Q4 2022 Avery Dennison Corp Earnings Call

February 2, 2023

Okay.

Ladies and gentlemen, thank you for standing by during 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.

If at any time during the conference you need to reach an operator, Please press star zero.

Welcome to Avery Dennison earnings conference call for the fourth quarter and full year ended on December 31 2022.

This call is being recorded and will be available for replay from four o'clock P. M. Eastern time today through midnight Eastern time February 5th to access the replay please dial 800.

6338 to eight four.

Or one 400 29779140 for international callers.

The conference I'd number is 2202.

0690.

I would now like to turn the conference over to John Ably Avery Dennison head of Investor Relations. Please go ahead.

Thank you Frank.

Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined qualified and reconciled from GAAP on schedules a four to eight to 10 of the financial statements accompanying today's earnings release.

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 statement included in today's earnings release.

On the call today are Mitch <unk>, Chairman and Chief Executive Officer.

Dion standard President Chief and Chief operating Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Mitch Thanks, John and good day everyone.

We posted impressive results in 2022 in the face of an extremely challenging environment.

We delivered another year of double digit EPS growth on a constant currency basis.

EPS is up 40% from 2019 levels, reflecting our consistent ability to deliver year over year earnings growth, despite concurrent and compounding challenges.

Both our materials group and solutions group delivered solid top and bottom line results last year, while driving further acceleration in the pace of intelligent labels adoption.

As you can see we have changed our operating segments, we combined LTM and IHS to create the materials group.

Over the past few years, we've been leveraging more and more of the operational capabilities and technologies across LG, <unk> and IHS to enhance our ability to win in each businesses respective marketplace.

The combination of these two businesses is the next evolutionary step of this strategy.

As for Rbis, we renamed the segment the solutions group to better reflect the increasingly broader reach and ambitions of our solutions beyond retail.

Deanna will provide color on segment performance in a moment.

Both businesses delivered impressive results in 2022, especially considering the significant macro headwinds, we faced including sizable currency movements condemn.

Pandemic driven demand challenges in China, The Russian war in Ukraine, and of course significant inflation and supply chain disruptions.

In addition to the unique challenges that the inflation and supply chain disruptions presented it's also caused an increase in demand volatility throughout the year.

The high inventory levels downstream from us, which we called out at the start of the year were built further mid year.

Then as supply chain constraints began to ease and raw material inflation showed signs of moderating inventories were reduced swiftly beginning in November .

This trend continued into December and January .

Now, while we anticipated the inventory buildup downstream from us to unwind at some point the pace and magnitude of reductions was faster and greater than we expected.

And then we have seen in past corrections.

Overall wireless put significant pressure on our financial results in Q4 and now in Q1 of this year, we see the reduction of excess inventory is a good thing as it positions our industries and business to return to a more normalized growth trajectory beginning in Q2.

That said such a sudden decline in volume is indicative of patterns of previous macro slowdowns, we have been activating countermeasures accordingly.

We have initiated temporary cost reduction actions ramping up restructuring initiatives and paring back capital investments in our base business based businesses, while protecting investments in our high growth initiatives, particularly intelligent labels, both organically and through M&A.

Despite a challenging macro environment, we are targeting mid single digit EPS growth in 2023, reflecting a soft Q1, driven by inventory corrections followed by a second half run rate for EPS of more than $10.

Our strong track record over the long term reflects the strength of our markets our industry, leading positions the strategic foundations, we've laid and our agile and talented team.

Our playbook is working extremely well as we continue to focus on five overarching strategic pillars.

The 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.

As you know a key element of our strategy to drive outsized growth in high value categories has been our focus on intelligent labels, which we expect to be a $1 billion platform. This year.

We continue to invest in this platform as we expect it to grow more than 20% annually in the coming years.

This is a tremendous example of our strategy to work we've refined our strategies over time, raising the bar for ourselves in the process to ensure we continue to deliver superior value creation for all of our stakeholders.

We have a clear set of objectives and strategies focused on their mutual success, we're making great progress towards our 2030 sustainability goals and are on track to deliver our 2025 financial objectives, which Greg will walk through momentarily.

The.

<unk> of our team to drive these strategies forward over the long haul and deliver these impressive results, including once again, achieving double digit EPS growth last year is remarkable so.

Once again, thank our entire team for their tireless efforts to keep one another safe while delivering for all of our stakeholders.

Over to you.

Thanks, Mitch and Hello, everyone.

As Mitch said, we delivered impressive results in 2022 in the face of an extremely challenging environment I'll now provide more color on our segment performance.

The materials group delivered 11% organic growth for the year, driven by higher pricing and a low single digit volume decline, excluding the impact of exiting Russia.

Operating profit for the segment was strong up mid single digits ex currency as unprecedented levels of inflation were met with significant pricing actions to continue delivering strong returns in this already high EBITDA business.

Over the long term label materials volumes continued to grow at GDP plus.

Up 3% annually in 2022 compared to 2019.

In the fourth quarter materials group sales were up 2% ex currency and on an organic basis, driven by a mid teens impact from higher prices largely offset by a low double digit volume decline.

Following a period of material constraints earlier in the year downstream inventories that began the year elevated we built up even further in midyear.

And a supply chain disruption eased and inflation debated customers rapidly destock as they began to optimize inventory levels in the fourth quarter.

On an organic basis for the quarter label materials were up low single digits graphics, and reflective sales were up low single digits and performance tapes and medical sales were up low double digits.

Yeah.

Looking at label materials organic volume growth in the quarter by region combined North America, and Western Europe were down mid teens.

Overall emerging markets were down mid single digits with China volumes down low single digits and.

And the exit of Russia lowered total label materials growth by roughly three points.

Given the soft environment over the past few months and the expectation for moderating economic growth, we have been activating our cost saving initiatives, both temporary and structural.

We are focused on optimizing our cost structure and protecting the bottom line in this lower volume period.

We'll continue to manage a strong pricing discipline.

Yeah.

Given all these factors, we expect Q1 to look similar to Q4.

Anticipating roughly one to two weeks of inventory to be further reduced across the industry.

With destocking, concluding in the earlier part of the year.

Following the inventory correction, given the durability of our diverse and growing end markets along with our market leading position, we expect to rebound to GDP plus growth from Q2 onwards.

Stepping back the combination of <unk> and <unk> not only enables us to fully leverage the capabilities of the whole business, but strengthens our ability to win in the broader functional materials market.

We're also continuing to deliver EBITDA growth.

Turning to the solutions group.

Organic growth sales were up 5% for the year driven by strong growth in high value solutions and posted record margins. Despite the impact of retailer destocking.

