Q1 2022 Avery Dennison Corp Earnings Call

April 26, 2022

Please continue to stand by your conference call will begin momentarily. We thank you for your patience and we ask that you. Please remain on the line.

[music].

Okay.

Yeah.

Ladies and gentlemen, thank you for spending by welcome to Avery Dennison earnings Conference call for the first quarter ended on April 2nd 2022.

The presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.

At that time, if you have a question. Please press the one followed by the four on your telephone.

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This call is being recorded and will be available for replay from three P. M. Eastern time today through midnight Eastern time April 29th.

To access the replay please dial one 806 338 to 84 or for international callers. Please dial 140 to 9779140 the conference I'd number is.

Is 21997965.

I'd now like to turn the conference over to John Edley, Avery Dennison <unk> head of Investor Relations. Please go ahead Sir.

Thank you Savannah. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures.

non-GAAP measures that we use are defined qualified and reconciled with GAAP on schedules a four to 89 of the financial statements accompanying today's earnings release we.

We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward looking statements are made subject to the safe Harbor statements included in today's earnings release.

On the call today are Mitch <unk>, Chairman and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer, I will now turn the call over to Mitch.

Thanks, John and Hello, everyone.

We are off to a strong start to the year with revenue up 18% and earnings per share of $2 40.

Above our expectations from a quarter ago, driven largely by an acceleration in pricing actions and LG EM and strong volume growth in Rbis.

These strong results come at a time of increasing challenges from.

From the continuing impact of COVID-19, and supply chain constraints to the highest levels of inflation, we have seen in decades and now Russia's worn Ukraine.

All of these challenges reinforce our determination to remain vigilant in protecting the health and welfare of our team and agile to ensure we continue to meet our customers' needs.

Our team continues to do a phenomenal job in managing a very dynamic environment and we remain confident in our ability to continue delivering superior value creation for all of our stakeholders across a wide variety of macro environments.

Now a quick update on the quarter by business.

Label, and graphic materials posted strong topline growth for the quarter and both label and packaging materials as well as our graphic and reflective solutions business largely driven by higher pricing.

And labels, while demand for consumer packaged goods and E. Commerce trends continued to drive strong orders volumes were down as expected due primarily to tough comps.

As you recall volumes were particularly high last year due to the combined impact of pre buys and the COVID-19 related order patterns that we discussed last year.

For context volume in the quarter was up approximately 20% versus 2019 or more than 6% annually well ahead of GDP growth over that period.

Tough comps aside supply chain constraints hampered our ability to meet demand in the quarter. Despite the tremendous job our team did to leverage our innovation capabilities and scale to offset a good portion of these raw material shortages.

We expect that the recent resolution resolution of the labor strike at a large global paper manufacturer will help ease supply chain across our industry beginning here in Q2.

As for our own operations, they were minimally impacted by Covid restrictions in Q1.

That said the recent lockdowns and the greater Shanghai area constrained our materials businesses ability to produce for much of April .

<unk> revenue by roughly $20 million for the month.

Fortunately these restrictions are now easing and we expect all plants will be operational imminently.

Yeah.

<unk> margin was strong in the quarter, though down from prior year as expected.

Sequentially margins expanded more than a point as we accelerated pricing actions to reduce the lead time between inflation and pricing.

And while pricing is catching up with inflation relative to the beginning of the broader cycle. We continue to see further inflation as we move into Q2 and continued to raise prices accordingly.

Importantly, we are on track to further increase our returns and EBITDA for this year in this already high return business.

Retail branding information solutions delivered another exceptional quarter with significant top and bottom line growth.

The strong revenue growth was broad based driven by both high value product categories, particularly intelligent labels and the core apparel business.

Enterprise wide intelligent label sales were up more than 20% on an organic basis.

The strong growth in the quarter was once again, primarily driven by apparel.

And while we continue to expect apparel to be the primary driver of dollar growth in the coming few years, we see even greater opportunity over the long run outside of apparel.

For example.

In the food segment, a number of quick service restaurants are piloting in in the early stages of rolling out intelligent label solutions to improve supply chain traceability and inventory accuracy.

In logistics, we continue to work with several shipping and logistics players seeking further automation to drive speed and productivity.

We are seeing retailers, who initially implemented RFID in apparel expand programs to other categories such as home goods.

