes sink and the labels float, allowing the clean bottle flakes for reuse. So as you can see, we are really leading the industry in this area. And with that, I would like to hand over to Hassan.

Thank you, Jeroen, and good morning, good afternoon, everybody from the Netherlands. Next, I'm going to walk you through our 2 growth catalysts in LGM, namely number one, high-value segments and then number two, our emerging regions. The high-value segments consist of 2 units for us. One is specialty labels and the second one is what we call Graphics and Reflective solutions. Specialty labels are high-end label applications, typically growing GDP+ in areas such as wine & spirits, pharmaceuticals, electronics, durables and reclosure. They are usually driven by secular trends such as electrification, sustainability and cold chain logistics to name a few. They are usually custom-made for specific needs and are not part of our standard portfolio offerings. Let me walk you through a couple of examples. I'll take durables as the first one. The labels and durables typically need to operate in a very demanding harsh environments with very tight specifications. This is a segment where we have unique application capabilities around the world, working intimately with our customer design centers to address those needs. The second example I would like to share with you are labels, including embedded forms of digital intelligence built into them, addressing needs and authenticity, consumer brand interface and information management. The second unit under our high-value segments is our Graphics and Reflective business. We are a global top 3 player here. And these are also segments growing at GDP+, driven by branding, personalization and government spending on infrastructure. Graphics is literally anything you see on delivery fleet trucks, taxis, convenience stores, gas stations, color change and protection phones for automotive. We have also added some key capabilities inorganically, such as solar and safety window films as well as metalization capabilities with the Hanita acquisition that we made in 2017. On the other hand, reflective, it's all the signs that you see all around you that reflect light around the world, things like traffic safety, emergency vehicles and work zone. These are applications that typically require unique capabilities in physics and specifically optics to manage the flow of flight. We have very nice pictures here. So I thought maybe what I could do, I give you some color, give some of these stories, give it a little bit of life. So if you look at the retro angle, starting with the first picture, which is the green electric vehicles, color change up, and going clockwise, you can see very high-end spirits. That's one application. You could see reclosure for fruits. In this case, we show blueberries. You also see RFID enabled tags for pharmaceutical authenticity and cold chain. And the last one on the top right in the triangle, you see a flame retardant label for durable goods. In this case, you see the electric drill. In summary, high-value segments account for 1/3 of our global business, and our strategy is to continue growing them profitably beyond 40% by 2025. In the next view or the next slide, I wanted to give you a very good flavor and color how we innovate embedding our customer unmet needs into our design cycles. We heavily engaged in the ecosystem. We talk to our customers, to our suppliers, to OEMs. We then translate their needs into technical specifications, we hand those technical specifications to our teams who then combine the creativity of material science, along with the precision and execution of our engineering teams, to create highly differentiated solutions and high-performance adhesives and specialty films. The next step then is to test these finished laminates at production speeds, working very closely with our customers to test the prototypes allowing us to have the right value proposition at the right application at the right customer. This enables us to deliver world-class solutions in industry. One example I would like to highlight for you here is reclosure, what we call reclosere solution. So you can see, these are very nice applications that replaced hard plastic lids enabling easier flexible packaging recycling for packages that you're used to, things like baby wipes and cookies, for example. In the next slide, I want to shift gears little bit to the emerging regions and our global presence and scale. So you'll see here, I want to share with you our global locations, you could see them on the chart. And it's a clear competitive advantage for us as we deliver innovations to our customers globally. But I also wanted to bring your attention specifically on our emerging markets where it is our second growth catalyst. We have extensive presence today there, close to 40% of our total sales. We have a clear competitive advantage as we were the first in our industry as a multinational to invest in China, India and the ASEAN region, more than 20 years ago, establishing the foundation of our industry. There are 2 macro drivers at play here. One is economic and the second one is premium look and shelf appeal. As GDP per capita and populations continue to grow, the lower PSL penetration, typically 2 to 4 square meter per capita in the emerging regions compared to 10 square meter per capita in the western world, allows us to continue to grow faster than GDP in those regions. The second key driver for us is decoration technology transfer, from wet glue to pressure-sensitive, as premium shelf-appeal and consumer taste continues to evolve. And as consumers become welfare, goods need to have a premium lock. In these cases, we do have the widest range of both fit-for-use and premium high-end solutions in the industry. We've also been very successful in the past in converting food & spirits from simple glue-applied label to great-looking premium brands. There's still great opportunity to go here as the majority of the technology today is still wet glue that doesn't apply as well or go as fast. Last but not least, on the sustainability front, we are working very closely with our customers to take a pioneering role to offer the widest range of sustainable solutions. To that end, we have established a converting center in China, a knowledge center in India as well as multiple manufacturing facilities to help create solutions tailored for these regions. We have also trained, and we are proud of doing so, hundreds of our converters on how to use our pressure-sensitive materials and increase their productivity. All in all, and in summary, based on everything you heard from me and Jeroen, based on our growth catalysts, our secular tailwinds and our relentless focus on productivity, sustainability, innovation and customer centricity, we are very confident this will enable us to continue winning, growing greater than GDP and creating superior EVA returns in a highly diverse and inclusive environment. Honestly, it's an incredible business and team to be part of. With that, I now hand it off to our CFO, Greg Lovins, who also leads IHM and interim, and thank you very much.

All right. Thank you, Hassan. So I'm going to spend a few minutes on our Industrial and Healthcare Materials segment. And this is a segment we had just created when we had our Investor Day back in 2017. And while we had some challenges in some of these businesses early on, we've seen significant progress in the last couple of years, as we really strengthened the foundation of these businesses. While also leveraging the core strengths of our LGM business and team, and we see significant opportunities in these businesses moving forward. So let me start with the composition of IHM. Our products here primarily go into industrial categories, such as automotive, building, construction and other general industrial areas as well as healthcare categories, such as medical and personal care or diaper tapes. And our products here typically are highly specified, highly functional materials that tend to be a critical component of the functionality of our customers' products. And in many cases, our products here are customized to meet the specific needs of a customer's application. Examples include products used upon side mirrors on a car or bonding of layers within a brake shim in a car, wire harnessing tapes and wire harnessing fasteners as examples. And then within medical, skin-friendly antimicrobial medical tapes, to name a few. We've improved our EBITDA margins here to 15% in 2020 while growing roughly 5% ex currency over the last few years, through a combination of organic growth in our higher-value categories, which make up the majority of IHM, as well as through acquisitions. In IHM, we're competing in attractive end markets. And while markets like automotive are generally more cyclical in nature, we continue to see favorable secular trends driving long-term growth in these spaces above GDP. While the industrial markets we compete in were impacted by the downturn in 2020, we would expect to see them bounce back quickly as the overall economies recover. And we also expect tapes and adhesives to continue outpacing the base growth in these markets as they replace mechanical fasteners. And our product support favorable macro trends such as lightweighting and noise and vibration reduction. For example, as vehicles strive to become more fuel efficient, as we move more and more towards electric vehicles as well, of course, our products, there's a need for lightweighting, bonding materials, and our products not only serve that critical bonding function, but they also help reduce the noise in the vibration within a vehicle. So we feel good about the potential of the markets we're competing in here from both growth and margin opportunities. And the strengths of the company with the material science and adhesive development backbone that Hassan mentioned, are critically important in the development of the highly technical application-specific products that meet our customers' complicated needs within IHM. And as I said earlier, we've improved our margins significantly over the last couple of years, up 2 points from where they were when we created this segment back in early 2017. We've simplified our organization structure, reduced the complexity in the business, while also increasing the speed of our execution within our markets. We've also strengthened our leadership, and we've streamlined the manufacturing footprint while significantly leveraging LGM's operations, procurement and R&D functions where we share our leadership and cross-divisional teams to drive excellence in our IHM operations, similar to what we built in LGM over many years, as Jeroen discussed earlier. So the foundations we've poured now in these businesses are strong. Our key strategies in IHM are focused on accelerating both our growth and profitability and industrial medical tapes through the development of differentiated solutions by leveraging our robust innovation and new product development capabilities and tailoring our commercial strategies and product portfolio to the specific needs of our target markets, and our customers. At the same time, like in the rest of the company, we remain relentlessly focused on driving productivity in these businesses, to both improve our margins and to fund ongoing investments. And we see compelling opportunities to expand our capabilities through both organic investments and bolt-on acquisitions. On that front, we recently announced a small acquisition that we're very excited about in our industrial tapes business in North America, of a company called JDC Solutions, which has about $30 million in revenue and competes in very complementary areas as our existing industrial business. And we see further opportunities for bolt-on capability building type investments like these that can continue to strengthen our capabilities within the IHM segment. In short here, we've solidified our foundation within IHM and we're confident in our ability to continue executing our core strategies to drive growth while expanding margins and delivering for our customers. So with that, let me hand it over to Deon to talk about RBIS.

