Q2 2023 Avery Dennison Corp Earnings Call
Ladies and gentlemen, thank you first time you buy.
During the presentation, all participants will be in a listen only mode. Afterwards, we'll conduct a question and answer session at that time you have a question. Please press star one by the four on your telephone.
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And welcome to Avery Dennison earnings Conference call for the second quarter ended on July 1st 2023.
This call is being recorded and will be available for replay from five P. M. Eastern time today through midnight Eastern time July 28.
To access the replay please dial 806, 338284 or 402 90 779140 for international callers The conference I'd number is 22020692.
Now I would like to check off over now to John I believe Avery Dennison, Vice President of Finance and Investor Relations. Please go ahead Sir.
Thank you Tommy.
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 89 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, Dr Standard, President and Chief operating 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 delivered $1 92 of EPS in the second quarter up sequentially from previous quarters, a trend we expect to continue in coming periods.
Volumes in our base business continued to recover from slow market conditions, largely destocking, while our intelligent labels platform accelerates adoption in new categories.
While it's good to see the continuing sequential improvements in our materials businesses and the building momentum in intelligent labels the pace of our recovery is slower than anticipated.
Our results for the quarter were below our expectation due to lower revenue, particularly in June .
Something the team was able to largely offset through cost reduction actions.
Clearly, our Intel and April understated the magnitude of the market challenges, particularly inventory builds.
That can be.
And with the fact that the drop off in volume was steeper in Q4 and Q1.
We assume the duration of the lower volume periods would be shorter.
We got that part wrong.
What we have been clear on and remain confident in is that this period of challenging results will soon pass.
While the pace of sequential volume improvement that we assumed mid year June and July specifically did not accelerate as anticipated volumes continue to recover.
Our underlying business is bouncing back as it always does.
This combined with the continued execution of our strategies to drive outsized growth in higher value categories, particularly intelligent labels.
Physicians as well to continue to deliver GDP plus growth and top quartile returns over the long run.
Yeah.
Now as you all know I've decided to step down as CEO at the end of August and I'm handing over the reins to Dion, while I'll continue as chairman of the board.
Yes, it's been a privilege to lead Avery dennison over much of the past decade, and I am proud of what the team has accomplished during my tenure.
We've accelerated our growth.
Improved margins achieved world class employee engagement scores and significantly advanced our sustainability objectives.
And I could not be more confident than I am now in our position and prospects.
I've been planning and preparing for this transition for years and as I've shared with a number of you. There are a few reasons behind my decision to step down as CEO .
One of the most important is that I've found a leader and Dion that I'm confident will lead us to success in the next phase of our journey as a company.
John it's been a close partner of mine over the years.
Over his 20 year career with the company. He demonstrated strong leadership and has a proven track record, including successfully transforming the solutions group and helping lead the acceleration of our intelligent labels platform.
I am extremely pleased that he will be our next CEO and I look forward to our future success under his leadership.
Now before handing the call over to Dr. Gregg, Let me conclude by thanking our team.
This is a team sport and I. Thank the entire organization for their dedication focus and excellence and delivering our continued and collective success.
I look forward to continuing to serve our stakeholders and supporting Dion and the leadership team to achieve new heights in my role as executive Chairman.
What are you doing.
Thanks, Mitch I'm extremely honored to become the company's next CEO and I am looking forward to partnering with you and Youll continuing role as chairman.
As CEO my focus will remain the same to ensure the long term success of the company by delivering exceptional value for all of our stakeholders.
As Mitch noted in the second quarter, we again delivered sequential improvement with adjusted EPS up 13% as volumes in our label businesses ramped new programs intelligent label's continued to accelerate and additional productivity initiatives were implemented.
That said earnings were modestly below our expectations as inventory destocking in both label and apparel channels is taking longer than anticipated and slower market conditions.
In this environment, we've activated additional measures to minimize the impact on our bottom line.