And our <unk> acquisition is showing positive early signs and providing additional channel access to intelligent labels and grocery while continuing to achieve its overall performance goals.

As the leader in Ultra high frequency RFID, we are positioned extremely well to not only capture these new opportunities but create them.

As for the bottom line Rbs's EBITDA was up more than 60% in the quarter compared to prior year due to the contributions of <unk> com and continued strong growth in the underlying business.

Turning to industrial and healthcare materials. The segment delivered modest sales growth in the quarter as margins declined. This group of businesses continues to be impacted by soft automotive end markets as well as similar supply chain constraints and inflationary pressures as discussed in lgs.

Okay.

Turning to our outlook for the year.

Given our strong performance in Q1, and our revised expectations for the rest of the year. We have raised our full year outlook and now anticipate topline growth of 15% to 17% ex currency and EPS of $9 45 to $9 85.

I am pleased with the continued progress we are making towards the success of all of our stakeholders.

Our consistent performance reflects the strength of our markets.

Our industry, leading positions the strategic foundations, we've laid and our agile and talented team.

We remained focus on the consistent execution of our five key strategies.

To drive outsized growth in high value categories.

Grow profitably in our base businesses.

Focus relentlessly on productivity.

Effectively allocate capital.

And lead in an environmentally and socially responsible manner.

We are confident that the consistent execution of these strategies will enable us to achieve our long term goals, including consistently delivering GDP plus growth and top quartile returns.

And once again I want to thank our entire team for their tireless efforts to keep one another safe while continuing to deliver for our customers. During this challenging period.

The team continues to raise their game each quarter to address the unique challenges at hand. Thank you.

Okay.

Now before turning the call over to Greg as I'm sure you. All saw we recently appointed Dion standard of President and Chief operating Officer.

John has done a tremendous job leading rvs over the last seven years and the team and I are excited to partner with them in this new capacity.

Over to you Greg.

Alright, Thanks, and Hello, everybody.

As Mitch said, we delivered a strong start to the year with adjusted earnings per share of $2 40.

Consistent with last year and up 5% excluding currency.

Roughly a dime above our expectations.

Sales were up 18% ex currency and 13% on an organic basis.

Driven by higher prices and higher volume and mix.

Despite the impact of inflation and supply chain disruptions, we delivered a strong adjusted EBITDA margin of 15, 3%.

Up 40 basis points sequentially.

Significant revenue growth and strong margins drove EBITDA growth of 6% compared to prior year up 10%, excluding the impact of currency.

Turning to cash generation and allocation, we generated $73 million of free cash flow.

Down compared to last year, but well above our historical Q1 levels.

Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 235.

Our current leverage position gives us ample capacity to continue executing our disciplined capital allocation strategy.

Including investing in organic growth and acquisitions.

While continuing to return cash to shareholders.

In the quarter, we paid $56 million in dividends and repurchased more than 800000 shares at an aggregate cost of $152 million.

Now turning to the segment results label and graphic materials sales were up 12% on an organic basis.

Driven by higher prices, which more than offset a modest decline in volume and mix due to tough comps as Mitch mentioned.

Yes.

Label and packaging materials sales were up low double digits on an organic basis with strong growth in both the high value product categories and the base business.

Graphics, and reflective sales were up high single digits on an organic basis.

Looking at the segments organic sales growth in the quarter by region, North America, and Western Europe sales were both up high teens, while emerging markets overall were up low to mid teens.

The Asia Pacific region was roughly flat with strong growth in India offset by a decline in China due to tough comps related to the price increase driven pre buys we discussed last year.

And Latin America grew low double digits.

LTM adjusted EBITDA margin increased 110 basis points sequentially to 15, 6%.

Largely driven by accelerated pricing actions to offset inflation.

And as Mitch mentioned, while EBITDA margins were strong they declined versus prior year for three primary reasons.

First the mathematical impact of raising prices alone reduced our margin percentage by roughly two points.

Second the remaining gap from the price inflation lag reduced margins roughly half a point.

And third impacts from the Russian War in Ukraine reduced margins by roughly one third of a point.

Now looking ahead, our input costs have continued to rise and supply chain remain tight.

We now anticipate inflation will be roughly 20% for the year with a high single digit increase expected sequentially in Q2.

We continue to address the cost increases through a combination of product reengineering and pricing actions.