In the fourth quarter solution group sales were down 7% ex currency and 8% on an organic basis.

Base business was down high teens organically, partially offset by mid single digit organic growth in the high value categories.

Apparel inventory reductions were broad based across all channels in the fourth quarter and Destocking continued in January .

In this segment, we expect Destocking to continue through Q1 and into Q2 as retailers effect of high inventories muted holiday performance and lower sentiment into the near term sourcing plans.

Similar to the materials segment, we are activating cost saving initiatives, both temporary and structural we.

We expect our apparel business to return to historic GDP growth in the second half of the year.

And for the solutions segment to additionally benefit from the significant growth increasing through the year and our intelligent labels platform.

Yes.

Turning to intelligent labels.

Enterprise wide sales were up mid teens on organic basis in 2022 <unk>.

Momentum in this roughly $800 million platform continues to accelerate.

This business has more than tripled in size over the last five years, averaging 20% annual growth.

Ganic basis.

The strong growth over this time horizon is primarily being driven by apparel as we continue to drive further adoption of the technology extend use cases and expand programs with major customers. In this key end market and while we continue to expect apparel to be the largest volume in the coming years.

We see even greater opportunity over the long run in other key untapped markets.

In logistics, which is expanding from targeted applications such as special package handling to broad based use cases, such as improving miss loads and routing accuracy.

And food, where we are seeing promising pilots in <unk> and grocery in use cases, covering freshness and labor efficiency.

And in general retail, where the technology is being expanded beyond apparel.

The benefits of our intelligent label technology and solutions are clear they.

The increased supply chain and inventory visibility lower cost and improved speed of operations reduce waste.

And ultimately enhance the experience of end consumers.

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

Lead at the intersection of the physical and digital.

To that end, we are continuing to invest in developing new applications and markets.

Adding new technologies, both physical and digital <unk>.

Increasing our manufacturing capacity, including investing more than $100 million in a new facility in Mexico for growth in the back half of 2024 and beyond and.

Expanding our team the best most experienced in this space.

Our strategies here continue to pay off.

We remain confident this will be a billion dollar platform in 2023.

And are targeting more than 20% growth in the coming years.

Lastly, we continue to deploy capital in other high value solutions.

Signing an agreement in January to acquire Thermopatch.

Business specializing in external embellishments with roughly $40 million in annual revenue.

In summary, we delivered impressive results in 2022 in the face of an extremely challenging environment.

Inventory Destocking is impacting our results near term and we are making adjustments accordingly Ira.

I remain extremely confident in the underlying fundamentals and prospects of our business over the long run and with that I'll hand, the call over to Greg.

Thanks, Dan and Hello, everybody.

I'll first provide some additional color on our results and our performance against our long term targets and then walk you through our 2023 outlook.

In the fourth quarter, we delivered adjusted earnings per share of $1 65.

Down, 14% ex currency compared to prior year, driven by a low double digit volume decline due primarily to inventory destocking.

For the full year, we delivered adjusted earnings per share of $9 15 sets up 11% X currency.

With organic sales growth of 10% as pricing offset a low single digit volume decline.

Our full year adjusted earnings per share was in line with the midpoint of our original guidance from the beginning of the year is.

Adjusted for currency translation.

For the year, we generated $667 million of free cash flow and we invested $300 million on fixed capital and it projects as we continue to accelerate investments in intelligent labels.

Free cash flow conversion in 2022 was lower than we targeted including higher than anticipated working capital driven largely by inventory.

The high inventory levels include some strategic inventory builds in areas such as RFID chips.

In addition, we still have some inventory we are working to optimize given all the supply chain disruptions throughout the year.

We're clearly focused on this and expect to make strong progress as the year progresses.

Despite this challenge our average free cash flow conversion over the past three years, it's been roughly 100% of GAAP net income and we expect this to continue in 2023.

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

Our current leverage position gives us ample capacity to continue investing organically as well as through strategic acquisitions.

While continuing to return cash to shareholders in a disciplined way.

During the year, we returned $618 million to shareholders through the combination of share repurchases and a growing dividend.

As well as deploy $40 million for M&A.

Turning to our long term targets.

Slide nine of our supplemental presentation materials provides an update on our progress against our long term financial targets that we communicated in 2021.

Recall this represents our fourth set of long term goals after meeting or beating our previous III.

The consistent execution of our key strategies enables us to continue delivering against our targets with an overriding focus on delivering GDP plus growth and top quartile return on capital over the long term.

Through the first two years of the cycle sales growth on a constant currency basis was 16% annually.

Well above our target and GDP driven.

Driven by strong volume growth higher pricing and M&A.

Adjusted EBITDA dollars have grown 28% compared to 2020.

With adjusted EBITA margin of 15, 1% in 2022.

As always our focus will continue to be the optimal balance of growth.

Margins and capital efficiency to drive incremental EBITDA over the long term.

We remain confident in achieving our 22025 margin target of 16% plus as part of that equation.

Adjusted earnings per share grew 13, 5% annually over the past two years, surpassing our target of 10%.

And our return on capital was 17, 4% in 2022 and in the top quartile relative to our capital market peers.

Given the diversity of our end markets, our strong competitive advantages and resilience as an organization to adjust course when needed.

Confident in our ability to continue delivering against these targets through a wide range of business cycles.

Now shifting to our outlook for 2023.

As mentioned the I commented on we are starting out the year in a challenging volume environment.

As we continue to see Destocking in the first quarter in both the label materials and apparel businesses.

We have been activating countermeasures and are confident in our ability to grow earnings for the year through a variety of environments.

As we look at how we expect that to play expect that to play out across the year. Given the continued destocking, we expect the first quarter to be comparable to Q4 of 2022.

Which was $1 65, and adjusted earnings per share.

Following Q1, we expect to see a strong rebound beginning in Q2 and moving through the back half of the year.

With our second half earnings run rate of more than $10 annualized.

In the second half, we expect downstream inventories will have normalized China to be rebounding and our growth in intelligent labels will build as we move through the year as the new programs rollout in areas such as logistics.

For these reasons, we expect significant earnings growth in the back half and also see a very strong trajectory as we exit 2023.

Yeah.

For 2023 overall, we anticipate adjusted earnings per share to be in the range of $9 15 to 955.

To highlight the key drivers of the high end of our 2023 EPS guidance compared to prior year.

We anticipate roughly 5% organic sales growth.

The majority from higher prices.

We estimate restructuring savings net of transition cost of roughly <unk> 40.

Another roughly 30 from temporary cost reduction actions.

And we expect strategic growth investments of roughly 25.