We've accelerated a temporary cost reduction actions ramped up our restructuring initiatives and pared back capital investments in our base businesses, while protecting investments in our high growth platforms, particularly intelligent labels.
Now I'll quick update on the quarter by business.
<unk> group delivered strong margins, despite low volume the volume decline versus prior year is magnified by the level of inventory that was built last year compared with the inventory reductions taking place this year.
Sequentially volumes improved as inventory Destocking began to moderate in the quarter.
The pace of improvement in North America, and Europe can be seen on slide six we expect volume will continue to improve at a similar pace in Q3 and indications are that inventory Destocking is now nearly complete in Europe with North America, roughly a quarter behind.
Looking at emerging markets, South Asia, particularly India continues to grow while in East Asia, particularly China demand remains muted.
Materials margin with strong expanding sequentially to nearly 16% in the quarter as volumes improved and structural and temporary cost saving actions were implemented.
Solution group sales were down mid single digits in the quarter as apparel volumes continued to be soft across channels.
Apparel imports are down significantly not only compared to prior year, but versus 2019, as well, which can be seen on slide six as retailers and brands targeted inventory reductions in fact, a muted consumer sentiment into the near term sourcing plans.
Enterprise wide intelligent labels in non apparel categories, including logistics food and other category expansions continues to ramp significantly which can be seen on slide seven and we're up roughly 50% in the quarter. This growth was offset by a decline in apparel driven by destocking in existing programs.
<unk>.
We expect non apparel growth to further accelerate throughout the second half of the year.
Enabling us to achieve roughly 20% growth for the platform overall in 2023, despite softer apparel volumes.
As adoption in categories like logistics, food and general retail accelerate and apparel rebounds, we expect the intelligent labels platform to be at a billion dollar run rate in the coming quarters.
And to deliver 20% plus growth in the coming years as we further advance our leadership position at the intersection of the physical and digital.
As you all know.
One of our key strategies is to drive outsized growth in high value categories, and we continue to shift our portfolio towards these categories, both organically and through M&A in.
In solutions, we expect to benefit from our higher growth contribution in these categories as we move throughout the year not only in intelligent labels, but external embellishments as well.
In May we closed the acquisition of line brothers, a leading provider of external embellishments with roughly $65 million in annual revenue expanding our position in this key growth platform.
Solutions group margins were flat sequentially.
We expect adjusted EBITDA margin will improve sequentially through 2023, as volume increases and additional productivity and cost reduction actions are implemented.
Turning to the rest of the year.
As volume and labels materials, and intelligent labels ramps up and additional structural cost saving actions are implemented we expect roughly 20% a sequential improvement in the third quarter. We expect further sequential improvement in the fourth quarter.
And we now expect to achieve a $10 plus adjusted EPS run rate a couple of quarters later than previously anticipated.
Stepping back the underlying fundamentals of our business are strong we're exposed to diverse and growing markets. We are industry leaders in our primary businesses with clear competitive advantages in scale and innovation.
And we have a clear set of strategies that have been the keys to our success over the long term across a wide range of business cycles.
We remain confident that the strategies, we have formulated will continue to able us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term.
I want to thank our entire team for continuing to raise their game to address the unique challenges at hand, and deliver value for all of our stakeholders and with that I'll hand, the call over to Greg.
Thanks, Dion and Hello, everybody.
In the second quarter, we delivered adjusted earnings per share of $1 92.
Up 22 sequentially, driven by benefits from productivity and temporary cost saving actions and higher volume.
Sales were down compared to prior year, roughly 10%, both ex currency and on an organic basis, driven by a low teens volume decline, partially offset by higher prices.
Adjusted EBITDA margin was 14, 7% in the quarter.
110 basis points compared to Q1.
With adjusted EBITDA dollars up 10% sequentially.
We generated $135 million of adjusted free cash flow in the second quarter, which was roughly in line with our expectations.
As you May recall I noted last quarter that we had higher inventories in certain areas across the company partially related to strategic inventory builds in areas such as RFID chips in.