Thanks very much, Greg, and good morning and good afternoon to everybody. It's really good to be here with you today, to be able to provide you an update on RBIS, our progress, our markets, our advantages and our ambitions and commitments to 2025. In the next 10 minutes or so, I'm going to cover the drivers of our current success and the strategies we will execute on to continue accelerating the value creation from RBIS. I'll then hand over to Franciso Melo, who will spend about 30 minutes or so providing greater insights into our largest high-value category of RFID intelligent labels. So it is clear that RBIS is delivering on the promise we presented to you in 2017, comparing to 2015 when we shifted our strategy and began our business transformation, we significantly increased the growth profile of the business and expanded margins by over 600 basis points, more than doubling operating profit, delivering returns well above the cost of capital and generating significant value for all of our stakeholders. This has been driven by the transformation of both the cost structure of the business and the service proposition within our base business, further strengthening our market-leading position in apparel. The execution capability and muscle memory we have built during this time in fixed cost innovation and service flexibility will continue to ensure sustainable profitable base growth over the longer-term period. We also see secular tailwinds in the end vertical markets we are targeting, driven by macro trends that we believe favor RBIS because of the solutions we bring to help address the customer challenges of provenance and personalization, and to help them as they transition their businesses to a more digital future. This will further bolster our growth catalysts of intelligent labels and external embellishments, delivering both higher growth and margins. And as I'll touch on later, we'll see real growth opportunities in food and logistics, leveraging our learnings in apparel, our success in intelligence labels as well as our legacy identification solutions and channel customer access. As a reminder, RBIS provides physical and digital labeling solutions that allow customers primarily within the global apparel market, but increasingly in other verticals like food and logistics to optimize their on-product branding and engagement with consumers and enable item visibility and information traceability from source to end of life. It is worth noting that while the majority of our revenues currently originate in Asia, we characterize our geographic sales by both where the end customer head office and decision-making is done, as well as by the type of product, be it a base tag and label, an intelligent label, an external embellishment or an automatic identification data capture solution, or AIDC. The latter which is sold by an existing legacy printer consumable service and software business we have, will help drive some, but not all of the opportunity in the food and logistics verticals I'll touch on later. So over the last 5 years, as you can see, the transformation strategy for us to become more competitive, faster and simpler, has delivered for all of our stakeholders. We reduced cost. We drove decision-making close to the customers and improved our service and flexibility proposition, and that continues to strongly resonate with our customers. Combined with the acceleration of our IR market leadership, we have consistently built a track record of value creation, delivered by an engaged global team of over 20,000 employees. In 2020, during the worst health and economic crisis in many decades, we again demonstrated how this transformation and IR market leadership helped us not only navigate the twin challenges, but also position the business for continued value creation through 2025. This value creation is also reflected in and driven by the diversification of our portfolio. As you can see here, a substantially greater part and share of our business is now coming from our high-value categories than even 5 years ago, and it will continue to do so as we move forward. Additionally, we believe that our competitive advantages, our IR leadership and our legacy market access and identification solutions will allow us to further unlock and then accelerate growth in food and logistics, market segments where our share is less than 1% of the addressable opportunity today and where our solutions for speed, labor efficiency, inventory visibility, waste reduction and food safety provenance are already resonating with end customers. As an example, we already provide a unique food labeling and safety solution to leading food retailers, which includes an IoT connected device covering consumables for label printing and a task in time productivity management in a Software as a Service platform, this is helping us unlock new opportunities. It is also noteworthy calling out the dramatic changes you can see in e-commerce as a percentage of business within apparel retail in the last 5 years, a trend that we believe will not only continue to accelerate moving forward, but one that we believe helps underline our competitive advantages. So as I turn to those competitive advantages, we believe that they are clear and compelling in light of the evolving industry trends you can see here, which cut across multiple verticals. I'm not going to touch on all of these, but I think 2 are worth calling out. The first is that we're seeing an acceleration of the digitization of items, supply chains and business models, driven by consumer needs for visibility, provenance, connectivity and personalization. In fact, this has been accelerated by the coronavirus crisis where contactless needs are driving ever-higher requirements for e-commerce, automation and frictionless solutions. Dealing with the implications of this in their business models will become, I believe, table stakes for success for our customers moving forward. In this regard, we have a belief that every physical item will have a digital identity and a digital life from its birth to the end of its life. And our investments in IL capability and solutions, our global scale and service proposition, our innovation in new digital solutions and our customer partnerships position us at the center of these critical customer conversations and strategies. Secondly, consumer demand for more sustainable and safe products and transparency on the environmental and social impact of how and where they are made and how they reuse and repurpose continues to rise. Combining sustainable products with supply chain visibility solutions, both physical and digital allows RBIS as a trusted partner to help customers navigate their environmental and social commitments. And so turning to our 4 broad strategies. We will, as we've consistently done over the last 5 years, continue to drive outsized growth in our high value categories. In particular, our Intelligence Labels growth coordinated across RBS and LGM will contribute 1.5% plus of our total company growth over the next 5 years. And as I've indicated, we will further diversify our portfolio by unlocking growth in food and logistics. Additionally, we will continue to drive profitable share growth in our base apparel business by leveraging our transformation progress, and then further evolving our flexibility, productivity, automation and fixed cost innovation to enhance margins and competitiveness. And we will continue to future-proof our business by accelerating our digital and data competence for solutions leadership and to enhance customer experiences that they partner with us. These strategies are built on both learnings and progress to date and the competitive advantages we have. And when executed by what I believe to be the strongest globally connected team in our markets, provide us with the confidence for success through 2025. Finally, our progress and our first strategy, outsized growth in high-value categories has been consistent in creating value and is the cornerstone of our continued success. Our 2 principle high-value categories are our Intelligent Label platform and our external embellishment solutions. In external embellishments, which refers to branding decoration on the outside of the garment, typically with products like transfers, badges and crests, we have made excellent progress. Our business has doubled in 4 years, and like our IL business generates above segment average margins. This has been driven by both partnerships with our key performance brand customers, as well as by securing exclusivity for providing names and number transfers on a number of very high-profile soccer associations or football associations, depending on your geography. These include the Premier League in England, Real Madrid and Barcelona, and our products can be seen week in and week out on television worn by some of the most famous soccer stars in the world. We believe that we have a lot of runway for growth in this category. Our share is still low, the market is growing at mid-to-high-single digits, and the innovation, scale and digital capability we bring is increasingly resonating with customers. Of course, our largest and most important high-value category is our Intelligent Labels platform, where we are the go-to-market leader. And so for a deeper insight into this, I'm going to hand over to Franciso Melo, who leads our global IR business. Franciso?

