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Corp Focus 2

By HOWARD FINE

Staff Reporter

It may not be glamorous, but the self-adhesive business has been paying big rewards for Pasadena-based Avery Dennison Corp.

The 62-year-old firm, known to generations of Americans for binder hole reinforcements and mailing labels, has suddenly become a darling of Wall Street after a year that saw record sales and earnings.

Since the end of January, its stock has burst through a relatively narrow trading range of $37-$44. By late February, the stock jumped to $54 a share, before dropping back to about $50 a share at the end of the month.

Last week, it rose to $51 when it was announced that Charles Miller, Avery Dennison’s chief executive for the last 21 years, was retiring from his post. Miller, 70, is expected to remain as chairman through the year 2000. The board is expected to appoint current President and Chief Operating Officer Philip Neal as its new chief executive, effective May 1.

For the fourth quarter ended Dec. 31, Avery Dennison reported net income of $54.4 million, compared with $47.7 million for the like period a year ago. Revenues were $836.4 million vs. $808.9 million.

For the year, the company had net income of $204.8 million ($1.93 a share diluted), compared with $175.9 million ($1.63) a year earlier. Revenues in 1997 were $3.35 billion vs. $3.25 billion in 1996.

For Avery Dennison, the results represent the payoff from years of gradual “cost-cutting, improving efficiency and pushing into new markets,” according to Richard O’Reilly, an analyst with Standard and Poor’s equity group.

“There is no magic secret to their success,” O’Reilly said. “It’s paying attention to the nitty-gritty and the little things that has paid off for them.”

Avery Dennison has achieved much of its growth by focusing on improving operating margins, said Vice President and Treasurer Wayne Smith.

In 1997 alone, its operating margin rose to 10.2 percent, a significant level for a company in a mature business. That also represents quite a turnaround from the early ’90s, when the company was trying to absorb the operations of Dennison which it acquired in 1990 and had to write off nearly $100 million in restructuring costs in 1991.

However, the efficiency and cost-cutting improvements can only go so far, according to Robert Bartels, an analyst with William Blair Co. in New York.

“They’ve done a really good job in improving their manufacturing process,” Bartels said. “But it’s going to be increasingly difficult to expand their margins at the same rate year after year. If they want to keep their earnings growth going, they are going to have to move more into fast-growth product areas.”

That’s what Avery Dennison is doing, Smith said. “We’re stepping up our profile to go after the consumer market, especially the very rapidly growing ‘small office-home office’ and kids markets,” he said.

As new home-based businesses spring up, he said, there is a tremendous demand for mailing labels and office products that use computer-generated bar codes.

Avery Dennison is also going after entirely new markets, like self-stick postage stamps. Last month, the U.S. Postal Service awarded Avery Dennison and two other adhesive-label makers contracts to print up to 10 billion stamps each over five years. The value of the Postal Service contract ranges from $66 million to $180 million, depending on the number of stamps printed and on whether the Postal Service grants two one-year extensions to a three-year contract.

Another new market is self-tester labels for batteries made by Duracell Inc.

“This market didn’t even exist a few years ago, and now, Avery Dennison has captured a significant portion of it,” O’Reilly said.

The company is also trying to build its international sales. “These markets are just now entering the mass-consumer stage,” Smith said. “More consumer products mean more labels and computer bar codes to go on those products.”

So far, the impacts of the Asian financial crisis have been avoided, Smith said, because the company is focusing on two of the countries in the region least affected: India and China.

“If the crisis persists or spreads, Asia could be a problem for them,” Standard & Poor’s O’Reilly said. “But it is only a small percentage of their total sales, so it won’t hurt the bottom line too much,”

Despite Avery Dennison’s pushes into Asia and Latin America, international sales make up 36 percent of its total $3.35 billion in sales, just about the same ratio as in 1990.

“The growth in our international business is being complemented by penetration into new markets at home, so the ratio has stayed constant,” Smith said.

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