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Thursday, Mar 28, 2024

Avery’s Play for RFID Tags Costs $249 Million

Glendale label and industrial supply company Avery Dennison Corp. showed its confidence in the future of RFID, or radio frequency identification, last month by purchasing the transponder division of Smartrac, another maker of tags and labels, for 225 million Euros, or $249 million. Smartrac, headquartered in Amsterdam, will remit to Avery Dennison its RFID business, which makes traceable tags that electronically store information for retail products, particularly clothing. The division sells an average of 2.5 billion transponders a year and has estimated global revenue of about $140 million for 2019. The deal is expected to generate more than $450 million in revenue for Avery Dennison. Chief Executive Mitch Butier said the acquisition is part of a push to add faster-growing, higher-value categories to the company’s product portfolio. “Smartrac’s Transponder Division represents an excellent strategic fit for us, accelerating our strategy to expand our Intelligent Labels platform across a variety of end markets and customers within the industrial and retail segments,” Butier said in a statement. Added Vice President Francisco Melo: “We believe in a future where every physical item will have a unique digital identity and digital life, which will transform the visibility of products throughout the supply chain.” Research published in October by brokerage Robert W. Baird & Co. called RFID one of Avery Dennison’s fastest-growing product offerings, citing 20 percent growth in the third quarter. As a result of that growth, the rest of Avery’s retail branding line of business saw sales rise 4.1 percent to $407 million in the quarter. In a separate report published in September, R.W. Baird wrote: “RFID … has a decade plus runway of outsized growth in context of a $300 million sales base. The scale and first-to-market advantage that Avery has in RFID is visible in the estimated 50 percent plus market share in the apparel market (90 percent of the $300 million), noting that there is considerable progress in various other verticals (aviation, beauty, food) that should sustain an outsized growth profile.” It follows that Avery will likely try to push for increased RFID adoption in those late adopter verticals as it searches for an even larger market share. The October report, published in response to Avery Dennison’s third-quarter earnings results, said organic growth in RFID was largely responsible for the company exceeding lowered expectations for its quarterly performance — and that was before the company’s $249 million buy. Avery reported net income of $145 million and adjusted earnings of $1.66 a share for the quarter ending Sept. 30, beating Zacks Consensus Estimate’s predicted earnings of $1.60 a share. Total revenue was $1.76 billion, slightly more than last year. “Our focus in this slower growth environment has been to protect, even expand our margins in the base business while driving faster-than-average growth in high value categories like RFID. We’re executing well on both fronts,” Butier said on a conference call on Oct. 23. Despite doubling down on one of its most promising technologies, Avery Dennison’s stock performance has stagnated in recent weeks. On Nov. 20, the day the Smartrac acquisition was announced, shares of AVY closed up 39 cents to $131.77 — on Dec. 4 shares closed at $128.53. Longterm, Avery stock has soared 43 percent since Jan. 1, when it sat at $89.99. The third quarter was strong but not outstanding for the company at a time when growth decelerated slightly across the U.S. market. The company saw modest growth in its labels and graphic materials department, where organic sales increased 1.2 percent as volume improved slightly. Similarly, sales of industrial and health care materials rose 3.7 percent, driven by a low-single digit increase in industrial categories and a high-single digit increase in health categories. The Smartrac acquisition will give Avery Dennison manufacturing operations in China, Malaysia and Germany.

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