Thank you, Deon, and good afternoon, and good morning, everyone. Delighted to have the chance to provide an update of our exciting and value-creating journey of Intelligent Labels. I intend to cover the quality of the markets where we operate, where we play, our positioning and track record within those as well as our strategy for growth. So let me start by sharing with you our vision within intelligent levels, which is to drive digital identification technologies to bridge the physical and the digital worlds to create a more sustainable and intelligent life. I'll draw your attention to this notion of the bridge element, the role that Avery Dennison plays in enabling the digitization of supply chains. Let me invite you to watch a brief video about our business that I trust will help bring that to light. [Presentation]

Very good. If we move to the following slide. I would like to start by sharing how our RFID and Intelligent Labels, in general, meaning sensors and IoT technologies that could enable passive automatic data capture i.e. enabling accelerated digitization of supply chains in many market segments and with that, improved efficiencies. Just a word on what we mean by passive, which is really battery free, which enables not only the most sustainable solutions, but also the lowest possible cost. And I'll certainly come back to that. In today's world, consumers are agnostic to channels. We continue to see digital being used as a backbone for shopping. Consumers expect availability everywhere and simply when they want it. This has led to new delivery models, such as buy online pickup in store, ship from store, and more recently, with the pandemic challenges, a significant growth in curbside up. Availability and accuracy is fundamentally not just to meet those demands and the positive consumer experience that it entails, but it's also fundamental importantly for -- to do it in an efficient man. Over the past several years, we heard many retailers from Macy's target mention how important stores are as an integral part of their fulfillment model. I even heard executives say actually referring to stores as important distribution centers. It is, however, important to realize that if a store associate takes 30 minutes to find an item in store, in many circumstances, the labor cost is significantly larger than the contribution margin of that item itself, causing a major bottom line pressure. As we all know, e-commerce continues on the rise. With China this year set to become the first country in history that we'll see the majority of its retail sales conducted online instead of by traditional brick-and-mortar stores in a recent report by eMarketer, a digital marketing research agency. So with China having much smaller footprint stores than, say, the U.S., that means major investments have happened and will continue to happen in back-end logistics. In addition, and a very interesting point, I would like to emphasize is our research has shown in a major event, 11/11 singles event in China, that the first retailers that get the product or the merchandise to the consumer, have a significantly lower rate return than those that do not. So to achieve all that, you need speed, you need accuracy, both in finding your products, also in shipping and fulfilling your order. Again, this is where RFID at item level can help. Let's now consider word on food to emphasize a different perspective. Well, it's estimated that about 1/3 of all food producers in the world is wasted, of which about 40% is consumer-facing and retail-related, a reduction here will have tremendous sustainability impact through waste avoidance. Again, here, improving visibility and accuracy in food retail, we estimate could reduce as much as 20% with emphasis on perishable items. In addition, the COVID-19 pandemic has also increased the need for touchless or contactless retail in autonomous shopping, an area where RFID has demonstrated to add value by creating greater freedom for shoppers in a more convenient and safer environment. And then last but not least, in areas like pharma and automotive, safety and authenticity coupled with traceability, are extremely important, only supply chain velocity and when required, speedy recalls. Bottom line is that RFID enables the creation of what I like to call a smart end-to-end supply chain, not just smart retail. Let me zoom in on that to explain you what I mean. So just a very quick chronological perspective of the use case evolution to date within RFID and certainly our hypothesis to the future. More than 10 years ago, in fact, significantly more 10 years ago, some retailers, pioneers like Marks & Spencer in the United Kingdom needed -- use their technology to ensure on-shelf availability. Shopper enters a store and finds what he or she is looking for. To do that, they need regular stock counts, would say, using a handheld device, to correct for inaccuracies and therefore, improve availability, rising sales and reducing markdowns. Back then, Avery Dennison, we started tagging at source at the manufacturing sites, originally by adding a supplemental tag and later by leading into integrating the technology with existing trims in the apparel case, hence creating a seamless integration experience and the most competitive solution possible. The value, however, was mostly retail driven. Instead of the typical 1 or 2 corrections a year at the time of a physical stock count, retailers could now use our heavy technology to do multiple accurate and efficient store counts weekly. If needed, correcting in accuracies and improving availability at the item level. Later in the event of omnichannel, today's reality, that need became and is today even more important. So all merchandise available in stores can also be available online. Note that with low inventory accuracies, retailers tend to use minimum thresholds for in-store availability, which limits the assortment that is effectively put online. That is a major challenge, particularly during the pandemic shutdowns. And one that you can only operate a store as a distribution center if you have confidence in what you have and where you have it. So we don't create big declines, any disappointed customers. Today, we're also exploring numerous segments beyond apparel, as we'll cover a bit later in the presentation. And the need for both accurate speed throughout the supply chain is certainly gaining momentum, both in apparel and beauty, but also with special emphasis info and logistics, providing electronic for delivery, labor efficiency, traceability, just to name a few. This is depicted on the arrow to the left or if you like, upstream from the retail element that you see at the center of the slide. To the right or downstream for retail, the arrow is expected to -- we actually expect to start unlocking a whole new breadth of opportunities, empowering the consumer, enabling a unique window of opportunity, a window of connectivity, if you like, between brands and consumer never possible before. This is what we call the power of connected products, enabling authenticity assurance, circularity, end-of-life management and direct-to-consumer interaction, the objective of many companies, certainly of consumer package good companies. In summary, RFID enables the digitization of end-to-end supply chains with all its benefits creating a smart capability throughout. So a word about where we operate. We're very proud of being a leader in this sort of high growth segment. And we have the privilege and the responsibility of leaving the UHF RFID adoption in the world, also known as RAIN RFID. The UHF market has been consistently growing according to the market research company, IDTechEx has reached about a CAGR of over the past 5 years of about 24% and is expected to [Technical Difficulty] 20 billion units this year, of which approximately 70%, just over 2/3, are expected to be apparel-driven today. [indiscernible] we've been at the forefront of this growth with our revenue track record showing over 18% CAGR of organic growth in the same period or 26% when you include the Smartrac acquisition. Note that from a revenue perspective, our innovation has enabled us to increase the competitiveness of the solution, drive volumes up while maintaining and actually improving, in many cases, superior returns. Today, after the successful Smartrac integration literally last week was the first anniversary, we estimate we have more than 50% global inlay share and higher relative segment share in apparel overall. We expect the new segments to grow faster in the coming years from a significant model base. Moving forward, our target for top line growth remains, as Mitch and Greg have several times stated, at 15% to 20% CAGR, obviously, on a significantly larger base, which is our reality today representing 1.5 to 2 points, as Mitch alluded to, of the total company growth in the future. So I wanted to just do a quick reminder to us all about what does the technology actually bring so that we're all grounded on similar knowledge. And RFID today brings the most efficient and most accurate stock-taking technology, enabling as many years 1,000 items per second to be captured in a very simple and effective way and not requiring line of sight, a very important element, typically done by means of a simple handheld reader. When you compare that with the accuracy of a highly operator-dependent barcode read, it's not only significantly cheaper from a label perspective but also much more accurate. Think about if you needed to open a box with, say, 150 items and manually barcode scan every single item and then box them again versus scanning just the face of those boxes a couple of times to capture 100% of the reads as we depicted in the video earlier. In addition, RFID attributes a unique digital identity to every single item, meaning that even if you read that item 3 times, the system knows it's 1 single item, something which is an important distortion factor in tradition barcode systems. This is the benefit of item-level visibility. Lastly, the solutions we provide -- that we are able to provide today are also extremely cost-competitive, typically yielding an ROI that tends to happen in less than a year, obviously segment-dependent. Let me tell you a bit more about our segments and the segments where we've been operating and we expect to continue to grow. As the world's largest inlay player, we're very proud that our products are being used by many segments and industries worldwide. We have also identified sweet spot segments, where growth is likely to be faster and more sustainable. Today, apparel is the largest and most penetrated segment for RFID adoption. Roughly 1/3 of the available space, what we call the total available space, is what we call the addressable space, typically including the largest retailers and brands, as we've said before, within Europe and North America as well as some of the large players in the new and emerging markets as well. We have used the experience from apparel, both in terms of learning about the segment key characteristics, return on investment, deployment strategies, to both identify the new target segments as well as to size the opportunity. It is important to highlight that many of these segments, it is very early days. And that the list of the addressable space is our estimation based on our current knowledge, the experience that I've mentioned before and also based on today's technology, all of which have a very low penetration as you can see on the slide. It is also important to emphasize that again apparel continues and will obviously continue to be a key focus of ours and that food and logistics are probably the ones with the greatest growth potential as we -- as you look into the segments that we're pursuing. Note that the addressable space we're showing here, based on these specific segments, it's actually showing a volume opportunity of about 8x that of apparel, creating a large untapped opportunity for growth. You can actually split this into 2 main areas, what we call the retail space with apparel, beauty, food and general retail or general merchandise, where we leverage the existing market access channels and all of which share some of the common set of characteristics that gravitate around the requirements of accuracy and visibility and the omnichannel needs; and the industrial with logistics, health care and automotive as leading segments, where the legacy Smartrac business has greater access and where speed and space, as we have mentioned before, tend to be key. To share with us some of those key segment characteristics and, as importantly, the benefits that the RFID brings to these segments, I would like to invite Deon to cover a brief introduction to these use cases in these key segments.