And we estimate net non operational items headwinds from interest currency and tax and a benefit from share count to be roughly 25 net headwind.

In summary to this dynamic environment, we are pleased with the strategic and financial progress we made against our long term goals in 2022.

Despite the near term challenges, we remain confident in our ability to continue to deliver exceptional value through our strategies for long term profitable growth and disciplined capital allocation.

Now we will open up the call for your questions.

Thank you.

Ladies and gentlemen, if you would like to register a question. Please press. The one followed by the four on your telephone you will hear a three pronged to acknowledge your request.

Your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.

If you are using a speaker phone please lift your handset before entering your request.

To accommodate all participants we ask that you. Please limit yourself to one question and one follow up and then return to the queue. If you have additional questions. One moment. Please for the first question.

Okay.

Our first question comes from Ghansham Panjabi.

With Robert W. Baird <unk> company. Please proceed.

Hey, guys. Good day, I hope everybody is doing well.

John can you just give us.

Can you just sort of elaborate on your view that the near term is largely inventory destocking versus something more broader.

In terms of recession, I mean, you yourself are enacting a recession scenario plan.

Yes.

What gives you confidence that this is purely more or less synergy destocking versus something more broad broader than that.

Ghansham this is deal.

When you look at the volume that we saw come out in Q4, largely because of the inventory Destocking. We see that trend also continue in January there'll be sort of in both November and December .

And we expect and our materials business for that Destocking to be complete largely by the first quarter.

On the apparel business as I called out we both see inventory destocking happening as we ran through the back half of last year and will continue in Q1 and into Q2 as well.

While we don't have as much forward visibility and also because of the lunar new year. It's clear that retailers are also factoring in sentiment into their fluid.

Volume ordering plans as well, but we anticipate that by the second half of the year that apparel business will return to its historic GDP growth rates and then when you factor in our additional growth that we're going to get from our I O platform. The rebounding of China, we expect to be able to deliver above GDP growth rates and in the second half of the year.

And Ghansham just to build on that it's also what we're hearing from the marketplace. Our customers are talking about the fact that they had built inventory.

Throughout the year, leading up to Q4 as well as the end customers CPG firms and so forth and the same thing on the apparel side. So it's market Intel.

Comparing we have pretty clear.

<unk> between our product consumption and demand relative to.

Consumption of non durable consumer goods for example.

And they definitely have disconnected to the negative they were a bit positive early in 2022, even the end of 'twenty, one which is why we called out that we thought there was some excess inventory in the system at a time and that continued throughout the year.

And then it's unwinding just at a much quicker pace than we traditionally see so theres a number of vectors. We're looking at it Triangulates gives us a lot of confidence. This isn't a majority of inventory correction that said, we do expect and consumption to moderate a bit.

We're already seeing it in apparel with a weak holiday season, and as far as you're looking at the GDP outlooks for at least Europe , and North America, there are modest to a slight recession.

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

Great. Good morning, Thanks for taking my questions I appreciate it.

Just one last one along similar lines to <unk> question, which is if youre anticipating conditions to get more or less back to normal in the second half.

Why they need to activate this recession scenario or if it's just a.

Two quarter blip and what exactly does that entail for you because if the economy gets back to normal in second half will you still need to do that.

That recession activation, if you will.

Yes, well I mean as far as the recession activation Theres a couple of things the structural cost reductions are not they recession.

Activation, if you will at the long part of our long term strategy as you know to focus on productivity. It's a way we could free up capital to invest more in the high value categories keep our base businesses competitive and profitably growing.

As well as to expand margins over time, so I wouldn't look at the restructuring of that side and as far as the temporary cost actions part of those are when Youre volume environment is lower you're having some dark days with implants.

To drive the way you <unk>.

Balance your load if you will can drive some savings and that's something that we're very focused on as well as belt tightening and everybody should tightened belts in this type of environment and Thats just part of how we operate.

Our next question comes from George Staphos with B of a securities. Please proceed.

Hi, guys. Good morning, Thanks for the details.

I wanted to touch, particularly on unintelligent levels, just given some some.

Now that we've gotten over the last couple of days can you talk at all.

Two how much chip shortages.

May have constrained youre growth recognizing that intelligent labels is still growing very very nicely.

What could the incremental volume have looked like had there not been shortages what impact did it have on your margins could margins have been pick a range of 100 points 200 basis points whatever better how would you have us think about that and last part of the question and I'll turn it over.

Can you talk at all to how much how important.

Some of the logistics Rollouts are in terms of your guidance for this year could there be incremental thanks.

Thanks, and I'll turn it over.

Thanks George.

We don't believe that in 2022 volumes were impacted.

Or impacted by any part of chip shortages, because as the market leader, we secured enough chip supply to ensure that we could deliver to all of our customers expectations.

Clearly from a margin perspective.

We maintained margins there was some degree of chip inflation and we've dealt with that through productivity as we always do.

And as we look forward.

<unk> is certainly going to be a big part of the second half of our growth during 2023, but I will emphasize that apparel will still be the largest part of our business and we'll be growing during 2023 as well in Georgia.

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

Yes, thanks for taking my question.

When you look at the severity of the Destocking, particularly in the <unk> segment.

<unk> seen some data out there that kind of shows.

Year over year 20, 25% declines certainly worse than we even saw in the financial crisis I guess can you explain.

How that's happening or why that's necessarily happening and are we putting ourselves in a position now given that it's so much worse in GDP in terms of the production levels that there may actually be a restock, where maybe people have cut even too deeply just trying to.

Focus on cash generation or what have you I guess can you help us to understand that a little bit.

Yes, John So why.

First part of your question I think it's a little bit of why is it a deeper decline that we've seen in past corrections, which you do have to go all the way back to the financial crisis to see that.

The reasoning is basically because of the supply chain disruptions people wanted to make sure they secured enough of the inventory for their own end demand.

And so there was much more safety stock in the system one too.

Timing of a significant inflation, we were raising prices significantly and people wanted to get in the queue and basically order and build inventory early to avoid the next round of price increases given we were actually in a stage of basically raising prices every couple of months or so in each region. So that's what drove the increase and then both of those fab.

<unk> basically started to stabilize at the same time, and so people no longer needed the excess inventory and they were starting to build it down. So that's the biggest reason for.

Why youre seeing a shift here overall.

Yes.

Our next.

<unk> comes from Anthony Pettinari with Citigroup. Please proceed.

Hi, This is actually Brian Maguire sitting in for Anthony Thanks for taking the question.

With some inflation buckets moving lower throughout for Q. What are you assuming for price cost in the materials group. This year do you think <unk> would be able to potentially capture a benefit lower raws or would that be passed along in full to customers.