Shifting now to retail branding and information solutions RBS.

Rbis sales were up 43% ex currency and 20% on an organic basis.

As growth remained strong in both the high value categories and the base business.

The apparel business saw broad based strength across channels and continued double digit growth and external embellishments.

And for the quarter intelligent label sales were up more than 20% organically.

Adjusted EBITDA margin for this segment of 19% was up nearly two five points.

With the positive benefits from higher organic volume and acquisitions more than offset growth investments and higher employee related costs.

Turning to the industrial and healthcare materials segment sales increased 1% on an organic basis, reflecting.

Reflecting low double digit growth in health care, largely offset by a low single digit decline in industrial categories as automotive markets weighed on this segment.

Adjusted EBITDA margin decreased to 12% driven by lower volume and mix and the net impact of pricing freight and raw material costs.

Now shifting to our outlook for 2022.

While there continues to be a high level of macro uncertainty we have raised our guidance for adjusted earnings per share to be between $9 45, and $9 85.

<unk> increase to the range.

The increase reflects a roughly <unk> <unk> headwind from non operational items, such as currency and taxes.

More than offset by roughly <unk> <unk> operational increase roughly half of which we realized in Q1.

This outlook reflects a roughly 50% increase in EBITDA compared to 2019.

And we now anticipate 15% to 17% ex currency sales growth for the full year above our previous expectation driven by higher prices to mitigate the increased pace of inflation.

In summary, we delivered another strong quarter in a challenging environment and we remain on track to deliver on our long term objectives to achieve GDP plus growth and top quartile returns on capital, which together drive sustained growth in EMEA.

We will now open up the call for your questions.

Thank you.

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One moment please for the first question.

Our first question is from George Staphos with Bank of America. Please proceed with your question.

Thanks, Hi, everyone. Good morning.

Thanks for all the detail.

My two questions. The first is around margins broadly and then the second.

Is just on <unk>.

The impact of the strike in Europe and.

And then what it might mean for you in terms of margin and gentlemen, can you talk a little bit about qualitatively. If you can't quite quantify what kind of margin trend you're seeing in intelligent labels either year on year or.

Sequentially in the quarter and the same.

Question around emerging markets I know, it's a broad region, but can you talk about the margin trends youre seeing in emerging markets. My second question.

With the strike now having ended how will it most immediately impact in.

Likely benefit your business.

What are the ramifications of that thank you and I'll turn it over.

Sure George Good morning, So, yes as far as your first question on intelligent labels, we haven't disclosed specifically what our intelligent label's margins are they are consistently above the average for the company and the average for Rbis.

And what I'd say is.

Have stayed remained in a relatively tight band.

Over time as we continue to.

Drive growth, but also reinvest a portion of the growing profits into new new growth opportunities, which are significant as far as emerging markets margins yes.

Yes, I mean, the margins remain strong within the emerging markets. So no no big update from from that perspective, we've talked about in the past that our.

Our margins have kind of across the board.

Can you sort of converged over the last number of years, so theres not a lot of variation of what you see on the global <unk>.

Level for El gem versus the individual regions and as far as the strike in Europe , yes.

Unfolding real time, it takes a little bit of time to restart paper mills, and so forth and the lead time between once the manufacturing starts happening to win.

And the rest of the industry will be able to receive product, but our assumptions here that we will start to see product.

Here in mid to late Q2, and it won't really probably be at full run rate until late Q2.

Our next question is from Ghansham Panjabi.

With Robert W. Baird. Please proceed.

Hey, guys. Good day, thanks for taking my questions.

You made some comments on China, Covid and the impact on April than some of the plants being impacted opening imminently.

So that some of the other regions may be impacted in China also including.

Beijing, the weekend et cetera, just curious as to.

The impact potentially on you not just on lgs, but also Rbis on the base business.

Maybe you can just kind of give us a sense as to what may be different with the.

<unk> Downs in China. This go around versus 2020, and how you're navigating that.

Yes, so it is hard to predict what each shutdown if there are future ones. So what the exact impact will be.

So there was about $20 million lower revenue from the.

Materials businesses that we have in the Shanghai area, we have an operation in the general Beijing area, but quite a bit smaller overall as far as size and impact.

And Rbis is footprint in China is in South China, So when the Pearl Delta region, So not in the Beijing area in general.