Thanks, Francisco. As Francisco indicated, our confidence in the adoption potential outside of apparel is really grounded in the similarity of the characteristics of these verticals when compared to apparel and more importantly, the proven benefits that these verticals will see from leveraging this technology. Recall that in apparel, the challenge of SKU complexity and a largely supply-driven sourcing model often leads to inaccurate inventory on the retail floor with little ability to correct that. This means consumers not finding what they want, which leads to reduced sales and often increased markdowns at the season end for our customers. Critically, it also means an inability to deal with the increasing e-commerce and omnichannel requirements, which often always rely on this very same inventory to be successful. And as we've shown over the last 5 years-plus, leveraging RFID by uniquely identifying an item at its birth or source allows for rapid real-time stock takes and provides visibility and accuracy across the supply chain. It also underpins being able to effectively deal with omnichannel requirements, as Francisco highlighted, and consistently is unlocking incremental sales, margin and efficiency in our customers around the world. As you can see on this slide, the retail-oriented verticals on the left, being beauty, food and general apparel, have similar characteristics to apparel, including SKU complexity, omnichannel needs, labor constraints, et cetera, albeit that the relative importance of each may vary slightly. And then similarly, the verticals on the right, from logistics through auto, share the majority of these characteristics. For all of these verticals, the adoption of RFID will bring benefits that not only include sales lift and fewer markdowns or less shrink, as in apparel, but other benefits, including labor efficiency and velocity. For example, in food, we are piloting and rolling out to certain customers how RFID addresses the issues of speed, inventory accuracy and limited resources to do both receiving and stock-taking on a daily basis in, for example, quick service restaurants. And with others, we are proving how providing visibility back to the source is allowing for greater food transparency and safety and reducing food waste. Another example in logistics is the role RFID is having in creating enhanced visibility across supply chains as the increase in e-commerce volume grows and delivery accuracy becomes more challenged with a growing percentage of packages not arriving at their intended locations, especially during peak holiday periods. The inherent RFID advantage of creating parcel visibility without direct line of sight, combined with scan speed and subsequent sortation quickness, particularly in the last mile of the journey, has demonstrated strong return on investment metrics within pilots and our regional rollouts. Drawing on our experience in apparel, we believe that the adoption of the technology in these other verticals is just at the start. And as in apparel, we believe we are best placed to lead this adoption in these verticals because of the competitive advantages we hold. And for this, I will hand back to Francisco.

Thank you again, Deon. So why is Avery Dennison uniquely positioned to win in the RFID space? At the highest level, 3 main areas. Number one, we lead in innovation. We have the widest product portfolio with unparalleled materials science expertise, as you heard from Hassan and Jeroen earlier. We have built the widest IP portfolio as a consequence of our continuous innovation by the most experienced team in the industry, the combination of the legacy Smartrac and the legacy Avery Dennison R&D teams growing together. We're accelerating our investment in a digital platform to enable us to broaden our offer to enable digital identities to be leveraged throughout the end-to-end supply chain, more on that in a launch within a week. This digital platform will enable us to reimagine how supply chains operate, how brands connect with consumers and how global organizations achieve their sustainability and their transparency goals. It has been an initiative driven by an internal startup, if you like, with tremendous learnings on speed and agility. We also continue to make strategic investments in areas we believe can broaden or even challenge our current technology and solutions offering, two examples being PragmatIC Semiconductor, a U.K.-based startup in the field of flexible electronics, to disrupt today's solution; and Wiliot, an Israeli company that has developed [indiscernible] Bluetooth chip solution that enables direct-to-consumer mobile phone communication, opening new levels of sensing and consumer interaction. Number two, we have scale. We have the wider manufacturing footprint covered across 7 sites all over the world from Asia to Europe to the Americas. We have produced more than 50 billion inlays to date through state-of-the-art process technology innovation that is both the most sustainable and the most competitive in the market today. Our Avery Dennison Smartrac business has an estimated global segment share, as I mentioned earlier on, superior to more than 50% in UHF or RAIN RFID space. And then certainly the last but not least, our proven go-to-market experience, where our front-end teams have developed a 5-step adoption process from ROI definition through to full adoption that works in guiding and accelerating adoption. We have acquired deep segment expertise, great channel access jointly with our sister divisions and certainly also the fact that we're a leading brand in the industry, all of which we believe play in our favor. We believe it's also important to provide a context about where are we operating today. So this diagram is meant to help us understand the role of Avery Dennison within the RFID ecosystem. From the base material that we've talked earlier on through to the design and the manufacturing of the most advanced RFID inlays, RFID at Avery Dennison also enables the data management and the service bureau at source, traditionally for apparel retailers as you heard Deon speak, and brands and we also play in the printer solutions, all of those sort of 4 red boxes right at the center in the middle of the slide. It is important to highlight that we have great collaboration with channel partners and converters worldwide that are themselves leaders in many segments, those being key customers of our inlay business. As mentioned before, we have, over the past more than 1 year, made significant investments in our digital platform, the red box over to the right. Think about it as the digital part of the physical inlay, sort of a platform that keeps track of what happened to that inlay, where it's been seen and so on. And it's an element that enables the bridge between the physical and the digital products that its digital identity. This back-end platform will be available for all customers as a single source of truth. As we think about how best to serve the market and our customers, we're also looking into small inorganic investments on an application software primarily intended to drive adoption in the food retail space, one of the largest and most promising segments as we discussed earlier. And again, from a venture perspective, we monitor the ecosystem for disruptions. As I mentioned earlier on today with the emphasis on chip portfolio as well as on the antenna technologies. So all that to -- I would like to leave you with why I believe that the future of connected products will be game-changing. While our business promise around connected supply chain has tremendous potential, as hopefully you got from everything we've been discussing, truly unlocking this notion of the digital life of everyday products will take that to a whole different level, enabling business models never possible before. Think of a product that looks after you, that enables your mobile phone to tell you that you should or should not eat or drink when you see a product at the supermarket or at home. Consider an enriched experience, where the product provides detailed information on provenance, a history of a family and their winemaking tradition. Think of enabling recommerce, creating a second life for things that you own and you no longer need in a simple and efficient way. Imagine a product as a helper, where products interacting with smart appliances at home manage themselves to make your life easier. This is the power of connected products made possible by attributing digital identities and enabling a digital life. That is the future we are enabling at Avery Dennison. And now I would like to -- for our financial review, I would like to hand it back to Greg.

