Avery Dennison made solid financial and strategic progress in 2010. We improved our financial results, strengthened our balance sheet and ended the year positioned to return more cash to you. At the same time, we continued to invest in long-term growth and transform Avery Dennison into a trusted partner that makes every brand more inspiring and the world more intelligent.

Here are the financial highlights for 2010:

• Net sales grew nine percent, with double-digit growth in our two largest segments, Pressure-sensitive Materials and Retail Information Services (RIS), which more than offset a decline at Office and Consumer Products.
• Sales in emerging markets comprised more than 35 percent of consolidated net sales.
• We expanded operating margin despite the second-half pressures of inflation and competition.
• We generated approximately $379 million of free cash flow through continued operating rigor and financial management.
• We completed a restructuring program begun in late 2008 that generated a total of $180 million of annualized savings, more than originally projected.

We achieved our most important priorities—strengthening our balance sheet and returning more cash to investors. We reduced debt by nearly $300 million and achieved our targeted leverage ratio, enabling our board of directors to increase the quarterly dividend 25 percent in January, 2011 and authorize the repurchase of up to five million additional shares of our common stock. We also repurchased three million shares during the fourth quarter of 2010, largely offsetting dilution.

Activating Our Vision

Avery Dennison has significant competitive advantages. Our businesses are clear market leaders with economies of scale. We have a global footprint touching key points in our customers’ supply chains with a strong presence in high-growth emerging markets. We have decades of expertise in materials science and technology. And we generate strong free cash flow for reinvestment and return to shareholders.

Our vision—to make every brand more inspiring and the world more intelligent—focuses our strengths on customers’ needs. Our products play a key role in making brands more compelling and in displaying information vital to moving goods efficiently through the global supply chain and helping consumers purchase and use them. To fully activate our vision, we are strengthening our relationships with the consumer product companies, retailers and brand owners that use our materials to label, package and brand their products. We are partnering not only with the commercial printers who produce their labels, but also with brand managers and package designers, who are demanding not just new materials but new ideas for differentiating their brands.

In 2010, we invested in marketing by hiring professionals with deep experience in the industries we serve. We increased the frequency and depth of our interaction with customers. From these engagements, we acquired numerous insights into their branding and information needs and built a robust pipeline of new business with the potential for hundreds of millions of dollars in sales.

Here are some of the ways our businesses lived our new vision in 2010:

In the Pressure-sensitive Materials segment, Label and Packaging Materials (LPM) has development projects under way with companies in key segments such as food, beverages and personal care products. These projects involve prototyping new designs and applications with our materials that will help their products stand out on the store shelf. One of our early successes is the redesigned packaging and labeling for a new line of fruit juice beverages that has increased consumer appeal and lifted the line's sales. We also increased the use of our materials with major global brewers and brand leaders in personal care products. Our goal is to work with the converters who are our direct customers to persuade more of their customers, the major brands, to make the switch from traditional glue-applied materials to pressure-sensitive materials. Graphics and Reflective Solutions, our other pressure-sensitive business, is marketing to vehicle fleet owners, architectural firms and retailers to accelerate sales of Avery Dennison Supercast^™ digital films for fleet and architectural promotional graphics.

Retail Information Services (RIS) learned from its deeper engagements with retailers and brand owners that we can best serve them with multi-product solutions that enhance brands and accelerate the performance of their complex global supply chains. In using heat transfer technology to brand athletic wear without compromising the stretch and breathability of high-performance fabrics, we entered a significant new market segment in which we can create new forms of high-impact, digitally printed branding on the exterior of numerous kinds of apparel. For information solutions, RIS is placing our proprietary ticket, tag and label printers in apparel manufacturers’ plants, retailers’ distribution centers and even in stores to supply price tags just in time for shipment and give retailers the flexibility to make last-minute price adjustments. We also had notable success with our RFID (radio frequency identification) technology, which was selected by major retailers for their “item-level marking” programs, which help them improve inventory accuracy, keep shelves stocked more efficiently, and satisfy shoppers.