So thats.

That's where we are as far as what the impact is I think the bigger question.

Everybody needs to make the assessment is what does it really do to end demand.

And demand everybody has obviously been depleting their inventories.

Bounce back and so forth or not we feel well positioned regardless of the situation.

If it were to get to the South South China, obviously, our Rbis plants would be impacted at that time.

But just as we saw the Vietnam.

<unk> was shut down last year, which is a major hub for us as well we were able to leverage the rest of our global manufacturing capability to help offset that and quickly quickly come back from and there it's a little bit different because most of the end market is really linked to demand in both the U S and Europe and so we tend to see that Theres a shortening.

Supply chains are adjusted adjustment of supply chain lead times in order to adjust for that so slightly different by business overall I think there is.

Yes positive the fact that the Shanghai areas opening as.

As far as our direct interactions.

We've gotten the green light to open up operations everything else, obviously, it takes a little while for the gears of industry to start moving all the customers need to be able to open up and suppliers.

And we're hoping that.

From the high degree of Lockdown that there are lessons learned from this more broadly and that with each each new lockdown should there be one that will have less impact on industry in general.

Got it and then Greg in your comments when you were giving us the variance for 2020 to EPS versus your initial I think you said 20.

Better operations or some version of that half of it came from the first quarter.

What is that specifically being driven by and then at what point do you expect to reach price cost parity based on what you see at this point.

Yes, so just to reiterate I guess overall, we said about 20 operational beat for the year from our previous expectations.

Offset by about <unk> 10, with some headwinds things like currency translation and a little bit on tax for instance.

The beat in the first quarter is driven by a couple of things one the RBS volume as Mitch mentioned earlier was pretty strong in the quarter very strong on the intelligent labels good growth on external embellishments and we continue to see strong apparel imports in the U S and that's continuing to see strong volumes in our overall apparel business even outside of IL.

At the same time as we've talked about we've been accelerating the pace of pricing.

To manage the increasing pace of inflation as well and we closed a little bit more of that gap in the quarter than we really expected at the beginning of the year. So overall, we feel good with the pace of that I think we still had a gap I mentioned, we had about a half a point gap and LG in margins year over year due to price inflation, we do see sequential inflation in Q1 to two years.

Q2 of high single digits, and we're putting new pricing actions there.

Our guidance assumes inflation in the back half is relatively stable.

If that happens we will look as we entered the back half of the year to hopefully close that gap between price and inflation.

Our next question comes from Anthony Pettinari with Citigroup. Please proceed with your question.

Hi, good morning.

The revision to the full year organic growth guidance is that entirely driven by price.

<unk>, passing along higher costs or is there any change in the volume outlook, either positively or negative or mix or anything else that.

You should be aware of.

Yes, I think that's largely price so as we've talked about inflation, we now expect full year inflation of about 20%.

Last quarter, I think I said low to mid teens. So that's a pretty healthy increase on the pace of inflation and we are increasing prices accordingly to mitigate that so most of that increase is really around the incremental price to deal with the incremental pace of inflation that we're seeing volumes continue to be strong and rvs as we mentioned.

<unk>.

Call in the back half is difficult right now with a number of things.

Moving around a lot of moving parts of course, so we don't have visibility on the inflation pace much past the next couple of quarters.

We'll look to manage that as we move through the year.

Okay, and then <unk> benefited from $9 million in restructuring savings in terms of maybe what you're seeing a similar level in the coming quarters anything you can say about sort of restructuring is.

Maybe.

A potential earnings contributor this year have you pulled forward some projects given inflation headwinds there was always sort of in the plan.

Any.

I think that you can get there.

Yes, so we talked about over the last couple of years, we've accelerated a number of projects, particularly in 2020, we had a number of projects that we had on the horizon, we accelerated and pulled into the year, we're still seeing some benefits from those and some initiatives. We executed late last year that are helping here in the first half. So a lot of that is carryover of some of those projects that we've been executing.

Over the last year or so.

Our next question comes from John Mcnulty with BMO. Please proceed with your question.

Thanks for taking my questions. So the intelligent label business. It looks like it did a lot better than I think.

Many were expecting I guess at the same time like we've heard there are some some supply chain issues, even there and component issues. I guess was there anything that actually held back any of the growth in that segment for you in the quarter that we should be thinking about.