All right. Thank you, Francisco. So before jumping into our new set of targets through 2025, I want to spend a few minutes talking about how we performed against our last set of 5-year goals we set back in early 2017. You may recall, this represented our third set of long-term goals after we've been meeting or beating our previous 2 sets. The consistent execution of our key strategies you've been hearing about today has enabled us to continue delivering against our targets with an overriding focus on delivering GDP-plus growth and top quartile returns on capital over the long term. Our targets are designed to deliver above-average cumulative EVA growth versus capital market peers and ultimately then superior total shareholder returns. As you can see, we're largely on track to deliver once again. Over the last 4-year period, sales growth on a constant currency basis is up nearly 4% annually with organic growth roughly 2% annually. And while both are below our initial target largely due to the late-stage recession in the last 4-year cycle, we're achieving our objective of growing above GDP during this period. And our operating margin was 12% in 2020, up significantly from the roughly 10% we had in 2016. And our target was set to deliver at least 1 point of margin expansion versus that 2016 baseline. And clearly, we've delivered on that front. Our adjusted earnings per share is up 15% annually, largely driven by that solid top line growth and the strong margin expansion. And our return on total capital came in at 18% for 2020, above our target and reflecting top quartile performance against our capital market peers. And at the same time, our balance sheet remains strong with our net debt-to-EBITDA ratio below the low end of our target range, giving us ample capacity to continue executing our strategies. And that leads us to our new set of targets for the next 5 years. But we'll continue driving our key strategies to deliver strong top line growth while expanding margins and maintaining top quartile return on capital. And as Mitch said, we think this is the right recipe for driving strong EVA growth over time, which, of course, is highly correlated to growth in TSR. As each of our segments are now delivering returns above the cost of capital and margins across our segments have converged a bit, we are not providing targets at the segment level. Specifically for the company, we're targeting sales growth of 5% or more, including our closed acquisitions, driven by continuing to increase our exposure to high-value categories, like Intelligent Labels, Specialty and Durable Labels, Graphics and Industrial Tapes, as an example. It's also driven by our leadership position in the faster-growing emerging regions and profitable growth in our base business. And clearly, since our baseline year of 2020 was a year when we had an economic downturn, we would expect higher growth earlier in the cycle as the recovery unfolds and an organic growth in the 4-plus percent range after the recovery. We're also targeting further margin expansion by 2025, driven by the impact of solid organic growth and our continued relentless focus on productivity. Over this horizon, we're targeting to continue growing EPS by double digits, again driven by that top line growth and margin expansion in addition to the impact of both share buybacks and M&A. As you can see, we're maintaining to -- or we're targeting to maintain our top quartile returns on total capital, despite the continued pace of investment in both the existing businesses and through M&A. And again, it's this combination of these factors, strong top line growth with expanding margins and high capital efficiency, that all work together to drive superior EVA growth over time. So as you've heard today, we have a number of catalysts that enable us to continue driving strong top line growth. What you see really stands out is the strong growth coming from our high-value categories, as you've heard from the team today, with Intelligent Labels having a meaningful impact on total company growth of 1.5 points or more each year. We expect our emerging regions also to drive much of our growth in both the base businesses and in our higher-value categories. And also within our base business, we see a positive mix shift in apparel labels towards Intelligent Labels as we've been discussing. So we would see a bit less growth in the base apparel business as that volume shifts to the higher value RFID-enabled labels. And we'll look for acquisitions to accelerate our strategies for profitable growth. And with the deals we've announced thus far, we would add about 20 basis points to the growth CAGR through 2025 and leading us to a target of 5%-plus growth excluding currency over this period. As you can see on the next slide, how our balanced strategy has played out over the last number of years. And as you've heard from us today, we're focused on balancing profitable growth with our capital efficiency. We've consistently delivered organic growth above GDP levels globally despite the slowdown we saw in 2020. And at the same time, we've expanded margins over the period through our focus on productivity as well as leverage from the volume growth. And our focus on capital efficiency has driven capital returns that are top decile related to our capital market peers. This combination leads to compelling value creation, as you can see in the EVA chart at the bottom right of the slide. So economic value added is an important metric for us because it's so closely correlated with total shareholder returns over time. It's a measure we use to run the business and it's how we allocate capital. So let me shift to talk about our leverage targets and capital allocation strategy. In short here, we're continuing to execute our playbook. Our simple net debt-to-EBITDA leverage target remains at the roughly 2.3 to 2.6 level. And we think this target allows us to ensure liquidity across a range of possible macro scenarios. It allows us to maintain our current credit ratings, which gives us access to better financing, particularly in the commercial paper markets. And it enables the lowest weighted average cost of capital across business cycles. We're in a healthy position right now. Below that level and as you can see, we have ample capacity to support investments both organically and inorganically while returning cash to shareholders. So let's look at how our capital deployment strategy should play out through 2025. Our approach here is relatively unchanged versus what I've described the last number of years as you can see on the chart, consistent with how we've been deploying capital for the last few years as well. With our current debt levels, we have approximately $700 million of capacity today. And our growth and margin targets result in growth in EBITDA over the 5-year period to give us additional leverage capacity of up to $1 billion by the end of the period. And we'll continue increasing our cash generation, targeting roughly $4.5 billion to $5 billion of operating cash flow over the next 5 years. So in total, this is $6.2 billion to $6.7 billion of available capital in the 5-year horizon, quite an increase versus the roughly [ $4.75 billion ] we showed in our last set of targets in 2017. We plan to continue allocating the similar level as we have in recent years with a bit less than 1/3 of our available capital to reinvest in the business through both capital spending and some restructuring. We continue to target to raise our dividend roughly at the same pace as our earnings growth. And that would use roughly 20% of our available capital. And the remainder, we have available for both share repurchases and M&A. Now let me talk about our thoughts on allocation between these 2 buckets. First, from a share buyback perspective, we look to generate a return here. We do quite a bit of analysis on the intrinsic value of our shares. We manage our pace of buybacks accordingly. And from an M&A perspective, you've heard from us quite a bit on this strategy over the last 4 or 5 years. We're going to continue looking for M&A opportunities to help drive our strategy, particularly the shift of the portfolio towards higher-value categories. And we're going to continue to be disciplined. But you can see, we have ample capacity to increase our return of cash to shareholders and to invest in the business organically and through acquisitions and all of these while maintaining a healthy balance sheet and our commitment to our credit rating. So in summary, as you've heard today, we have leading positions in large and growing markets. We have a number of key catalysts to continue driving top line growth above GDP while also generating strong returns. And we are focused on continuing to execute against our key strategies to further raise the bar and to deliver for all of our stakeholders. So with that, let me open up the call for your questions and then Mitch and I will make some closing comments at the end of the call.

[Operator Instructions] We'll go to George Staphos with Bank of America.

George, we can't hear your question if you're asking one.

The lag between the PC and the audio got in the way there. Thanks for the presentation and the details. Two questions and I'll turn it over. First, when you think about the opportunities for organic growth, restructuring and M&A over the next 5 years, how does the return profile in each compare against one another and versus what you saw in 2017 through '21? The second question for Deon and Francisco. Thank you for the great review on Intelligent Labels and RBIS and RFID. What do you think the natural market share might be, especially for food and logistics applications, if we're at 30% or so already in apparel? And over what time period could you get there? What is possible, by 2025, 2030?

Thanks, George. Greg, do you want to take the first question around capital allocation and return dynamics of how we look at that?