And.

Separately, just apologies if I missed this did you provide a growth target for <unk>. This year is it fair to assume that it could fall little bit short of that 20% just given the headwinds in apparel.

Yeah. Thanks, Brian So on the inflation question I think sequentially from Q3 to Q4.

Overall net price inflation was a relatively immaterial impact we had a little bit of sequential price Q3 to Q4 from some of the actions we've been taking as we move through the back half and a little bit of a sequential inflation I think I talked about last quarter, we expected a little bit of a sequential impact from paper at.

At the same time, we had some sequential benefit from that Kent films and chemicals a bit of deflation. There. So as you look into 2023.

Sequentially, we don't see a lot of change there, it's still a little bit of pressure on specialty papers, just given capacity and what's happening in the marketplace. There from a specialty paper perspective, and maybe a little bit of a sequential benefit in films and chemicals, just like we had in Q4.

When we look at overall price inflation.

We have a carryover benefit of price carryover impact of raw material inflation, we also have a bit.

At or above historical levels of wage inflation, they've got some utility inflation, where we had a little bit of a benefit last year from <unk>.

Prices, we had locked in for part of the last year as well. So when you look across our whole basket of raw materials wage inflation utility inflation, where we expect a roughly neutral impact year over year from that perspective, all of those things included in.

And Brian on your IL question, we will be growing more than 20% this year.

Recall that we said we are very confident and this being a billion dollar platform in 2023, and we see growth in apparel and we see significant growth in our logistics platform. During this year.

Our next question comes from Mike <unk> with <unk> Securities. Please proceed.

Thanks, Mitch and Greg John Appreciate you taking the questions.

First question just I know you mentioned just now in response to last question is about 20% growth in IL.

The adoption as global economies and companies are increasingly laying off employees.

It would be a headwind as companies look to curtail spend.

Certainly could it be annoyed because it will be a benefit as they look to increase efficiency productivity and the like and then my second question is just in terms of China with Chinese government strictly given COVID-19 policies, and obviously that was it.

Let me see if April was $10 million headwind could that actually serve as a pretty big tailwind for you as well as things normalize in China.

Yeah, Mike.

Your first question. It was the latter we see during times when things are more difficult full brands retailers and customers that they look to improve their automation efficiency and technologies that we have really plays into the heart of it reduces cost labor improved labor efficiency provides visibility throughout the supply chain. So we see that doesn't access.

Element and not a barrier to adoption of our intelligent label platform.

As it relates to China, clearly, we saw in 2022, the impact of the Covid policy playing out in the country.

And what we saw as I said in the fourth quarter was that China was down low single digits is that trajectory started to change we believe that post COVID-19 change, we see China returning to its normal slightly above GDP growth, but if we start to you said and we see that as part of our ongoing second half growth.

Both Mitch and Greg have called out as well.

Okay.

Our next question comes from Jefferies.

<unk> with Jpmorgan Securities. Please proceed.

Thanks very much.

For the nine months Youre intelligent labels were up 20% year to date and Theyre up 15% for the year. So that means in the fourth quarter. They grew zero.

And you're expecting the first quarter to be like the fourth quarter.

So can you talk about.

What happened in growth in intelligent labels in the quarter is it likely to be similar in the first quarter.

And then secondly.

Are your raw materials year over year in the fourth quarter up about 8%.

So Jeffrey from an IR perspective, yes, we grew 15% last year and in the fourth quarter we grew.

Sorry, mid single digits in the fourth quarter, reflecting the impact of Destocking, particularly in apparel.

And as I've said, we anticipate the Destocking to continue in Q1, but as we ramp through the year in that business returns to its historic GDP growth, we see a number of factors come into play that helps us get to and be have conviction around a $1 billion platform. Firstly, the apparel business will be in growth during next year as both the business rebounds.

And further adoption in retailers as well as further use case extension such as loss prevention come to bear and new programs. Secondly has already called out we're going to see a significant ramp in our logistics program as we go through the second to the back half of the year and that will add.

To that and finally, we continue to see good traction in a number of our food pilots that are also adopting with an increased frequency as well.

Yes, Jeff on the raw material side.

We're up for the year in 2022, a little more than 20% and in Q4 that would be kind of mid to high teens rate versus prior year. So overall.

For the full year over 20%.

And last year in the fourth quarter of 2021, we still had a net headwind between price inflation that then is adjusted as we look Q4 versus prior year.

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

Yes, thanks for taking my questions just a couple of follow ups I could.

Depth of Destocking that you're seeing in the base labels has there been any change in pricing in terms of competitive dynamics in that market and then on the RFID side, you talked about Kip availability last year.

You have availability or secured your needs for what you expect this happen later this year and our chips inflationary or deflationary fair cost stack over the next 12 months.

Yes.

Josh Let me address your second question first.

We have secured all the chips that we need for this year and into next as well sorry for 2023 and into 2024.

And chip market has been slightly inflationary and we're adjusting as I said based on both productivity and pricing as we move forward.

In terms of Destocking.

Just repeat your question for me Josh.

Question on it's Destocking was having any impact on competitive pricing dynamics within the base label fitness.

We don't see that at the moment, Josh historically as the market leader, we maintained fairly strong pricing discipline.

We will respond if there if there is pricing changes in the market, but typically we tend to make sure. We are disciplined as home is strong and if you also remember during the inflation repair Josh we tend to use surcharges. The first start in the in how we manage pricing.

Deflation starts to occur and if it does occur those are the things the first start to roll off.

Our next question comes from George Staphos with Bofa Securities. Please proceed.

Hi, Thanks for taking the follow ons.

I'll try to get them all in here and turn it over for the rest of the call. So first of all could you talk at all to what your customers say their inventories grew too relative to normal at.

At the peak of the inventory build were customers in your key categories, saying their inventories were double what they normally would have triple a half mile obviously on a half but.

Somewhere in that range between what would you say there.

Secondly, as we think about logistics and project out.

Your market share in the market growth you've talked about in the past could logistics alone B.

$1 billion plus in revenue.

By 2030, and then last on any comments on how <unk> com is doing and how thats, adding or not relative to your expectations. Thanks and good luck in the quarter.

Thanks, George Yes, so I'll start off so as far as what are customers, saying around inventory levels, yes. The couple.

Couple of things.

One as you know we have many customers, particularly on the materials side. So there's a lot of anecdotes, but we were hearing definitely area ranges of two to four weeks of excess inventory.

So there was quite a bit of build overall.

And on the apparel side the end customer.

