Q3 2023 Avery Dennison Corp Earnings Call

October 25, 2023

If you have a question. Please press the one followed by the four on your telephone.

Run.

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.

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

Welcome to <unk> earnings Conference call for the third quarter ended on September 30th 2023.

It has been a privilege to lead every denison over much of the past decade, and I am proud of what the team has accomplished during my tenure.

This call is being recorded and will be available for replay from five P. M. Eastern time today through midnight Eastern time October 31 <unk>.

We've accelerated our growth improved.

Margins achieved world class employee engagement scores and significantly advanced our sustainability objectives.

Access the replay please dial 806 338 to eight four or plus one.

And I could not be more confident than I am now in our position and prospects.

<unk> hundred two 970 790 140 for international callers.

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.

The conference I'd number is 220 to zero 693.

One of the most important is that I've found a leader and Dion that Im confident will lead us to success in the next phase of our journey as a company.

I would now like to turn the conference over to John heavily.

Dennison, Vice President of Finance and Investor Relations. Please go ahead Sir.

Okay.

Dion has 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.

Thank you Carlos 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 a nine of the financial statements accompanying today's earnings release.

I am extremely pleased that he will be our next CEO and I look forward to our future success under his leadership.

We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results.

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.

These forward looking statements are made subject to the safe Harbor statement included in today's earnings release.

I look forward to continuing to serve our stakeholders and supporting <unk> and the leadership team to achieve new heights in my role as executive Chairman.

On the call today are Dr Standard, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer.

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.

I'll now turn the call over to Dion.

Thanks, John and Hello, everyone.

In the third quarter, we delivered earnings in line with our expectations grew volume and margins in both segments sequentially generating strong free cash flow and delivered significant intelligent labels growth in new categories, such as logistics and food.

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 business ramped new programs intelligent label's continued to accelerate and additional productivity initiatives were implemented.

While earnings were in line with our expectations for the quarter.

<unk> was lower than anticipated on broader macro uncertainty and slow consumption, which the team was able to offset through productivity and cost reduction actions.

That said earnings were modestly below our expectations as inventory destocking in both label and apparel channels is taking longer than anticipated in slower market conditions.

As I mentioned last quarter, we have activated countermeasures to minimize the impact on our bottom line.

We have implemented 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.

In this environment, we've activated additional measures to minimize the impact on our bottom line we.

We've accelerated a temporary cost reduction actions ramped up our restructuring initiatives and peered back capital investments in our base businesses, while protecting investments in our high growth platforms, particularly intelligent labels.

Now a quick update on the quarter by business.

The materials group delivered strong margins and volume improved sequentially as inventory Destocking continues to moderate.

Now I'll quick update on the quarter by business.

<unk> group delivered strong margins, despite lower 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.

Volume was down compared to prior year as customers were still building inventory in the third quarter last year and have been reducing it this year.

As you can see on slide six volume in North America, and Europe continued to improve at a steady pace in the third quarter.

Sequentially volumes improved as inventory Destocking began to moderate in the quarter.

Latest indications suggest that our customers inventory destocking is largely complete in Europe and will be largely complete in North America by year end.

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.

Demand in these regions has been softer than anticipated on broader macro uncertainty and slow consumption, particularly in Europe.

Looking at emerging markets, South Asia, particularly India continues to grow while in East Asia, particularly China demand remains muted.

As Destocking continues to moderate we expect volume will again improved sequentially in the fourth quarter of <unk>.

And we have seen through the first three weeks of October.

Materials margin with strong expanding sequentially to nearly 16% in the quarter as volumes improved and structural and temporary cost saving actions were implemented.

Overall emerging market label demand was solid in the quarter up high single digit sequentially with particular strength in Asia.

Materials margin was strong expanding year on year and sequentially 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.

Solutions group sales were up mid single digits in the quarter sequentially volume in apparel solutions and intelligent labels improved <unk>.