And also in components, and which we experienced supply disruptions over the last couple of years.
For the latter we are focused on driving improvements across the businesses and we made good progress in the second quarter and expect to make further progress as the year unfolds.
Our balance sheet remained strong we continued to execute our disciplined capital allocation strategy.
Including strategic acquisitions, such as Lion brothers, which closed in the second quarter and continuing to return cash to shareholders.
And the first six months of the year, we returned $216 million to shareholders.
Through a combination of share repurchases and dividends.
As well as deployed $194 million for M&A.
Turning to the segment results materials group sales were down 12% ex currency and on an organic basis.
By a mid to high teens volume decline.
As inventory was being built downstream from us last year and has been reduced this year.
On a sequential basis volumes increased in the second quarter with label materials volume up overall low to mid single digits sequentially.
As Dion highlighted on slide six you can see that label volume and combined North America, and Europe ramped as we move through the second quarter and into July .
We assume that pace to continue for the remaining of the third quarter.
Looking at label materials organic volume trends versus prior year in the quarter, North America, and Europe were down roughly 25% to 30%.
China was up significantly as we lapped the Shanghai area Lockdowns from last year.
And it was up low single digits sequentially.
Latin America was up modestly and up mid single digits sequentially.
Also compared to prior year graphics, and reflective sales were up organically high single digits.
Materials group delivered a strong adjusted EBITDA margin of 15, 7% in Q2.
150 basis points from Q1, and down one point compared to prior year.
Is it the benefits from productivity and temporary cost saving actions were more than offset by lower volume.
We expect adjusted EBITDA margin to continue improving sequentially.
Regarding raw material costs, we have moved into a modest deflationary environment.
Following a period of significant inflation. These lower costs are largely being passed along in price reductions to our customers.
Shifting now to solutions group sales were down 4% ex currency and 7% on an organic basis.
Is low single digit growth in high value categories was more than offset by a high teens decline in the base business as retailer and brand sentiment remains muted.
GAAP operating margin was down in the quarter largely due to an increased liability related to the recently disclosed jury verdict in the ADESA legal matter.
The company continues to dispute this and is preparing to appeal.
We have also largely completed any migration to alternative and coating methods for RFID tags.
Adjusted EBITDA margin of 15, 8% was down 320 basis points compared to prior year.
Driven by lower volume with continued strategic investments in intelligent labels.
And partially offset by productivity productivity and temporary cost actions.
We expect adjusted EBITDA margin to improve sequentially through the remainder of the year.
Now shifting to our guidance.
In the third quarter, we expect adjusted earnings per share to be in the range of $2 to $2 20.
Up roughly 20 sequentially at the midpoint similar to the level of improvement we delivered in Q2.
In the third quarter, we expect label volume to continue to ramp at a similar pace as Q2.
As inventory Destocking further moderates.
Intelligent label volumes and new categories will continue to accelerate and further structural cost reduction actions are being implemented as we continue to focus on driving productivity across our businesses.
Looking forward, we expect adjusted earnings per share will further increase sequentially in the fourth quarter.
And as Dan mentioned, we continue to anticipate achieving a $10 plus adjusted EPS run rate, albeit a couple of quarters later than previously anticipated.
We previously assumed that Destocking period would end with a more accelerated ramp like we've seen in these cycles in the past.
In light of the broader macro uncertainty, we're currently seeing a more measured ramp.
The anticipated sequential improvement across the next couple of quarters and towards that $10 run rate driven.
Driven by the normalization of inventory Destocking and label materials.
The continued ramp in non apparel intelligent labels volume.
The impact of ongoing productivity actions, particularly structural cost reductions.
And the normalization of apparel volumes.
We've outlined additional full year considerations on slide 13 of our supplemental presentation materials.
We now estimate that incremental pre tax savings from restructuring net of transition cost for <unk>.
Contribute roughly $65 million.
$15 million from our April estimate.
