CCL read-through: Key takeaways from Avery Dennison's Investor Day
Our view: Avery Dennison held its Investor Day today, which provided several read-throughs for CCL. Most notably, Avery Dennison introduced a target of +5% annual revenue growth over the long-term, profiled the emerging markets tailwind, and outlined the long-term RFID opportunity (targeting +15% annual revenue growth), all of which we view as being directionally positive for CCL. Recall that Avery Dennison is a supplier of pressure sensitive materials to CCL and also competes with CCL in the RFID space. For additional information on CCL, please see our recent assumption of coverage/deep dive report here. We outline our key takeaways below.
Targeting +5% annual top-line growth – Over the long-term, Avery Dennison is targeting +5% top-line growth annually (ex. FX), driven by ~1% growth in base solutions, ~2% growth in high-value solutions (e.g., specialty labels), ~1.5% growth in Intelligent Labels (i.e., RFID; detailed further below), and contribution from M&A. This is largely consistent with the company's historical growth algorithm (i.e., ~4% organic sales CAGR in the Materials Group between 2014-2024E according to the company), where Avery Dennison has characterized itself as being a GDP+ grower. Overall, we believe Avery Dennison's growth target supports our positive outlook for CCL as Avery Dennison is levered to many of the same tailwinds that benefit CCL (e.g., RFID, "premiumization" of packaging, emerging markets, etc.).
Emerging markets growth is a long-term tailwind – Consistent with our views, Avery Dennison outlined that emerging markets present a large opportunity for the Pressure Sensitive Label ("PSL") market as PSL usage per capita is only ~2.5sqm in Asia/Latin America vs. ~11sqm in North America/Europe. Looking ahead, higher population growth and rising goods consumption are long-term tailwinds for increasing PSL usage in emerging markets (recall that packaging/label consumption typically increases as GDP per capita increases), which we believe is a tailwind that CCL will benefit from over the foreseeable future.
Sustainability is here to stay – Avery Dennison outlined how sustainable solutions help customers meet their sustainability targets, comply with regulations, and increase the availability of recycled resins. Given the trend toward a circular economy, we believe it is critical for the Label industry to continue innovating on the sustainability front, and we note that CCL is already actively making progress with sustainable products (e.g., PCR tubes exceed 30% of CCL’s total production capacity, 30% of Food & Beverage sales are linked to sustainable products, etc.).
The RFID opportunity is meaningful – Avery Dennison (the largest player in the RFID industry at US $850 million in sales as of 2023) estimates the RFID TAM is >350 billion units, with the Food industry being the largest at 200 billion units. In comparison, Apparel, which is currently the most penetrated market (~40%), is a 45 billion unit market. Given the benefits and potential use cases of RFID technology (e.g., creating a "smart supply chain", where products could be traced from production to disposal), the industry has been expanding rapidly, with Avery Dennison expecting to grow its Intelligent Labels revenue at a ~17% CAGR organically between 2017-2024E. Going forward, Avery Dennison is targeting >15% organic sales growth annually in Intelligent Labels, driven by continued adoption across the Apparel and General Retail industries (expected to contribute to ~50% of the growth), further industry adoption in Logistics (notable use case includes reducing last mile shipping errors), expansion in the Quick Service Restaurants and Grocery markets (notable use case includes decreasing the amount of food waste via better inventory management, noting >1 billion tonnes of food is wasted annually), and growth across various other categories (e.g., Beauty, Healthcare, Automotive). As it relates to CCL, we note that the company is one of the largest players in the industry (~$250 million in sales), and we believe it is well-positioned to grow with the market (and potentially take share) over the coming years.