And also how should we be thinking about when those kind of issues might be might be alleviated.

Yes, so we grew more than 20% within the quarter and that was broad based.

Yes.

We've said apparel was most of the dollar growth, but percentage wise.

The food and logistics categories, and now home goods are from a percentage wise off a very small base growing even faster so.

Continuing to build momentum what we did say and I think you might be referring to Jon is given where the supply chain constraint specifically around microchips.

That would be it would be challenging to go above the long term growth range that we have a 15% to 20% this year.

And we do see that there will be.

There should be some easing in changed a little bit depending what you're talking about as we go into 2023.

And an important part of this is we've been able to leverage.

We're a bit unique in being able to drive this level of growth and certainly for the new market development, just leveraging our scale and our partnerships that we have up the up the supply chain.

The chipset manufacturers and so forth work through.

This challenging time that have unconstrained supply, but we're all aligned on what the opportunity is around RFID and intelligent labels more broadly.

Got it.

That's helpful color and then I guess second question is just when I think about your new guidance or your updated guidance. The midpoint of the range. Essentially is is just it looks like it's taking <unk> and just kind of straight lining it across and yet it does seem like on.

On the puts and takes with <unk>.

Finished strike kind of behind us at this point evidence that youre getting all the pricing that you need it.

It seems like you've probably got more <unk> than headwinds at this point. So I guess is that a fair characterization or are there other things we should be thinking about on the negative side to kind of give you that more balanced approach to how youre thinking about the year.

Yes, so I think theres a lot of moving parts here between as you said the strike of our paper suppliers start to get better later here in the second quarter as Mitch talked about it doesn't have a huge impact on Q2, given that that just ended pretty much here at the end of April .

So that will start to get better as we get to the middle of the year.

But we talked about at the same time, we've got a little bit of a China headwind in the month of April at least.

From there that we didn't have in the first quarter and then we exited.

Shipping to the Russia, Russia market, which we had shipped for much of Q1 at least so theres a number of impacts there. When you look from where we are in Q1 to what will be the rest of the year.

Difficult to call what the environment will be in the back half.

From an inflationary perspective, as well as from a continuing Matt.

The macro perspective.

Our next question comes from Jefferies.

With J P. Morgan. Please proceed.

Thanks very much.

Operating income in label and graphic materials was down.

$20 million year over year.

Our fleet was half of that from volume and half of that from price cost.

Well half of that was actually from currency translation year over year. The rest of it was a bit of a gap as I talked about between price and inflation still as well as some increasing just employee costs wage inflation year over year et cetera. So it's really about half of our currency and the other half are a large part of the other half the remaining.

On pricing and placement.

Okay.

Do you expect your volumes to decrease in <unk> year on year for the next two quarters and then to begin to grow is that your base case.

We have a variety of different scenarios, we would lay out so we don't pinpoint a specific target as we said the comps in Q1, Jeff are the toughest and the comps get easier as we go throughout the year. So that's I guess the biggest thing I would highlight so we don't have we don't give quarterly guidance.

In general or by business that Q1 is the toughest comp within the materials business overall.

Is your price raw material spreads getting better sequentially or you can't tell.

Sequentially. It has gotten better we've accelerated I think one of the things.

When we commented on performance in Q1 being better than we expected. So we had a number of initiatives just given the share duration magnitude and consistency of the inflation, we've been experiencing we've been fine tuning our pricing strategies and our execution capabilities and we're targeting specifically to reduce that.

That lead time, and we were successful in doing that we're going to need to continue doing that given the incremental inflation, which is.

Going from the.

Low to mid teens as Greg said for the full year to roughly 20% for the full year. So it was better than expected as the short answer Jeff.

Our next question comes from Josh Spector with UBS. Please proceed.

Okay.

Hi, Thanks for taking my question so.

Just again on I guess on the inflation.

So the high single digit Q on Q I'm wondering if you could maybe break out how much of that would you say is direct materials. So the cost of the material itself going up versus is there some element of that from your operating differently. So using film instead of paper or sourcing from a suboptimal location that creating an additional cost burden.

But perhaps pose away when supply normalizes is there a way to differentiate between those two.

Well I mean, what we're talking about there is really the direct inflation, whether that'd be in raw materials freight utilities all of those areas really so it's really about the direct inflation.