Sure. So thanks, George, for the question. So as I talked about a few minutes ago, all of our businesses are generating strong returns above the cost of capital at this stage, which is a bit different position than we were less at a couple of sets of targets back in '14 and in the beginning of '17. So we feel good about the return dynamics of our existing businesses. And our focus is on continuing to invest where we see opportunities to continue increasing those returns. So those are the areas like the higher-value categories we've talked about, particularly in Intelligent Labels, where a fair amount of our investment is going and we can generate strong organic returns. At the same time, when we look at M&A, we're looking at M&A to also generate returns. Typically, as you know, we've done over the past 4 or 5 years, it's been bolt-on type of M&A, capability building type of M&A that helps us build our position and increase the portion of our portfolio towards these higher-value categories. And that's the kind of approach we would take. And we are looking for a return and to be EVA positive with our M&A activities as well.

Yes, George. And just to build on that very quickly, so just to reinforce Greg's point, relatively consistent as far as what's changed, we have been ramping up our pace of investment in organic growth over the last 3 or 4 years, particularly in IL. We will continue that and be looking to ramp that up even more so going forward and a little bit less on restructuring investments and so forth, which Greg reviewed in the capital allocation slide on a relative basis. And our desire is to continue to -- we see high return opportunities, we're going to continue to invest in them and be very disciplined as we go through that. And looking for the M&A opportunities and deals that we can convert is a priority of ours as well. With that, Deon, Francisco, do you want to comment on the addressable markets that we've talked earlier to answer George's question?

So George, in terms of the addressable markets that Francisco laid out, I think you know the apparel market well. We still are convicted that the apparel market will continue to adopt and potentially at an accelerated rate as we move forward. But that the penetration, as you see, is still at around that 30%. And as we move forward through 2025, our overall share of apparel as a percentage of our business, RFID business, is still going to be above 50%. The adoption rate of the other verticals that Francisco and I touched on will not only depend on the return on investment case we believe is there but on other factors as well, George, not least how ready individual retailers' brands and organizations are, but also on how each piece of the individual solution will play out as we get to those individual supply chain steps. I think that we laid out just how much we believe that the return on investment is strong in the pilots and the small [indiscernible] we're doing so far. And we believe that the significant growth acceleration will come over the next 5 years in the non-apparel segments.

Next, we'll go to Ghansham Panjabi with Baird.

I guess on Slide 49, when you have your results between 2017 and 2020 and then the targets between 2021 and 2025, just from our perspective, I mean, your top line growth projections aren't that different between the 2 periods. You seem to have confidence in terms of margin expansion. Your balance sheet is as good, if not better, than when you last gave these targets. So on the EPS growth CAGR of 10% versus 15%, was there anything unique between 2017 and 2020 that may not repeat through 2025? Why would there be a difference in terms of operating leverage and your ability to replicate the 15% EPS growth CAGR?

Sure. Greg, do you want to take that?

Sure. So I think just based on our targets, as you said, Ghansham, growing roughly 5% ex currency. Right now, our target is to expand margin roughly 1 point or more, of course, over this period as well. And that will lead to EBITDA growth in the 6% to 7% range, just based on 1 point of margin expansion and growth, top line growth of 5%. Obviously, our target is also focusing on the plus there on both the top line growth and as well as on the margin expansion. At the same time then, we would look at buybacks and M&A to get us to roughly that 10% growth within -- on EPS level. So I think when we were sitting here 4 years ago, I think our share price was a much different situation than it is today. We've had more share buyback earlier in that period that helped drive some of that EPS growth as well as obviously some M&A. So we haven't factored in significant amount of M&A, as you could see in our growth trajectory here as well as part of getting to this EPS growth of roughly 10%.

Yes, Ghansham. I would just -- just to reinforce that point, our growth rates, with the exception of starting off in a more of a trough baseline year with 2020, our margin expansion and last time we targeted EPS growth of 10%-plus CAGR, we're now saying 10%. So overall, your takeaway should be pretty consistent with how we've laid out the targets last time and with how we're laying them out this time.

Next question will come from Adam Josephson with KeyBanc.

Just one on the margin target, I guess this is to Greg. Given that you're expecting faster organic growth over this next 4-year period than over the previous 4-year period, do you expect more raw material and other cost inflation as part of that? And if so, how is that reflected in your margin target? I ask just given that over the past several years, there was a pretty benign raw material environment in addition to the fact that you're able to reduce your SG&A cost quite considerably over that period.

Yes. So I think, yes, from a raw material perspective, certainly right now, we're seeing a bit of an inflationary environment so far this year. I think we talked about in the earnings call, we were looking at a low single-digit level of inflation in 2021. With the events and some of the storms and things have happened since that call, we've seen that migrate up closer to mid-single digits this year. And our teams are working through price increases and other things to manage through that. But over a longer 5-year cycle, we'd be looking at potential ebbs and flows of inflation or deflationary periods during that. And our focus, of course, in an inflationary time is managing that inflation through a couple of levers. One is pricing actions, but the other is also continuing to drive material reengineering to take cost out of our products and help to offset part of that inflationary pressure. So that's been our playbook over the last many years. And that will continue to be our playbook in the future to manage through an inflationary window.

Next question will come from Anthony Pettinari with Citi.

On RFID, understanding you don't parse out profitability, but just over the past 5 years, can you give us a sense as to whether RFID returns and margins -- I mean, have they been stable? Are they -- have they risen or maybe come down a bit as the business has grown? And then maybe just directionally, how you might expect that to progress over the next 5-year target period? And then just on a related note, do you have any view on what RFID tag price -- pricing could look like over the next 3 to 5 years and what that could mean for adoption and for your business in particular?

Yes. So I'll just very quickly say the margin profile of this business, we have not disclosed externally. We have said, and it continues to be, has been for the last 4 years or so, and we expect to continue to be is above the company and the group average within RBIS as far as margins. And that is after considering the heavy amount of organic investment that we've been plowing back in to develop some of these end markets and innovations Francisco spoke about earlier. As far as the pricing component, and there's a lot of variation in our specialty tags, there's -- or base inlays and so forth. There's inlays where we are printing the data versus just providing the base materials, Francisco [indiscernible]. There's a good amount of variation. Maybe, Francisco, just comment a little bit on kind of the trends and how we're -- what we're doing to help drive some of the penetration.

Sure. Sure, Mitch. I'm happy to. Anthony, I think, obviously, on pricing, as Mitch said, depending on the segments we're pursuing, we have -- it's a very, very widespread, all the way from retail through to health care and automotive. They operate in very, very different spaces with different products, hence with very different prices and different volumes as well. So it's very hard to give a very generic question -- or answer to this question. I think the -- what we've seen is a continued improvement in -- over the years on the cost, which obviously has been reflected in the competitiveness of the solution overall. As you look forward, however, I think it is important to consider also elements and things like do you envision that there could be a disruption in that space, right? There could be new things that you've heard me say on the presentation about one of the investments we make in flexible electronics. If and when that happens, when we unlock that, will that create a fundamental shift that will going to unlock the spaces even further? So I think we expect sort of a natural evolution of the space within the growth profiles that we've said. And obviously, we will continue to try and unlock possible disruptions within the space.

Next question will come from Josh Spector with UBS.

Just a follow-up on RFID and specifically around the software side of things. So you guys talked about your digital IT platform. I was wondering if you can help us understand kind of how that compares with other firms that do a wider software solution that links perhaps the readers with systems like SAP to your customers. And you mentioned that you might have to invest in software to enable more adoption in food. Is that an attractive market for Avery to become a software provider that helps enable more of these solutions? Or how does that interplay work?

Yes. Francisco, do you want to take that?