And we anticipate investing roughly $325 million on fixed capital and it projects.
Down roughly $25 million from our previous outlook.
As we pared back capital investments in our base business.
And the anticipated impact from currency translation has increased slightly and now reflects a roughly $15 million headwind for the full year based on current rates.
In summary, we're continuing to improve our results as we move through the year and despite near term challenges, we remain confident our ability to continue delivering exceptional value through our strategies for long term profitable growth and disciplined capital allocation.
And we're committed to delivering on our long term financial targets through 2025.
And now we will open up the call for your questions.
Thank you very much.
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One moment, please our first question.
And we'll get to our first question on the line from John Mcnulty with BMO capital markets go right ahead.
Yes, thanks very much for taking my.
And Mitch let me be the first split probably one of many to congratulate you on on moving from the CEO role.
And Dion, let me congratulate you for getting the CEO role so.
Thank you. Thanks again, you jumped to both of you for for all the years of <unk> sure.
So I guess, maybe just.
A question, maybe there's two parts to it though if youll forgive me. So it seems like you had raw materials that should've been down quarter over quarter kind of low to mid single digits or so.
Is that what you saw and is that what we should be thinking just given kind of what's going on in terms of deflation.
Broad is that something that we should be thinking about <unk> and then I guess tied into that I know you normally.
You Chase I guess to some degree inflation on the way up and then when deflation comes you give it back but with a lag it doesn't seem like there was all that much of a lag. This time around so I guess is that is that right and is there any reason to think that thats.
But something has changed in terms of how you give give pricing back.
Yes, Thanks, John for the question overall to your point, our raw materials. When we look from the first quarter. The second quarter of course, it differs a little bit by region and commodity but generally to your point, we had about somewhere in the low to low to mid single digit deflation sequentially from Q1 to Q2.
And Thats basically what we would expect as we look forward into the third quarter as well.
To your point as I mentioned earlier in my prepared remarks, we have.
Continue to be disciplined in our pricing as you know over the last couple of years, we've implemented pretty significant amount of pricing actions given all the inflation that we've taken over that time.
So given the deflationary or slightly deflationary trend we've seen here, we have given back a little more price to go with that deflation as we've gotten into the second quarter.
Yes, John what I'd, just add to that typically win when we've seen such a steep rise in pricing, we expect that pricing to unwind over the time period as deflation continues to.
To ramp as well.
And I think the one thing I would stress as we continue to make strong pricing discipline in the industry as the industry leader to protect the health of the industry in the long term.
And we will respond as appropriately making sure that first we address some of the surcharges that are out there and secondly, then making sure we're continuing to manage our overall margins as well, but I'd also remind everybody that during these times would be really leaning into productivity and those are typically things that we hold onto in the longer term the productivity gains we make as well.
Thank you very much.
Proceed with our next question on the line is from the line of Ghansham Panjabi from Baird. Please go right ahead.
Yeah, Hey, guys.
Just wanted to Echo my congratulations to you Mitch and Don in your new roles, our best wishes for the future and thanks for all the help over the years also.
Thanks, Ghansham. Thanks Ghansham. Thanks, so much. Thank you Dan I guess just on your comments that you anticipate the $10 plus EPS run rate will be delayed a couple of quarters.
<unk> guiding for 2024 EPS to be North of 10, and then related to that you have easier comparisons for Q onwards, with Destocking also sort of behind you, but now we're at a point where consumer spending globally is also weaker how are you thinking about that headwind.
But for the back half of this year and also 2024.
Yes ghansham.
This is Greg again, so I think overall as you said, we're looking at that last quarter, we had talked about expecting the back half to be at the $10 $10 plus run rate pushing a couple of quarters essentially means that moves more into the first half of next year. So overall, yes that would mean next year, we're looking at more than a $10 EPS run rate for the year. When we look forward from where we.
We are here in the second quarter to getting to that $10 run rate I would say theres four primary drivers of that trajectory.