Adjusted EBITDA margin improved 60 basis points, we expect to drive further margin improvement in the fourth quarter as volume increases.

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.

Apparel imports continue to be down compared to prior year in 2019, which can be seen on slide six.

Following a mixed back to school season retailers and brands continued to affect a muted sentiment into their near term sourcing plans.

And we're up roughly 50% in the quarter. This growth was offset by a decline in apparel driven by destocking in existing programs.

Intelligent labels in non apparel categories, particularly logistics and food continues to ramp significantly and were up roughly 75% in the quarter.

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.

Our execution of these key rollouts in new categories is delivering significant value for our customers and compelling proof points for broader segment adoption.

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.

This growth was partially offset by a decline in apparel, resulting in roughly 10% growth for overall intelligent labels in the quarter.

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.

We expect non apparel intelligent labels growth to further accelerate in the fourth quarter.

As you all know.

Along with sequential improvements in apparel, enabling us to achieve low to mid teens growth for the platform overall in 2023 lower than previously anticipated due to the continued soft apparel market.

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.

As adoption in categories like logistics, food and general retail accelerate and apparel rebounds, we continue to expect the intelligent labels platform to deliver 20% plus growth in the coming years as we further advance our leadership position at the intersection of the physical and digital.

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.

Our ability to help address challenges such as labor efficiency and waste in very large volume categories like logistics and food is increasingly resonating with customers and we continue to invest to capture the significant opportunity ahead of us.

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.

Intelligent labels is a great example of one of our key strategies to drive outsized growth in high value categories. We continue to shift our portfolio towards these categories, both organically and through M&A and we expect to benefit from higher growth contributions from these categories over the long term.

And we now expect to achieve a $10 plus adjusted EPS run rate a couple of quarters later than previously anticipated.

Another example of this is our external embellishments platform.

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.

Early this month, we announced an agreement to acquire silver Crystal group.

An established player in sports apparel customization and application.

With roughly $30 million in annual revenue as we continue to expand our position in this key growth platform.

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.

Turning to the fourth quarter at a total company level.

We remain confident that the strategies, we've 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.

As volumes continue to improve we expect further sequential earnings improvement in.

In both of our primary businesses in past inventory Destocking cycles, we've seen the pace of volume improvement accelerate as the industry nears the end of the cycle.

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.

In light of the broader macro uncertainty and softer consumption. We continue to anticipate a more measured recovery as we indicated last quarter.

Thanks, Dion and Hello, everybody.

In the second quarter, we delivered adjusted earnings per share of $1 92.

We remain confident that as volumes normalize and non apparel intelligent labels adoption expense, we will steadily increase earnings to achieve a $10 plus EPS run rate.

Up 22 sequentially, driven by benefits from productivity and temporary cost saving actions and higher volume.

We anticipate achieving this at some point in 2024, but the timing of this is understood.

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.

Up 110 basis points compared to Q1.

We have clear set of strategies that have been the keys to our success over the long term across a wide range of business cycles, and we are uniquely positioned to connect the physical and the digital to help address some of the most complex problems in the industries we serve.

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.

We remain confident that the strategies, we formulated will continue to enable us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term.

And also in components, and which we experienced supply disruptions over the last couple of years.

I want to thank our entire team for their continued resilience and commitment to addressing the unique challenges at hand, and with that I'll hand, the call over to Greg.

For the latter we are focused on driving improvements across the businesses.

A good progress in the second quarter and expect to make further progress as the year unfolds.

Thanks, Neil and Hello, everybody.

In the third quarter, we delivered adjusted earnings per share of $2 10.

Our balance sheet remained strong we continued to execute our disciplined capital allocation strategy.

Up 18% sequentially, driven by benefits from higher volume and productivity actions.

Including strategic acquisitions, such as Lion brothers, which closed in the second quarter.