Sure, Mitch, happy to. So yes, so I think 2 things there. On the digital ID, what we call the digital identification platform, George, I think the way we're thinking about it is that the products we're having today are -- the products we're having today are not so much about unlocking this [indiscernible]. If you recall that I mentioned about the grid and the physical and the digital, so the platform is exactly going to be enabling that to be a reality. So today, we believe that in the future as the adoption progresses, you're going to see part of the memory for, as an example, go on from the physical element, without getting too technical here, into potentially the cloud. So we need to have a platform for that. And then it's very different from, say, an application software. You mentioned the software that allows you for instruments to interact SAP with readings you're having on your retail or in your warehouse. Those is what we call middleware. Those are application-specific and segment-specific solutions. This is a back-end platform that will serve as a backbone for -- as a single [indiscernible], if you like, about all the elements we create and all the allowing brands and retailers to keep track of those throughout their lifetime. So it's really a back-end solution that goes hand-in-hand with the physical element. And to the investment, that is, yes, that is specific to applications. We feel that areas within food that we're unlocking that lack the capability and the, let's say, the solution elements that Deon alluded to earlier on, that allows us to sort of accelerate that. And that's the type of relatively modest investments that we are expecting to make in the near future.

Yes. Josh, I would just add, overall, if you think about our ambition as being a complete solutions provider, we will very selectively make sure that we have the right end state solution. Many times, we'll choose to partner. So many times, we'll choose to work by ourselves. And we'll be very selective about where we're going to go to make sure that we drive the right solution in front of the customer, particularly in some of these new and emerging verticals, where it is not as complete from an end solution as it is currently within apparel.

Thanks, Francisco. Thanks, Deon. And so yes, Josh, just one thing to build. So if you look at our coming few year -- coming 5-year horizon, it's really about more providing the solutions which are more products and overall solutions with the hardware link and the consumables is what drives that revenue. We see significant opportunity for these longer-term unlocks to be investing in more of the digital capability and have been getting some early good traction here along the way.

Next question will come from Chris Kapsch with Loop Capital Markets.

So sort of a follow-up to a couple of the questions that were asked focused on RFID. And one of those is handled by Francisco. But thank you for the Page 42 on the slide, which shares the TAM in units of some of the verticals beyond apparel. I'm just curious about based on what you know today about the likely form factor of the RFID solutions in those verticals. Do you know what the pricing will be? Is it a form factor and therefore tag that's priced comparably to an RFID item level for apparel? Or is it -- I'm particularly interested obviously in the food and logistics bubbles. But curious if there's any of those that deviate dramatically from the price point of an apparel tag.

Deon, do you want to take that one?

Yes. Chris, the way I'd characterize it is, again depending by vertical, you're going to have very different, what I would call, integration of an RFID sensor device into some form of container or packaging that has to carry that item. Largely, our focus is around label and label -- and variable label information products. So maybe as an example, in food, we will be looking, as we've done in apparel, to integrate that technology into some of the standard labeling applications that food retailers use, be they decorative labeling or even variable information labeling. And as such, you can expect to see those form factors will also vary then when you go across some of the other verticals. Maybe in pharmaceuticals, it will be much more around rigid packaging and how we integrate into those, Chris. I don't know if that -- I hope that helps address your question.

So it sounds like there'll be a more diverse set of solutions in some of those other verticals versus apparel tag? You can address it, but...

So Chris, I was going to say, even in apparel, we have different applications that play out. So if you have, for example, a very lightweight garment, sometimes being able to integrate an RFID device into that woven or care label that goes to the garment is better than putting it on a hang tag as an example. So think about lingerie versus, let's say, dress tailoring, we use different applications even within the apparel industry.

And our next question will come from Jeff Zekauskas with JPMorgan.

When you look at the 2015 through 2019 period, your gross margins were roughly flat, but your SG&A ratio really came down a lot and your margins improved by a few hundred basis points. In the future, you have 100 basis points of margin expansion. And since all of the leverage so far has really come from SG&A, does that mean that the progress that you're going to make on your SG&A line for various reasons will be smaller? Or does it mean that you expect lower gross margins? Can you talk about what those differences are? And secondly, if we exclude 2020 and you look at your 5-year growth rate, organically, it was roughly 5%. You expect 5% for the future. But you have a much faster-growing RFID business. Why in general shouldn't the growth rate in the future be faster than it was in the period that came up to 2019?

Thanks, Jeff. Greg, do you want to take the first question around margins and our history and profile?

Yes, of course. So as you said, Jeff, a lot of our margin expansion over the last 4 years has been through SG&A improvements. And of course, much of that are, especially, early on coming in RBIS. And I think, as you know, as we've talked about for a number of years, RBIS was going through their strategy acceleration, really looking at improving their efficiency, improving their speed, moving decision-making closer to their customers and all the efforts that they're putting through there. And much of that was focused on also improving SG&A percent. So more of our EBIT margin expansion over the last few years has come from SG&A, partially as a result of that. We certainly started to see gross profit margins improve in 2020 versus where they were the first -- the couple of years prior to that. Our expectation going forward is we see less of the margin expansion from SG&A as we've done a lot of work on improving SG&A ratios over the last number of years and more margin expansion continuing to come from stronger gross profit from our higher-value category growth as well as the continued productivity initiatives that we have there.

Yes. Thanks, Greg. And Jeff, very quickly, and Greg add anything here that I missed, but you're asking about our historical growth rate excluding currency and then going forward. Greg laid out the growth waterfall that basically is how we get to the 5%-plus. And it shows more growth from Intelligent Labels than we had, more points of growth to the overall corporation from Intelligent Labels, we're estimating 1.5 to 2 points. Last time we laid our targets, we said roughly 1 full point from RFID at the time. So to reinforce your point, it's in there. The difference is we have -- is the M&A. We only list our closed M&A here. It's, as you can see, 0.2 points of growth for what we've already closed. And we would expect there to be more opportunity as this actually plays out through 2025 on the M&A front.

Our next question will come from Neel Kumar with Morgan Stanley.

Great. I was wondering if you could just touch on the competitive landscape for RFID. Just given all the growth opportunities going forward, are you concerned about potential new entrants and competing technologies? And what would you say are the main barriers for a new player to enter the RFID market?

So Francisco, do you want to take that?

Sure, Mitch. And thank you for the question, Neel. I think -- so there's -- in terms of competitive landscape, as I said, I believe we're in a very strong position. The biggest competition we have from a pure RFID side, if you'd like, the inlay side of the house, the RF side of the house, so we have it primarily -- it's primarily Asia-driven. We are obviously having a balance between our Asia capabilities as well as our Western world capabilities. And we think that's a very balanced approach. If you look into the segments we're pursuing now, a lot of them are linking to food. And others, they are very much in-country requirements as opposed to somewhere sort of a source -- distant sourcing. So while those continue to be important and we'll continue to invest and ensure that we grow those as needed, we think we're better positioned to continue to achieve and obviously pursue our growth targets. So that's, at the highest level, the way I will frame it, and obviously leveraging our scale, as I mentioned earlier on. In what relates to technology, we continue every year, we do technology scouting. We go and we chase new opportunities. We look into different technologies with the research institutions and so on and so forth. And I would say I do not see line of sight for a technology that would disrupt in essence about what RFID brings at the same cost point with the same returns certainly in the near future or certainly over the period of between now and 2025. I would say I do not see that coming. Our team does not see that coming. So we feel pretty confident on where we are from a technology standpoint.