Change one is really about less destocking in the labels business. So even though the there are some signs of consumer demand in packaging categories is a little bit lower we still saw a fair amount of destocking in Q2, and more normalization of that Destocking will give us an increase even if the markets are a little bit slower we.
So continue to see the non apparel intelligent labels growth as Dion talked about and you could see in the chart. We included in our slides.
And we're continuing to do productivity actions, we raised our productivity of our restructuring expectations for the year by about $15 million from where we were a quarter ago. So I would expect we're ending the year with about 15 more restructuring benefit than where we were in the second quarter as well.
And then again.
Don and I talked a little bit about the base apparel business being softer and you can see that in some of the charts on our slides as well so as that normalizes a little bit we would expect some benefits. There also so those are really the four big drivers IC and getting us towards that $10 run rate.
Over the next.
Not too distant period, and Ghansham, maybe let me just add a little context around where we see the markets at the moment I think as you recall in times when we've seen significant volume declines for example in a recessionary period, they tended to be steep but they tended to be a relatively steep recovery as well and thats. What we had been anticipating as we came through the second quarter and we didn't see that in June and.
I think that's largely down to the pace of inventory destocking moderating but.
But as well we've seen more uncertainty in the markets in the near term I think there are a number of indicators the macro level that R. R.
Country to each other and I think thats driving further uncertainty.
In our labels business, specifically, we're going to continue to see that measured recovery you see on slide six and and for apparel I think there is more and more muted sentiment now than there has been for a while and a lot of how apparel goes over the next couple of quarters is going to relate to the results from back to school and then the implications for holiday as we move forward.
As such we're going to be continuing to focus on service execution for our customers addressing our cost as Greg has said and making sure that we're continuing to drive on our share gains as we move forward into the market as well.
Thank you very much we'll get to our next question on the line is from Anthony Pettinari from Citigroup. Please go right ahead.
Good afternoon.
Congratulations to Mitch and beyond and the new rules.
Thank you.
Following up on <unk>.
Just following up on <unk> question.
Can you discuss kind of the decision to pull the full year guide you guided to <unk>.
And you discussed reaching $10 plus in 2024.
Yeah.
Wondering about sort of the decision to give us a number for 'twenty three versus not giving a number and I think you said that you expected <unk> to be above three Q. Just wondering if you can talk about sort of the sources of potential uncertainty around <unk> or just that decision.
Anthony Let me address that first and then Greg can follow up as needed as well I think I made the point that we typically have exceed a steeper decline in the more steeper recovery in periods. When we when theres been recessionary environment. This motor recession environment now, but to some of the analogy that we would use as we move forward, we would anticipate that there'd been a sharp recovery, particularly in June .
In July .
And we've not necessarily seen that we've seen volume sequentially improved that combined with the more near term market uncertainty and outlook given some of the country indicators, we're seeing over there.
Has.
Let us to focus where we are in Q3 and continuing to see the projection of our volume recovery in the labels business and assuming at the moment that our apparel business will not recover during Q3 at this stage and then when we factor on top of that our accelerated Io non non apparel adoption rollout we feel good about where we are as we look towards.
At 2020.
Earnings growth in the third quarter.
Thank you very much.
Proceed with our next question on the line from Josh Spector with UBS go right ahead.
Yes, Thanks for taking my question and just Echo my congrats to the niche and beyond.
Thank you so just on the RFID non apparel categories, obviously, you're still forecasting quite strong growth. There has anything changed in terms of timing and rollout and then kind of related with that that chart. You show on slide seven is pretty helpful. About the rates through the year looking at fourth quarter and that exit rate is that the right.
Way to think about kind of the stack when we get into 2024 as well thanks.
Just thanks for the question.
Nothing has changed in terms of the timing of the current rollout of non apparel. The biggest change has been on apparel softness, but let me go back to the non apparel piece those programs are in flight existing rollouts that we've seen in logistics and food and they are tracking to plan team continues to excellent sort of execute excellently in that regard and making sure we deliver.