A substitute materials.

Isn't that significant but that wouldn't be included in that bucket as well as from let's say one to Q2 perspective and the way we tend to look at that is that is a different product. If you are substituting having a film decliner versus the paper liner that's a different product at a different price point.

No.

Okay, I guess I mean is there a way to think about that in terms of the contact our first quarter, how much of that substitution maybe impacted profitability outside of the price cost dynamic.

Yeah.

We don't think it had a significant impact on profitability. This was an area where and this is where demand is strong and customers and their customers need the product and so we were able to leverage our innovation and scale capabilities to be able to quickly substitute and we've got disproportionately more experience both on the film and paper side of the industry.

So to be able to do mix and match of different languages different face materials that was an area of particular strength for us and we were able to leverage those capabilities to be able to deliver and they obviously came at a different price point. So once the supply chain normalizes I think there'll be some reversion back to the other product categories.

Customers ultimately would not fun.

Our next question comes from Mike Rosslyn, which boosted securities. Please proceed.

Thanks, Mitch Greg John Congrats on a good quarter.

Given the label paper release liner supply tightness can you just give us a sense of how you were able to manage supply. This quarter was it was it just a matter of procuring tons wherever you can get them and passing along the higher cost to customers did you work through inventories I'm just trying to understand your performance relative to the issues experienced at.

At the finish the part this quarter.

Yes.

Yes, I think it's a combination of things really I mean, I think we started the year with a little bit of inventory. So we were able to manage the early part of the quarter at least from that perspective, but as Mitch was just talking about a minute ago, we shifted some some materials to somewhat liners away from paper liners, where possible again, leveraging our capabilities in our plants and our R&D teams to make that change easily for customer.

At the same time, leveraging our scale with our suppliers and looking for other sources of materials.

And really we talked about the strength of our teams overall over the years and a lot of people say that but really clearly we have the strongest teams in the industry and they've shown time and time again, the resilience of managing through these things and helping us find ways to mitigate the impacts of challenges like this and work through it and still deliver for our customers. So for me I think there's a number of factors there, but our teams really came through.

In the quarter overall.

Got you and then just quickly just like with John's question regarding chip availability.

Mitch mentioned I think that's going to improve in 2023, what type of growth you expect to see an intelligent labels once if and when that ship availability improves.

To come back to about 2023.

Look at it this way if you had the chip chips available today.

What type of growth would you see intelligent labels versus the 15% to 20% you have seen.

Thank you.

Yeah, so I'm not going to and we see tremendous momentum in this space and I'm not going to deviate from 15% to 20% long term growth objective.

So that's what we've laid out as a long term growth objective.

I said, we'd be hard pressed to go above the high end of that we definitely see momentum for growing faster than that but as we've seen in the past.

In the past there is a certain cadence that every market needs to go through as they adopt the technology. So that's something that we'll continue to.

Investment ahead of the curve on and continue to lead with our customer partners to help them in their identification of how to how to roll out the new technologies to capture more more growth for themselves improve their consumer experiences and lower costs.

Our next question comes from Adam Josephson with Keybanc capital. Please proceed.

Thanks, Good morning, everyone.

Mitch one for you on demand if memory serves I think last call. You said demand was the biggest source of uncertainty with respect to your full year guidance and that was before the onset of war that was before widespread lockdowns in China Inflation's only intensified globally. Since then.

But it doesn't seem like your demand expectations for the year have changed at all and maybe they've even.

Gotten better so.

So I'm just trying to understand that and what you're expecting demand wise in the second half of the year as embedded within your guidance range.

And so overall, our volume assumptions haven't shifted all that much from where we were a quarter ago.

We came into the year with our eyes open to some of the macro uncertainties and so forth.

Remember when we gave some commentary around our volume expectations people thought those might be a bit low we actually saw.

And the foreseeing some of the specific challenges, but with all that.

The World has been going through the last couple of years, obviously had a little some temporary dislocations around demand environment built into our overall guidance for the year and thats proving the appropriate approach thus far.

I appreciate that and Greg with respect to your inflation outlook high single digit sequentially <unk> to <unk> and then I think you said flat thereafter.

Even though the strike in Finland is coming to an end I would think if anything that might put some downward pressure on your paper costs in the second half of the year can you just talk about why youre not expecting any.