Office and Consumer Products focused on executing a disciplined defense of its labels business in 2010 and was successful in protecting its leading position at major superstores. At the same time, we invested selectively in innovation, launching two well-received new products, Avery^® NoteTabs^™ and Avery^® Label Pads, and developing a roster of new organization and identification products that we plan to launch later this year. The Avery^® brand continues to be the consumer’s brand of choice for office and home labeling needs.

Other specialty converting businesses is a diverse group of smaller businesses that had a number of successes. We launched Avery Dennison Flexis^™ steam valve technology, which is being used on microwave meal packaging to control steam release and enhance flavor. We also formed Avery Dennison Automotive Solutions, a team that won new business with auto makers including Ford, GM and Chrysler Group LLC in the U.S. and Geely and Chery in China, by offering them a single point of contact for products and solutions from five separate Avery Dennison businesses.

What’s Possible

Avery Dennison was founded on an innovation—the self-adhesive label—that created a global industry. Over the past 75 years, we have developed a remarkable body of expertise in materials technology and process capability that continues to serve as a strong foundation for growth.

Today we define “innovation” as meeting customer needs with unique solutions, and just as we invest in marketing we are also investing to develop new innovations—both incremental improvements and potential breakthroughs—from our closer customer relationships. The idea to apply Avery Dennison Flexis^™ to microwave cooking, for example, was sparked during a conversation with a customer.

We have a number of promising new ideas in various stages of commercialization:

• Label and Packaging Materials has announced the Avery Dennison Curve Appeal^™ system for labeling complex curves, which allows package designers to decorate a whole new range of container shapes. RIS is adding loss prevention capabilities to its RFID-based inventory management systems and is also exploring flexible pricing systems that would allow retailers to change prices more frequently and with lower labor costs.
• Our RFID business is partnering with GE to commercialize sensor-equipped RFID inlays that could greatly expand the number of possible RFID applications.
• Medical Solutions is using our expertise in adhesives and layered materials to make wound dressings and ostomy bags both more effective and more comfortable.

Sustainability is a critical element of brands today, and greener products and solutions are high on the “must have” list of every customer we serve. We view sustainable design as an opportunity to advance our market leadership as well as a responsibility to our communities. Each of our largest businesses introduced more sustainable products last year, including the industry’s thinnest label liner and our Avery Dennison^™ Greenprint, a unique analytical tool for measuring and communicating the impact of products on the environment. We are embedding sustainable design into our innovation and product development processes.

Accelerating Performance

I’m proud to say we improved service in every business for the third straight year. By year-end, RIS plants were achieving reliability scores in the high 90s, and Office and Consumer Products’ Tijuana, Mexico plant was named one of the top ten plants in North America for 2010 by Industry Week magazine. A key contributor to that success was Enterprise Lean Sigma (ELS).

ELS makes the customer the source of value and the employee the source of improvement. “Value” is defined as what’s important to the customer; anything in a process that impedes the creation of that value is waste. Employees team up to identify wasteful methods and actions, design improvements, and execute them.

Not only has ELS helped us improve service, it is stimulating innovation. Employees at an RIS plant in India used ELS to reorganize the process of heat transfer printing, which reduced the cost and enabled us to make heat transfer labeling affordable for Indian retailers and brand owners. Sales are booming in India, and, best of all, our employees are sharing their process with other RIS operations around the world.

Our New Director

Brad Alford, Chairman and CEO of Nestlé USA, a key division of one of the world’s premier packaged foods companies, joined the Avery Dennison board of directors in April, 2010, and we are benefiting from his deep experience in consumer branding and packaging.

2011 and Beyond

On June 2, 2010, a group of Avery Dennison leaders and I visited the New York Stock Exchange and rang the closing bell to mark the company’s 75th anniversary and honor the innovative spirit of our founder, R. Stanton Avery. Although I was moved by the thought of how far the company had come, I was looking forward. We were ringing the opening bell of Avery Dennison’s next 75 years.

I am proud to lead the Avery Dennison team of more than 30,000 women and men. With this team and our new vision, competitive advantages, and global partnerships with customers, we have the elements in place to drive long-term growth and value creation. We appreciate your confidence in Avery Dennison and we are focused on making further progress for you in 2011.