On those promises.
As you look at the Q4 run rate.
Could that will indicate a degree of the exit run rate into next year, but also remember in logistics it's <unk>.
Principal season, when most packages and volume is shipped as well. So we tend to see a slightly entry low entry point into into Q3 that said that continues to be new and other programs in logistics and food that will increase adoption as we go through 'twenty four as well and in addition, as apparel volume recovers we also.
To see new apparel Rollouts that we already have secured and will start to launch during the second half of this year.
Thank you very much.
Our next question on the line from the line of Mike Rosslyn, which was securities current ahead.
Thank you Mitch.
Greg John Appreciate you, taking my questions and I'll, just echo everybody's comments mixing beyond congrats on your new roles.
Thank you.
Just one quick question just I'm interested in talking about the cadence of Destocking in the materials and QQ, especially since you've repeatedly called out June so what happened in June relative to April and May was there a deceleration in June if suddenly when end markets. Obviously panel is one that you called out repeatedly.
Markets that were impacted and can you comment on what you've seen thus far in July . Thank you.
Yes, Mike.
The difference in June that we saw we'd anticipated a steeper ramp as I think both myself and Richard said previously and volumes did continue to ramp but not at the pace that we'd expected. If you look at slide six which you can see is the combination of April may and June continues to ramp and in July we're seeing a similar consistent.
In our in our on our revenue through through July month to date.
Yes, I think Mike part of it part of it is really about as Dion said a couple times here, it's really about.
Historically, we've seen more of a.
Sharper recovery in cycles like this and this is part of it goes back to the question on Q4 guidance as well.
What we have seen throughout the quarter as a pretty steady ramp up across the quarter and continuing into July and that's what we show on the chart on slide six that you can see there and that's how we built our outlook into Q3 from the challenge here has been really calling the pace of the recovery at which is why we are confident that we'll get to the $10 and that question is the timing of that and how does that pace.
And do we see it ramp up.
Steeper ramp up near the end of the Destocking period or does it stay in a more steady flow. So that's how we've been thinking about things and what we've been seeing is a more steady increase over the last few months.
Thank you very much we'll get to our next question on the line from Jeff Zekauskas with Jpmorgan Securities go right ahead.
Thanks very much.
On slide seven the way I understand it is that intelligent labels in the quarter were about flat.
And in the first quarter I think they were up a little bit.
So in order to grow 20%. This year do you have to grow 40% in the second half roughly.
And secondly.
Thank you.
<unk> <unk>.
<unk> and their workers or maybe they have a tentative agreement, but if it turns out that there is a.
And extended UBS strike.
Does that put your projections.
Great.
So Jeff.
Our performance year to date, if you look across the two quarters is roughly flat for for apparel and that's largely been driven by the apparel softness that is.
Be more pronounced than we'd anticipated.
As I said, our IL non apparel ramp up is on track and on pace with what we'd anticipated and is continuing to ramp through the second half of the year. So that does imply yes at greater than 40% growth rate as we go through the second half of the year and we feel good about that as it relates to <unk>, specifically, we don't comment on specific customers, but logistics is a big part of our ramp as we move.
Forward through this and as we always do for every significant program rollout that we do Jeff we do a lot of scenario planning to make sure that we're ready for all eventualities. We've done that in this case, if there was to be any striking the logistics sector of any period than we would anticipate some impact, but we have made sure all.
Our efforts are focused on continuing for service excellence to continue to validate the strength of the business case that in this instance, the logistics industry is really.
Field feel strongly about.
Thank you very much.
Thank you for that we'll proceed with our next question on the line is from George Staphos with Bank of America preferred ahead.
Thanks, very much hi, everybody good morning.
Ill Echo what everybody has said mentioned Dan Congratulations Mitch in particular, congratulations on all the.
A positive and a value creation you brought to Avery over your tenure.
With that being said.
On the matter at hand.
Given the uncertainty that you're seeing right things are steadily getting better but.