I mean, you've heard you can read all the headlines of what theyre talking through but they definitely have quite a bit of extra inventory and even entire containers full that they were said they are just waiting for the next season two to unload them at the next season, so quite a bit of inventory which is.

That's what our customers are telling us and what we're all seeing in the headlines I think what we all know on the apparel side. If you look at the actual hard data of inventory levels within apparel, it's actually dropped down a bit from where it was pre pandemic.

So a little bit of a <unk>.

Disconnect between what the data says and what we're hearing anecdotally, but we definitely are ourselves know there's excess inventory there as far as logistics I think your question is.

With the growth and the opportunity we see how big can logistics be specifically it can be $1 billion by 2030, Dan do you want to take that one as well as the follow up.

George and you can see the scale of what we believe this initial phase of logistics adoption will do for us and our results overall.

Drive to get to a billion dollar business during this year our commitment to that.

And as you know as well as logistics segment is it highly concentrated my sense and belief is that as the technology continues to resonate with one or two customers I think it'll become a de facto mechanism for operating as a logistics provider around the world and if that should happen then I believe that there should be a billion dollar plus business by 2023.

As it relates to divest 2030, 2030, sorry 'twenty.

As it relates to divest come George the business continues to perform very well the team have added enormously to our capability.

Providing greater access to the grocery.

And.

In retail market and in addition is also fairly consistent stable business.

And ensure that portfolio of our solutions businesses becomes more robust through cycles as well.

<unk> recent performance and outlook are ahead of our acquisition case.

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

All right well, thanks, everybody for joining us today as you've heard throughout the call. We remain confident that the consistent execution of our strategies will enable us to continue to meet our long term goals for superior value creation for all of our stakeholders. Thank.

Thank you all.

Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line. Thank you.

Yeah.

Right.

Hum.

Okay.

[music].

Okay.

Hum.

Okay.

So.

Okay.

Sure.

Thanks.

Sure.

[music].

Sure.

Okay.

So.

Okay.

[music].

Ladies and gentlemen, thank you for standing by.

During 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.

If at any time during the conference you need to reach an operator, Please press star zero.

Welcome to Avery Dennison earnings conference call for the fourth quarter and full year ended on December 31, 2020 to.

This call is being recorded and will be available for replay from four o'clock P. M. Eastern time today through midnight Eastern time February 5th to access the replay please dial 800.

6338 to eight four.

Or one 400 29779140 for international callers.

The conference I'd number is two two.

Zero two.

0690.

I'd now like to turn the conference over to John Ably Avery Dennison head of Investor Relations. Please go ahead.

Thank you Frank.

On the call today are Mitch <unk>, Chairman and Chief Executive Officer Dr.

Dion standard President Chief and Chief operating Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Mitch Thanks, John and good day everyone.

We posted impressive results in 2022 in the face of an extremely challenging environment.

We delivered another year of double digit EPS growth on a constant currency basis.

<unk> is up 40% from 2019 levels, reflecting our consistent ability to deliver year over year earnings growth, despite concurrent and compounding challenges.

Okay.

Both our materials group and solutions group delivered solid top and bottom line results last year, while driving further acceleration in the pace of intelligent labels adoption.

As you can see we have changed our operating segments, we combined <unk> and IHS to create the materials group.

The combination of these two businesses is the next evolutionary step of this strategy.

As for Rbis, we renamed the segment the solutions group to better reflect the increasingly broader reach and ambitions of our solutions beyond retail.

Deanna will provide color on segment performance in a moment.

Okay.

Both businesses delivered impressive results in 2022, especially considering the significant macro headwinds, we faced including sizable currency movements condemn.

Pandemic driven demand challenges in China, the Russian more in Ukraine and of course significant inflation and supply chain disruptions.

In addition to the unique challenges that the inflation and supply chain disruptions presented it's also caused an increase in demand volatility throughout the year.

The high inventory levels downstream from us, which we called out at the start of the year or built further mid year.

Then as supply chain constraints began to ease and raw material inflation showed signs of moderating inventories were reduced swiftly beginning in November .

This trend continued into December and January .

Now, while we anticipated the inventory buildup downstream from us to unwind at some point the pace and magnitude of reductions was faster and greater than we expected.

And then we have seen in past corrections.

That said such a sudden decline in volume is indicative of patterns of previous macro slowdowns, we have been activating countermeasures accordingly.

Our strong track record over the long term reflects the strength of our markets our industry, leading positions the strategic foundations, we've laid and our agile and talented team.

Our playbook is working extremely well as we continue to focus on five overarching strategic pillars.

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.

As you know a key element of our strategy to drive outsized growth in high value categories has been our focus on intelligent labels, which we expect to be a $1 billion platform. This year.

We continue to invest in this platform as we expect it to grow more than 20% annually in the coming years.

This is a tremendous example of our strategy to work.

We have refined our strategies over time, raising the bar for ourselves in the process to ensure we continue to deliver superior value creation for all of our stakeholders.

The ability of our team to drive these strategies forward over the long haul and deliver these impressive results, including once again, achieving double digit EPS growth last year is remarkable so I <unk>.

Once again, thank our entire team for their tireless efforts to keep one another safe while delivering for all of our stakeholders.

Over to you.

Thanks, Mitch and Hello, everyone.

As Mitch said, we delivered impressive results in 2022 in the face of an extremely challenging environment I'll now provide more color on our segment performance.

The materials group delivered 11% organic growth for the year, driven by higher pricing and a low single digit volume decline, excluding the impact of exiting Russia.

Over the long term label materials volumes continued to grow at GDP plus.

Up 3% annually in 2022 compared to 2019.

In the fourth quarter materials group sales were up 2% ex currency and on an organic basis, driven by a mid teens impact from higher prices largely offset by a low double digit volume decline.

Following a period of material constraints earlier in the year downstream inventories that began the year elevated we built up even further midyear.

And a supply chain disruption eased and inflation debated customers rapidly destock as they began to optimize inventory levels in the fourth quarter.

Looking at label materials organic volume growth in the quarter by region combined North America, and Western Europe were down mid teens.

Overall emerging markets were down mid single digits with China volumes down low single digits and.

And the exit of Russia lowered total label materials growth by roughly three points.

Given the soft environment over the past few months and the expectation for moderating economic growth, we have been activating our cost saving initiatives, both temporary and structural.

We are focused on optimizing our cost structure and protecting the bottom line in this lower volume period.

We'll continue to manage a strong pricing discipline.

Given all these factors, we expect Q1 to look similar to Q4.

Anticipating roughly one to two weeks of inventory to be further reduced across the industry with destocking concluding in the earlier part of the year.