Yes. Maybe just to reinforce some of that, I mean, it's -- as Francisco said, this is basically what brings our strengths across the rest of the corporation. We're leveraging our innovation prowess, leveraging the capabilities that we have for making very high-quality products that are ubiquitous, low-cost and leveraging the first-mover advantage that we have from the apparel group within RBIS. So -- and ultimately, it leads to scale advantage, and we're continuing to double down on both investment for innovation as well as market development and so forth. So those are all the same areas. And we've been consistent around technology with the link between the physical and the digital world and the ever-increasing need for that. There will be a place for multiple technologies, QR codes, otherwise with further enhanced image recognition and ubiquity of cameras, there's going to be a number of technologies that will continue to help fill that space and also for the high need of accuracy at times providing some redundancy for certain types of things. So we are quite confident. And I think part of what -- when Francisco laid out is overview of the various end markets, what are the reasons we're targeting these is because they share a lot of similarities to the reasons why apparel went. So much of our confidence here, the barriers to entry, I think are -- it's quite difficult to get our scale and innovation advantage that we have today.

Next question will be from Paretosh Misra with Berenberg.

Can you talk about your current RFID pipeline a bit more? How many customers are you currently engaged with? And if you could maybe talk about what's the mix there, apparel versus non-apparel or industrial.

Sure, Paretosh. We haven't been giving the exact number of our -- size of our pipeline of late, but we can give some color. Francisco, maybe give a little bit of color just on relative basis growth and relative size.

Sure, absolutely. So first of all, I think our pipeline has been tracking consistently sort of increasing opportunities, particularly as it relates to the new segments. It goes without saying that because our business is so big within the apparel space, obviously what relates with retailers and brands, there's a lot of opportunities and a lot of projects that, obviously, it's a pretty strong pipeline. It is interesting because I was recently looking at that prior to this call, and the number of customers we have in the new segments as opposed to the traditional apparel segments, so that has shifted. So now we do have more pipeline in terms of number of customers, if you'd like, in the new segments as opposed to the traditional "apparel segment". So I think it continues to be very, very solid overall, still growing in apparel, but certainly not growing at the same pace. And then in new areas like food, where the space is very vast and pretty diverse, picking up very, very fast and being -- and creating a number of opportunities. So we feel pretty good about it overall.

So it's also worth highlighting that it is clear that the COVID crisis, as it's played out over this last year, has helped apparel retailers refocus down in trying to achieve this contactless, frictionless experience for consumers. And that has certainly reignited a number of conversations with potential customers about adoption in our -- even in apparel as well.

Next question will be from John McNulty with BMO Capital Markets.

Yes. So maybe a follow-up to one that, I think, George had asked before. So when you look at the apparel market and the penetration that it has with RFID, where it's taken about 10 years to get about 1/3 of the market penetrated, when you look at the other silos, assuming that some of the delay in that penetration was proof of concept, but it was also technology development around the apparel side and it seems like a lot of the technology stuff has already happened, are there any of the silos that you listed where you think in the next 5 years you can be at a 30%, 35% kind of penetration rate? Or is that just too aggressive?

Yes. So I'll just take that one. It's -- we see paths to where these opportunities are, predicting the exact adoption cycle is tough to do. And if you look at within one of the bigger areas of addressable market, food, that's a broad category with many different applications. But specifically, we're working with a number of quick service restaurants specifically for how to deploy the technology to help increase their supply chain effectiveness and efficiency and reduce labor costs within the store and so forth. So we are working that. We see paths to some of these things adopting, ramping up. We expect to be shorter than apparel. But we do expect this to take time. There are learnings with each new use case. There's learnings that each end market needs to go through and manage through. And we're continuing to just lean forward and push and invest in these categories. Predicting exactly when they will unlock is tough to make. Francisco, I don't know if there's anything you'd like to add to that.

Yes. Maybe just very briefly, Mitch, if I may, which is, John, as you said, I think the technology obviously has evolved, right? So where we were 10 years ago, where we are today, it's significantly different. Having said that, there's always needs and things that we learn within segments which will vary and make that prediction extremely hard to make. Obviously, we're confident that within all of those, we will be able to meet the growth targets that we've laid out. But the point I wanted to make is given the example of food. One of the important unlocks in food groceries is making sure that your tag does not pose a fire risk when you put it on a microwave, right? There's many things you buy, whether that's a tray with meat or something that you can just stick in the microwave. And if you put a standard tag in a microwave, you can actually put a fire hazard. So creating fireproof tags, which we've done and we were the first and actually we got a recognized award for that, it was an important unlock. That is done. Now there's other things in specific segments that we will learn as we go through and then we'll need to unlock from an innovation standpoint.

All right. And we'll take one more question, a follow-up from George Staphos with Bank of America.

First of all, as we think about Label and Graphic Materials and Packaging Materials overall, which of your advantages, if you want to think about this way, scale innovation sustainability, do you think you will -- productivity, I left that out, do you think you will most need to press on, most need to leverage over the next 5 years versus your peer companies who are also in the LGM markets to your advantage? The second question I had, as we think about sustainability, can you give us some targets on recycling rates or however you want to define sustainability for reclaiming and reusing the label and the matrix and into Intelligent Labels in those product categories? Any targets you can give us there would be helpful.

Mitch, you're on mute.

Mitch, you're on mute. We can't hear you.

Thank you. It wasn't -- I'm clicking. I figured we have to have one of those throughout the course of the call. So George, thanks for the question. As far as your second question around recyclability rates and targets and what we're laying out, I would encourage you, we just released today our new sustainability goals in much more detail. There's an appendix here with a few more -- a little bit more information. But on our website, you can see even more details. So maybe, Jeroen, answer -- if you can answer the question very briefly because we do have a couple of closing comments, so we can close at the top of the hour. Jeroen, the question is what is the key capability we have that we really want to leverage over the next 5 years or need to leverage even more so?

Yes. Thank you, George. I think, to be honest, those capabilities go strongly together. Particularly with sustainability, we have a -- we are well positioned. We have an innovation pipeline to come with thinner constructions using less material or with recyclable solutions. But at the same time, we also leverage our scale in order to work with our supplier base to have recycled contents, to have responsible sourcing. And we're working with a broader ecosystem, including recyclers, brands, our customers. So I would say, all 3 elements of our key strengths fit very well together in this next episode.

Thank you, Jeroen. All right. Well, we're going to conclude the call now with some quick remarks. We have been giving over the past few quarters a mid-quarter update. So we do want to give a very brief update on where we're trending from a top line perspective. And then we will close out the call. So Greg, over to you.

All right. Thanks, Mitch. So as he said, we have been giving updates in the middle of the quarter the last few quarters. So we just wanted to give you a brief view on how we're doing so far into the year. And overall, we've had a very strong start to the year across the portfolio with our quarter-to-date shipments up high single digits versus prior year through the first couple of months of the quarter. Now we do believe that there are some benefits related to some pulling forward of volume from both a bit more muted Lunar New Year impact as well as given some of the inflation and price increase announcements, some pulling forward of volume from customers ahead of price increases. But overall, still a very strong start to the year. Looking at shipments across the businesses. LGM is up high single digits organically. And we've seen relative strength in both the emerging regions and in North America and with Europe up in the low single-digit range. So overall, roughly high single digits organically for LGM thus far this year. RBIS has also started out strong with organic shipments up high single digits as well, driven by continued strength in Intelligent Labels, just as you heard a lot about today, of course. And then IHM has also had a strong start to the year with strong organic shipments thus far in the quarter. So overall, a very good start to the year. As I said a minute ago, we've had some benefits, like potential price increase prebuys but a strong start nonetheless. And obviously, our earnings call is in a little bit over a month, and we'll see how that plays out as we move through the rest of March. And also at that time, we'll have our orders and shipment patterns through much of April by the time we get to that call. So I feel very good about the progress we're making thus far in 2021 and our start to delivering against our expectations this year.

Thanks, Greg, and thank you all for joining us today to learn more about our company, our strategies and our goals. We continue to look forward to continuing to deliver for all of our stakeholders throughout our 2025 horizon and beyond. Thank you very much.

That does conclude today's call. We thank everyone for their participation.

Thank you.

Thank you.