You're uncertain enough such that it's difficult for you to project for the full year, hence the lifting of the guide for the year as Anthony was pointing out.
What you gave us several points as to why you feel you get to $10 of earnings power, but what exit rate on volume do we need to be seeing.
What other specific quantification would you give us in terms of margin productivity and so on such that you feel you are at that let's call. It $2 50 of earnings by the first quarter, So again, particularly.
What kind of volume run rate do we need to see.
Into the first half.
The first quarter of 2004 for you to feel comfortable about that guidance to $10 of earnings power for the first half of 'twenty four.
Yes. Thanks for the question George overall, when we look at even where we were in Q2 with the amount of Destocking. We have we had in the second quarter and we would estimate that probably more than a couple of weeks in North America and Europe .
And if we were to normalize for that amount of Destocking and also normalized for apparel are based apparel business was down I think more than 20% in the quarter.
And you can see the chart on apparel and parts as well as both of those would normalize we would be closer to $2 50 run rates already at this point from the normalization of those tanks. So that's how we would think about it as we get through the Destocking.
Even in the lower volume somewhat lower volume environment that we're in a demand environment I should say, so we get to the Destocking and see.
Here's some normalization of the apparel demand and starting to normalize the apparel demand. That's how we feel like we can get back to that $10.
Thank you very much.
We'll get to our next question on the line is from Christopher <unk> with loop capital markets go right ahead.
Yes, hi, so I had a sort of a bigger picture question about the broader RFID adoption lots about the cadence of growth over the next couple of quarters.
I guess it was early 'twenty. One you guys did a pretty comprehensive update and talk about the commercial momentum we had in IL and different categories beyond apparel that you were targeting and the base business.
A business case, the adoption case for those for those target markets and so I'm. Just wondering is if you as you.
Continue to get momentum and traction beyond item of apparel I'm just curious if the use case that you anticipated back then.
Still intact.
It's.
Evolving at all are there any.
New sort of adoption cases.
Eric E R.
Emerging like predicted predictive analytics anything like that I'm, just wondering if yes.
Everything is sort of evolving and developing.
As you kind of expected strategically.
A couple of few years ago.
Yeah, Chris Thank you.
In apparel, what we saw the industry really drive adoption around was effectively inventory productivity and visibility in that case actually holds true for many industries and verticals as we look further along Chris.
If you remember, we said that apparel addressable market was about 40 billion units logistics is about $60 65 in food was north of 200 billion.
A significant order of magnitude if we were able to prove the value of the solutions that we provide and we have not come to sort of realize that those are really sort of in full really categories. One is helping reduce waste, whether that's food waste the promise of reducing food waste the promise of waste in the supply chain.
Re emphasizing the how labor efficiency and supply chain effectiveness becomes more pronounced when you use technology like RFID third one is really an emerging piece, which is around being able to provide the sustainability circularity and transparency of items and the mechanism of measuring that and the final. One is we're starting to see also.
A better way for brands to directly connect with their consumers and so when we look into each one of these verticals and particularly the ones that are in flight now logistics and food. We see use cases that are reinforcing the need to address those problems in food really trying to understand how you shine a light on province provenance down the supply chain.
And then use that to drive food freshness in stool and less waste.
<unk> could be 30% to 50% of everything produced in United States gets wasted typically we produced a report that showed that I think last year.
In logistics using the technology to really understand how do you avoid missed shipments and MS. Sorts is one example, but then also traceability as well and that is to come and we're engaged with a number of alternative place the ones. We already have both in food and logistics proving out some of these.
Proving out the economics of those business cases, and what we've come to realize that.
As in apparel.
The typical use cases apply across all the industry players when thats once been established since the reason why because we've been leaning so far forward and not just dealing with customer problems, but trying to activate markets because in that activation in markets. We can see the benefits spreading across all of them.
Thank you very much.
We'll get to our next question on the liaison a follow up question from the line of John Mcnulty with BMO capital markets go right ahead.