Following the inventory correction, given the durability of our diverse and growing end markets along with our market leading position, we expect to rebound to GDP plus growth from Q2 onwards.

Stepping back the.

The combination of <unk> and <unk> not only.

<unk> enables us to fully leverage the capabilities of the whole business, but strengthens our ability to win in the broader functional materials market.

We're also continuing to deliver EBITDA growth.

Turning to the solutions group.

Organic growth sales were up 5% for the year driven by strong growth in high value solutions and posted record margins. Despite the impact of retailer destocking.

In the fourth quarter solution group sales were down 7% ex currency and 8% on an organic basis.

<unk> business was down high teens organically, partially offset by mid single digit organic growth in the high value categories.

Apparel inventory reductions were broad based across all channels in the fourth quarter and Destocking continued in January .

In this segment, we expect Destocking to continue through Q1 and into Q2 as retailers effect of high inventories muted holiday performance and lower sentiment into the near term sourcing plans.

Similar to the materials segment, we are activating cost saving initiatives, both temporary and structural.

We expect our apparel business to return to historic GDP growth in the second half of the year.

And for the solutions segment to additionally benefit from the significant growth increasing through the year and our intelligent labels platform.

Yes.

Turning to intelligent labels.

Enterprise wide sales were up mid teens on organic basis in 2022 <unk>.

Momentum in this roughly $800 million platform continues to accelerate.

This business has more than tripled in size over the last five years, averaging 20% annual growth.

Ganic basis.

While we continue to expect apparel to be the largest volume in the coming years.

We see even greater opportunity over the long run in other key untapped markets in logistics, which is expanding from targeted applications such as special package handling to broad based use cases, such as improving miss loads and routing accuracy.

And food, where we are seeing promising pilots in <unk> and grocery in use cases, covering freshness and labor efficiency.

And in general retail, where the technology is being expanded beyond apparel.

The benefits of our intelligent label technology and solutions are clear that increased supply chain and inventory visibility.

Lower cost and improved speed of operations reduce waste and ultimately enhance the experience of end consumers.

As the leader in ultra high frequency RFID.

We are extremely well positioned to not only capture these new opportunities, but lead at the intersection of the physical and digital.

To that end, we are continuing to invest in developing new applications and markets.

Adding new technologies, both physical and digital.

Increasing our manufacturing capacity, including investing more than $100 million in a new facility in Mexico for growth in the back half of 2024 and beyond and.

Expanding our team the best most experienced in this space.

Our strategies here continue to pay off.

We remain confident this will be a $1 billion platform in 2023.

And we're targeting more than 20% growth in the coming years.

Lastly, we continue to deploy capital in other high value solutions.

Signing an agreement in January to acquire Thermopatch business specializing in external embellishments with roughly $40 million in annual revenue.

In summary, we delivered impressive results in 2022 in the face of an extremely challenging environment.

Inventory Destocking is impacting our results near term and we are making adjustments accordingly Ira.

I remain extremely confident in the underlying fundamentals and prospects of our business over the long run and with that I'll hand, the call over to Greg.

Thanks, Dan and Hello, everybody.

I'll first provide some additional color on our results and our performance against our long term targets and then walk you through our 2023 outlook.

In the fourth quarter, we delivered adjusted earnings per share of $1 65.

Down, 14% ex currency compared to prior year, driven by a low double digit volume decline due primarily to inventory destocking.

For the full year, we delivered adjusted earnings per share of $9 15.

Up 11% X currency.

With organic sales growth of 10% as pricing offset a low single digit volume decline.

Our full year adjusted earnings per share was in line with the midpoint of our original guidance from the beginning of the year is.

Adjusted for currency translation.

For the year, we generated $667 million of free cash flow and we invested $300 million on fixed capital and it projects as we continue to accelerate investments in intelligent labels.

Free cash flow conversion in 2022 was lower than we targeted including higher than anticipated working capital driven largely by inventory.

The high inventory levels include some strategic inventory builds in areas such as RFID chips.

In addition, we still have some inventory we are working to optimize given all the supply chain disruptions throughout the year.

We're clearly focused on this and expect to make strong progress as the year progresses.

Despite this challenge our average free cash flow conversion over the past three years, it's been roughly 100% of GAAP net income and we expect this to continue in 2023.

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

Our current leverage position gives us ample capacity to continue investing organically as well as through strategic acquisitions while.

While continuing to return cash to shareholders in a disciplined way.

During the year, we returned $618 million to shareholders through the combination of share repurchases and a growing dividend.

As well as deploy $40 million for M&A.

Turning to our long term targets.

Slide nine of our supplemental presentation materials provides an update on our progress against the long term financial targets that we communicated in 2021.

Recall this represents our fourth set of long term goals after meeting or beating our previous III.

Through the first two years of this cycle sales growth on a constant currency basis with 16% annually.

Well above our target and GDP driven.

Driven by strong volume growth higher pricing and M&A.

Adjusted EBITDA dollars have grown 28% compared to 2020.

With adjusted EBITDA margin of 15, 1% in 2022.

As always our focus will continue to be the optimal balance of growth.

Margins and capital efficiency to drive incremental EBITDA over the long term.

We remain confident in achieving our 22025 margin target of 16% plus as part of that EBITDA equation.

Adjusted earnings per share grew 13, 5% annually over the past two years, surpassing our target of 10%.

And our return on capital was 17, 4% in 2022 and in the top quartile relative to our capital market peers.

Given the diversity of our end markets, our strong competitive advantages and resilience as an organization to adjust course when needed.

Confident in our ability to continue delivering against these targets through a wide range of business cycles.

Now shifting to our outlook for 2023.

As mentioned <unk> commented on it we're starting out the year in a challenging volume environment.

As we continue to see Destocking in the first quarter in both the label materials and apparel businesses.

We have been activating countermeasures and are confident in our ability to grow earnings for the year through a variety of environments.

As we look at how we expect that to play expect that to play out across the year. Given the continued destocking, we expect the first quarter to be comparable to Q4 of 2022.

It was $1 65, and adjusted earnings per share.

Following Q1, we expect to see a strong rebound beginning in Q2 and moving through the back half of the year.

With our second half earnings run rate of more than $10 annualized.

In the second half, we expect downstream inventories will have normalized China to be rebounding and our growth in intelligent labels will build as we move through the year as a new program its rollout in areas such as logistics.

For these reasons, we expect significant earnings growth in the back half and also see a very strong trajectory as we exit 2023.

For 2023 overall, we anticipate adjusted earnings per share to be in the range of $9 15 to 955.