Sequential declines in inflation, beginning in <unk> or even in <unk> for that matter.

Yeah, Adam I think it's been difficult over the last year or so to really call inflation and material move.

<unk> over past the next couple of months really so I think for US we're looking at what we what we can see from our line of sight perspective, there are different views. If you look at different indices and different outlooks for the back half of where things may or may not go but right now we are.

We know what we received for the second quarter as we've talked about them, we're assuming a moderate kind of.

Environment from an inflation perspective in the back half that could change up or down and so we will we would flex our pricing accordingly, and just build on just to reinforce greg's point.

Nobody really has visibility beyond 90 days and we've seen the industry show that theres going to be an easing of the inflation three months out four months out a few times over the past year and that has not panned out so we.

We have visibility in 90 days and we're putting in our pricing strategies and our productivity strategies Accordingly, and we will continue to pivot and adjust as needed.

Go from there.

Our next question is from Joshua Wilson with Raymond James. Please proceed with your question.

Yes, Hello mentioned, Greg Thanks for taking my questions.

Of course.

Just to make sure we're clear on the modeling side of things can you give us an update on what youre assuming for share count in the EPS guidance and just your general thoughts on share repurchases from here. So that's accelerated.

Yes, so maybe just backing up I think our overall capital allocation and balance sheet approach is the same strategy has been for a number of years now we have a very strong balance sheet right now our debt ratios at a relatively low level. Despite a lot of the acquisitions.

Even in light of a lot of the acquisitions, we've done very recently.

So we have ample capacity to continue investing in the business continue leveraging M&A to help strengthen our portfolio and shift the portfolio towards high value categories.

And capacity to continue increasing the rate of our dividend overtime in and continuing to drive share buybacks and return cash to shareholders. So we've talked about over over the years. Our approach there has been no.

In periods, where looking at share buyback to generate a return and in periods, where we see maybe a pullback in shares will have accelerators and our share buyback and the opposite if we see increases so clearly in the first quarter.

We saw the pullback in the shares and took advantage of that from a buyback perspective, depending on how that plays out over the rest of the year, but really determined how how share buyback overall plays out I think we ended the quarter with about 83 million shares and clearly we expect to be somewhere below that.

By the end of the year.

Got it and then as we think about how the European Theater continues to evolve any color you can give on what youre hearing either from your customers or customers are seeing in your own operations as it relates specifically to logistics and outbound freight availability and trucker availability.

I don't think that were seeing.

We're seeing what youre reading in the headlines overall I mean, just continued constraints, but I think the bigger item is just.

Yes, I think just questions about what the more of the economic outlook is than it is around freight availability and so forth.

What's going to happen.

Coming coming quarter coming years, and so forth, it's definitely a very sad development to see what's happening within Europe and.

That's what is on People's minds more than anything than then.

What's going on just getting.

Getting product and so forth. So that's key what's the sentiment has shifted in Europe . Overall is what I would say I think growth trends and so forth still seem fairly strong, but the sentiment is more on other matters and what it means to the macro long term.

And our next question is from Chris and lapses.

Loop capital. Please proceed.

Yeah, Hey, it's Chris Capps with loop capital.

Okay great.

Good afternoon, or good morning, I guess, where you guys are.

So question focused on LTM I didn't catch the detail by region, but I think you said that basically all of the segment sales growth was effectively pricing on passing through inflation and volume flat or down my question is.

To the extent that.

Paper liner availability can screen your volume how did your volumes compared to the industry volume did this constraint caused you to lose share in any region.

We don't have the industry data yet for Q1. So overall, that's something that we don't see we think we were in a number of markets disproportionately advantage the ability to switch from one category to another but it's hard to see exactly how how things played out across the from just a market perspective.

And share perspective.

Sequentially, we believe we're pretty confident we have gained share.

Particularly in Europe , but also North America year over year, you've got the factor of our tough comps in Asia Pacific, which were a bit more company specific as it related to pre buy so.

Overall the share landscape I think you tend to see we've talked about this before things moving around the board a bit, especially in periods of change and with price increases.

Generally within a normal band, we would expect and we would expect them to settle settle up where.

Historically been.

That's helpful and then I think your demand.

Again LTM, it's been characterized by.

Generally healthy with strong backlog and to the extent that the strike being resolved allows you to work down the backlog would that be.