Yes, good morning, maybe.
Maybe I can kind of sneak two in here since we've brown drifted once already so.
I guess the first one would just be in the solutions business going from <unk> to <unk> you saw revenues up.
And presumably the mix got better because it looks like intelligent labels was at least flat if not if not up.
Just a little bit so why wasn't there or any improvement in in the Oi.
And then I guess, the second thing that I, just wanted to flush out a little bit.
I think youre always busy with new projects, new pilots in the RFID or intelligent labels area.
But obviously there are some chunky ones like we've seen the big home goods form that you've had with the customer we've seen a new big logistics, one I guess as you look out over the next 12 months or so are there other large scale projects.
Maybe you haven't been announced yet but that you see in the pipe that could make it to the finish line in the next 12 months that we should be at least considering thanks.
Thanks, John So on your first question looking at installations from Q1 to Q2.
As you said, we saw the sequential improvement in the non apparel portions of IL.
The base apparel business is where we saw a pretty significant decline and we actually had within that even an unfavorable mix. So from Q1 to Q2, despite that portion of intelligent labels. The rest of this segment had an unfavorable mix sequentially and thats really what.
While we had a benefit from the volume growth sequentially Q1 to Q2 and some of the productivity actions, we had unfavorable mix sequentially as well.
And John just to a question on any large scale programs that we look forward.
The short answer is yes, there are a number that are in flight at the moment.
I was actually just with an executive of a.
Fast casual chain and during this last week.
Rediscovering some of the extended applications that we're going to work with them on both transparency and freshness as well and we see similar things in grocery around freshness.
In addition in logistics, we're engaged with a number of other industry players as well and so in time those will become more pronounced and we will start the rollout and adoption of those I'll also say as I reiterated I think earlier on in apparel. We've recently just awesome closed at four new apparel accounts and they will be start.
Going to rollout from from the third and fourth quarter into next year.
Yeah.
Thank you very much.
Next question on the line.
A follow up from the line of George Staphos with Bank of America go right ahead.
Thank you hi, guys.
Two quick east to wrap up for me so.
When we talk about Destocking and apparel some of the discussion in the past has been.
Your customers ultimately will markdown to move inventory and so destocking is not an issue and that was the expectation in terms of why destocking should have been done by now.
Year after.
Those retail headlines started coming out so where is this inventory that needs to continue to be destock. What have your customers told you in terms of why they are still in this position.
Recognizing it is what it is and then secondly.
Back to organic volume when should we expect positive volumes for Avery across its key segments and product lines.
Recognizing IL is going to be growing but in total is that a fourth quarter phenomenon or is that a first quarter phenomenon. Thank you.
George Let me address the first question yes.
The news that I think I mentioned this last time the news that a number of retailers and brands have started to make progress on their inventory reductions is true, but it's not uniform George.
Across some of across the whole apparel industry, there's variation in both brands and retailers and their ability to get it.
We continue to see variation, where some in some retailers and brands have high inventory levels, maybe historically carried.
And then with a more muted sentiment to their factoring in.
Not seeing necessarily that inventory come out at the rate that we would have hoped and I suspect that they would have hoped as well.
Yes.
Yes, and then George on your second question from organic volume growth perspective, we would expect.
Anticipated lease as we're into the fourth quarter to see volume growth versus Q4 of last year as.
As we start to obviously comps some of that Destocking, but we would see that continue to improve as we moved into the beginning of 2024 as well.
Thank you very much Mr.
Mr. <unk> there are no further questions at this time.
Turn the call back to you for any closing remarks.
Alright, well. Thank you everybody for joining the call today are clearly, having a challenging period right now, but we remain extremely confident in our position and prospects and our ability to continue to deliver GDP plus growth and top quartile returns over the long run. Thank you all very much.
Thank you and thank you everyone.
And ladies and gentlemen that does conclude the conference call for today. We thank you for your participation aspira disconnect. Your lines have a good day everyone.
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