To highlight the key drivers of the high end of our 2023 EPS guidance compared to prior year.

We anticipate roughly 5% organic sales growth.

The majority from higher prices.

We estimate restructuring savings net of transition cost of roughly <unk> 40.

And another roughly 30 from temporary cost reduction actions.

And we expect strategic growth investments of roughly 25.

And we estimate net non operational items headwinds from interest currency and tax and a benefit from share count to be roughly 25 net headwind.

In summary through this dynamic environment, we are pleased with the strategic and financial progress we made against our long term goals in 2022.

Now we will open up the call for your questions.

Thank you.

Ladies and gentlemen, if you would like to register a question. Please press. The one followed by the four on your telephone you will hear a threefold prompt to acknowledge your request.

Your question has been answered and you would like to withdraw your registration. Please press the one followed by the three <unk>.

If you are using a speaker phone please lift your handset before entering your request.

Our first question comes from Ghansham Panjabi.

With Robert W. Baird <unk> company. Please proceed.

Hey, guys. Good day, I hope everybody is doing well.

John can you just give us.

Can you just sort of elaborate on your view that the near term is largely inventory destocking versus something more broader.

In terms of recession, I mean, you yourself are enacting a recession scenario plan.

How do you what gives you confidence that this is purely more or less inventory destocking versus something more broad broader than that.

Ghansham this is Jim when.

When you look at the volume that we saw come out in Q4, largely because of the inventory Destocking. We see that trend also continue in January that we saw in both November and December .

And we expect and our materials business for that Destocking to be complete largely by the first quarter.

On the apparel business as I called out we both see inventory destocking happening as we ran through the back half of last year and will continue in Q1 and into Q2 as well.

While we don't have as much forward visibility and also because of the lunar new year. It's clear that retailers are also factoring in sentiment into their fluid.

Volume ordering plans as well, but we anticipate that by the second half of the year that apparel business will return to its historic GDP growth rates and then when you factor in our additional growth that we're going to get from our Io platform. The rebounding of China, we expect to be able to deliver above GDP growth rates in the second half of the year.

And Ghansham just to build on that it's also what we're hearing from the marketplace. Our customers are talking about the fact that they had built inventory.

Throughout the year, leading up to Q4 as well as the end customers CPG firms and so forth and the same thing on the apparel side. So it's market Intel.

Comparing we have pretty clear <unk>.

<unk> between our product consumption and demand relative to.

Consumption of non durable consumer goods for example, and they definitely are.

Have disconnected to the negative they were a bit positive early in 2022, even the end of 'twenty, one which is why we called out that we thought there was some excess inventory in the system at a time and that continued throughout the year.

You're already seeing it in apparel with the weak holiday season, and as far as you're looking at the GDP outlooks for at least Europe , and North America, there are modest to a slight recession.

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

Thank you Greg Good morning, Thanks for taking my questions I appreciate it.

Mitch just one last one along similar lines to <unk> question, which is if youre anticipating conditions to get more or less back to normal in the second half.

Why they need to activate this recession scenario or if it's just a.

Two quarter blip and what exactly does that entail for you is if the economy gets back to normal in second half will you still need to do that.

That recession activation, if you will.

Yeah.

Yes, well I mean as far as the recession activation Theres a couple of things the structural cost reductions are not a recession.

Activation, if you will at the long part of our long term strategy as you know to focus on productivity. It's a way we free up capital to invest more in the high value categories keep our base businesses competitive and profitably growing.

To drive the way you <unk>.

Our next question comes from George Staphos with B of a securities. Please proceed.

Hi, guys. Good morning, Thanks for the details.

I wanted to touch.

Particularly on intelligent labels just given some some.

That we've gotten over the last couple of days can you talk at all.

Two how much chip shortages.

They have constrained youre growth recognizing that intelligent labels are still growing very very nicely.

What could the incremental volume have looked like had.

Theyre not been shortages what impact did it have on your margins could margins have been pick a range of 100 points 200 basis points whatever better how would you have us think about that and last part of the question and I'll turn it over.

Can you talk at all to how much how important.

Some logistics Rollouts are in terms of your guidance for this year could they be incremental thanks.

Thanks, and I'll turn it over.

Thanks George.

We don't believe that in 2022, our volumes were impacted.

Or impacted by any part of chip shortages, because as the market leader, we secured enough chip supply to ensure that we can deliver to all of our customers expectations.

Really from a margin perspective, we maintained margins there was some degree of chip inflation and we've dealt with that through productivity as we always do.

And as we look forward.

<unk> is certainly going to be a big part of the second half of our growth during 2023, but I will emphasize that apparel will still be the largest part of our business and we will be growing during 2023 as well in Georgia.

Our next question comes from John Mcnulty with.

BMO capital markets. Please proceed.

Yes, thanks for taking my questions.

When you look at the severity of the Destocking, particularly in the <unk> segment.

I mean, we've seen some data out there that kind of shows.

Year over year, 2025% declines I mean, certainly worse than we even saw in the financial crisis I guess can you explain.

Focus on cash generation or what have you I guess can you help us to understand that a little bit.

Yes, John So why.

First part of your question I think it's a little bit of why is it a deeper decline that we've seen in past corrections, which you do have to go all the way back to the financial crisis to see that.

The reasoning is basically because of the supply chain disruptions people wanted to make sure they secured enough of the inventory for their own end demand.

There was much more safety stock in the system one too.

Each region. So that's what drove the increase and then both of those factors basically started to stabilize at the same time and so people no longer needed the excess inventory and they were starting to build it down. So that's the biggest reason for.

Why you are seeing a shift here overall.

Yes.

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

Hi, This is actually Brian Maguire sitting in for Anthony Thanks for taking the question.

With some inflation buckets moving lower throughout for Q.

What are you assuming for price cost in the materials group. This year do you think <unk> would be able to potentially capture a benefit from lower raws or would that be passed along in full to customers and.

Yeah, Thanks, Brian so on the <unk>.

<unk> question I think sequentially from Q3 to Q4.

Overall net price inflation was a relatively immaterial impact we had a little bit of sequential price Q3 to Q4 from some of the actions we've been taking as we move through the back half.

Little bit of a sequential inflation I think I talked about last quarter, we expected a little bit of a sequential impact from paper at.

At the same time, we had some sequential benefit from the films and chemicals a bit of deflation. There. So as you look into 2023.

When we look at overall price inflation.

We have a carryover benefit of price carryover impact of raw material inflation, we also have a bit.

At or above historical levels of wage inflation <unk> got some utility inflation, where we had a little bit of a benefit last year from <unk>.