Do you have a sense for any.

Any part of that backlog being sort of double ordering them.

Because of the concern on behalf of customers to get material <unk>.

How do you see that.

Those lead times working down overtime, what does that do you look at this as an opportunity to maybe take share as you are.

<unk> constraints are alleviated.

Strike is resolved.

Any color there would be helpful. Thanks.

Yes, sure so as far as the backlog we've talked about the lead times are much longer than they've been over the past year.

Year, and particularly over the past quarter clearly some of that we're not expecting that's all just incremental demand what happens when in a constrained environment people will get back in the queue for ordering future materials and so forth. So it's clear to us when we look at underlying demand for consumer packaged goods and e-commerce trends.

And demand remains strong.

And as we I think once the raw material environment stabilizes a bit youll have less of that.

Getting in the queue early effect, so lead times will reduce a bit but we still expect to.

Relative to the macro healthy growth profile.

So as far as taking share and so forth like I said those things, we expect would be settling out we are the industry leader and so we expect to be able to leverage our capabilities to help continue investing in innovation to drive the disproportionate amount of the industry's growth over the long run as we've done for since <unk> invented.

The category 80 years ago.

Our next question is a follow up question from the line of George Staphos with Bank of America. Please proceed.

Hi, everyone. Thanks for taking the follow on.

Greg mentioned is there a way to roughly quantify what the impact of the strike might've been on your P&L either from a margin standpoint or in any way and if you mentioned it.

Prior I apologize for having missed it but if you could remind us then what it would be if you've quantified. It and then I had a couple of quick follow ons after that.

Yes, we haven't quantified and we're not going to overall George it's the net impact is relatively small but still impactful.

Because if you isolate it on its own as one impact, but we then been leveraging our other sourcing providers.

Materials of providers to help mitigate that as well as the material substitution to film decliners and so forth. So we haven't provided that.

But that's that's yes.

We have something that's in our guidance is.

Is it basically a return to normal if you will by the second half.

Understood and then my other two and I'll turn it over one you had mentioned on the fourth quarter call.

Potential that there was.

The precise phrasing, but inventory in the channel that might need to be worked down.

From your volume discussion and from the results overall doesn't seem like you're seeing much effect from that but nonetheless are you seeing any signs of destocking, specifically within Europe and in the states and then with supply chains being so volatile.

The last it seems like the last couple of years are you seeing any shift from your customers in terms of where they're planning to produce and sourced from I would imagine would be more of an effect, perhaps on your Rbis customers and in turn.

What that means what the implications are for avery's production stance over the next couple of quarters a couple of years.

Thanks, and good luck the rest of the year guys.

Thanks, George Yes.

So overall around the inventory comment we had said that we.

Anecdotal evidence I believe there was some inventory building.

Going into this year, which by the way I think is playing out well for the end markets as far as when you are in a period of tightness of supply.

That people have some extra buffer to work through.

From what we see it looks like some of that was worked off we think in Q1.

And we commented that our volume mix within LG and was down low single digits. So there is the comps was one reason, but I think that the inventory levels could have been another but we think there is also still continuing some inventory here in Q2, which is important given that the impact of the strike won't be fully worked through until we work our way through Q.

Two and get towards the end of it.

And so George I wasn't clear on the second part of your question overall.

Broadly speaking what you've seen through this very dynamic environment.

Is that we've been able to leverage our global scale, our strength and innovation to basically ensure that we are able to.

Provide for our end markets. We are seeing is the industry leader that are not just trying to protect our own business, but also ensure the long term health of our industry and that's not just an LG and where a lot of discussion is but also within Rbis, and the branding information solutions, we provide there.

Wherewith all of the challenges that the apparel industry has seen that we've been able to show consistent robust growth.

Cycle, especially relative to apparel and demand so.

So overall very yes.

Good very good with how we performed there is a lot of uncertainty on the horizon.

We're confident in the team's ability to continue managing as we have over the past couple of years.

Mr. <unk> there are no further questions at this time I will turn the call back to you for closing remarks.

Thank you I just wanted to conclude by saying strong performance in a very challenging environment and just wanted to conclude by once again thanking our team for their phenomenal performance dedication and ingenuity. So thank you to the entire team.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.

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Q1 2022 Avery Dennison Corp Earnings Call

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