Prices, we had locked in for part of the last year as well. So when you look across our whole basket of raw materials wage inflation utility inflation, where we expect roughly <unk>.

Mutual impact year over year from that perspective, all of those things included.

And Brian on your IL question, we will be growing more than 20% this year.

Recall that we said we are very confident and this being $1 billion platform in 2023, and we see growth in apparel and we see significant growth in our logistics platform. During this year.

Our next question comes from Mike <unk> with <unk> Securities. Please proceed.

Thanks, Greg.

Greg John appreciate you taking the questions.

First question just I know you mentioned just now in response to last question is about 20% growth in IL, but with respect to the Iot adoption as global economies sloping companies are increasingly laying off employees.

Could that be a headwind as companies look to curtail spend or alternately could it be annoyed because it will be a benefit as we look to increase efficiency productivity and the like and then my second question is just in terms of China with Chinese government strictly given COVID-19 policies obviously.

Lindsay I think April was $10 million headwind could that actually serve as a pretty big tailwind for us.

Normalized in China.

Yeah, Mike.

Your first question. It was the latter we see during times when things are more difficult for brands retailers and customers that they look to improve their automation efficiency and this technology that we have really plays into the heart of it reduces cost labor improved labor efficiency provides visibility throughout the supply chain. So we see that as an accelerant.

And not a barrier to adoption.

Our intelligent label platform as it relates to China clearly we saw in 2022, the impact of the Covid policy playing out in the country.

And what we saw as I said in the fourth quarter was that China was down low single digits is that trajectory started to change we believe that post the COVID-19 change, we see China returning to its normal slightly above GDP growth. Let me start the set and we see that as part of our ongoing second half growth.

But as mentioned Greg have called out as well.

Our next question comes from Jefferies Costless with Jpmorgan Securities. Please proceed.

Thanks very much.

For the nine months Youre intelligent labels were up 20% year to date and Theyre up 15% for the year. So that means in the fourth quarter. They grew zero.

And you're expecting the first quarter to be like the fourth quarter.

So can you talk about.

What happened in growth in intelligent labels in the quarter is it likely to be similar in the first quarter.

And then secondly.

Are your raw materials year over year in the fourth quarter up about 8%.

So Jeffrey from an IR perspective, yes, we grew 15% last year and in the fourth quarter we grew.

Sorry, mid single digits in the fourth quarter, reflecting the impact of Destocking, particularly in apparel.

And as I've said, we anticipate the Destocking to continue in Q1, but as we ramp through the year in that business returns to its historic GDP growth, we see a number of factors come into play that helps us get to and we have conviction around a $1 billion platform. Firstly, the apparel business will be in growth during next year as both the business rebounds.

To that and finally, we continue to see good traction in a number of our food pilots that are also adopting with an increased frequency as well.

Yes, Jeff on the raw material side.

We're up for the year in 2022, a little more than 20% and in Q4 that would be kind of mid to high teens rate versus prior year. So overall.

For the full year over 20%.

And last year in the fourth quarter of 2021, we still had a net headwind between price inflation. Then is adjusted as we look Q4 versus prior year.

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

Yes, thanks for taking my questions just a couple of follow ups I could.

Depth of Destocking that you're seeing in the base labels has it been.

Any change in pricing in terms of competitive dynamics in that market and then on the RFID side, you've talked about Kip availability last year.

Do you have availability or secured your needs for what you expect this happen later this year and our chips inflationary or deflationary a fair cost stack over the next 12 months.

Okay.

Josh Let me address your second question first.

We have secured all the chips that we need for this year and into next as well start for 2023 on into 2024.

And the chip market has been slightly inflationary and we're adjusting as I said based on both productivity and pricing as we move forward.

In terms of Destocking.

Just repeat your question for me Josh.

Question on it's Destocking was having any impact on competitive pricing dynamics within the base label business.

We don't see that at the moment, Josh historically as the market leader, we maintained fairly strong pricing discipline.

We will respond if there if there is pricing changes in the market, but typically we tend to make sure we're disciplined as hoped.

As strong and if you also remember during the inflation repair Josh we tend to use surcharges. The first start in how we manage pricing and <unk>.

Deflation starts to occur and if it does occur those are the things the first start to roll off.

Our next question comes from George Staphos with Bofa Securities. Please proceed.

Hi, Thanks for taking the follow ons.

I'll try to get them all in here and turn it over for the rest of the call. So first of all could you talk at all to what your customers say their inventories grew too relative to normal at.

At the peak of the inventory build were customers in your key categories, saying their inventories were double what they normally would have triple a half mile obviously on a half but.

Somewhere in that range between what would you say there.

Secondly, as we think about logistics and project out.

Your market share in the market growth you've talked about in the past could logistics alone B.

$1 billion plus in revenue.

By 2030, and then last on any comments on how <unk> com is doing and how thats, adding or not relative to your expectations. Thanks and good luck in the quarter.

Thanks, George Yes, so I'll start off so as far as what are customers, saying around inventory levels, yes. The couple.

Couple of things.

One as you know we have many customers, particularly on the materials side. So there's a lot of anecdotes, but we were hearing definitely areas ranges of two to four weeks of excess inventory.

So there was quite a bit of build overall.

And on the apparel side the end customer.

That's what our customers are telling us and what we're all seeing in the headlines I think what we all know on the apparel side. If you look at the actual hard data.

Inventory levels within apparel, it's actually dropped down a bit from where it was pre pandemic.

So a little bit of.

Disconnect between what the data says and what we're hearing anecdotally, but we definitely ourselves know theres excess inventory there.

As far as logistics I think your question is.

With the growth and the opportunity we see how big can logistics be specifically it can be $1 billion by 2030, Dan do you want to take that one as well as the follow up.

George and you can see the scale of what we believe this initial phase of logistics adoption will do for us and our results overall.

Drive to get to a billion dollar business during this year commitment to that.

And as you know as well logistics segment is it highly concentrated my sense and belief is that as the technology continues to resonate with one or two customers I think it will become a de facto mechanism for operating as a logistics provider around the world and if that should happen then I believe that there should be a billion dollar plus business by 2023.

As it relates to divest 23 2000 32013.

As it relates to divest from George the business continues to perform very well the team have added enormously to our capability.

Providing greater access to the grocery.

And.

When retail market and in addition is also fairly consistent stable business.

And ensure that portfolio of our solutions businesses becomes more robust through cycles as well the position recent performance and outlook are ahead of our acquisition case.

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

Thank you all.

Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line. Thank you.

Q4 2022 Avery Dennison Corp Earnings Call

Request a DemoDemo

AVY

Avery Dennison

Earnings