Adjusted EBITDA margin was 15, 6% in the quarter up 90 basis points compared to Q2 and comparable to prior year.

And continuing to return cash to shareholders.

And the first six months of the year, we returned $216 million to shareholders through.

With adjusted EBITDA dollars up about 7% sequentially.

Through a combination of share repurchases and dividends.

As well as deployed $194 million for M&A.

Compared to prior year sales were down 10% ex currency and 11% on an organic basis.

Turning to the segment results materials group sales were down 12% ex currency and on an organic basis.

Due to lower volume largely from Destocking, which continues to moderate.

Driven by a mid to high teens volume decline.

GAAP operating margin was 10% in the third quarter, which included $44 million in restructuring charges as we continue to drive productivity across our portfolio.

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.

The majority of the charges taken in the quarter were related to footprint optimization initiatives and materials Europe.

Turning to cash generation and allocation.

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 generated strong adjusted free cash flow of $310 million in the third quarter.

Up $170 million compared to prior year.

And we assume that pace to continue for the remaining of the third quarter.

In the third quarter, we continued to make good progress reducing higher inventory levels in certain components in which we experienced supply disruptions over the last couple of years and.

Looking at label materials organic volume trends versus prior year in the quarter, North America, and Europe were down roughly 25% to 30%.

And overall, our working capital metrics are in good shape.

China was up significantly as we lapped the Shanghai area Lockdowns from last year.

Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end up two six.

And it was up low single digits sequentially.

Latin America was up modestly and up mid single digits sequentially.

And we continued to execute our disciplined capital allocation strategy.

Also compared to prior year graphics, and reflective sales were up organically high single digits.

<unk> strategic acquisitions, and continuing to return cash to shareholders.

And the first nine months of the year, we returned $309 million to shareholders through a combination of share repurchases and dividends.

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.

As well as deploy $204 million for M&A.

Turning to the segment results materials.

As it benefits from productivity and temporary cost saving actions were more than offset by lower volume.

The materials group sales were down 16% ex currency and on an organic basis.

We expect adjusted EBITDA margin to continue improving sequentially.

Driven by a mid teens volume decline as inventory was being built downstream from us last year and continues to reduce this year.

Regarding raw material costs, we have moved into a modest deflationary environment.

On a sequential basis volumes increased in labor materials by mid single digits in the third quarter.

Following a period of significant inflation. These lower costs are largely being passed along in price reductions to our customers.

Label volume and combined North America, and Europe continued to improve at a similar pace in the third quarter as in the second quarter, which can be seen on slide six.

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.

Volume also continues to improve through the first few weeks of October.

Looking at labor materials organic volume trends versus prior year in the quarter.

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.

North America was down mid teens and up low single digits sequentially.

Europe was down roughly 30% and up mid single digits sequentially.

The company continues to dispute this and is preparing to appeal.

Asia Pacific was up low double digits and up high single digits sequentially.

We have also largely completed any migration to alternative and coating methods for RFID tags.

In Latin America was down mid single digits and up mid to high single digits sequentially.

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.

Also compared to prior year graphics, and reflective sales were down low single digits organically and performance tapes and medical were up low single digits.

Materials group delivered a strong adjusted EBITDA margin of 16, 4% in the third quarter up 90 basis points compared to prior year and up 70 basis points sequentially.

We expect adjusted EBITDA margin to improve sequentially through the remainder of the year.

Now shifting to our guidance.

As benefits from productivity productivity and temporary cost saving actions more than offset lower volume.

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.

Regarding raw material cost, we again saw modest deflation sequentially.

And as I mentioned last quarter. Following a period of significant inflation. These lower costs are largely being passed along and price reductions to our customers.

Shifting now the solutions group sales were up 5% ex currency and 1% on an organic basis.

Is high single digit growth in high value categories was partially offset by a mid to high single digit decline in the base business as retailer and brand sentiment remains muted.

<unk> EBITDA margin of 16, 4% was up 60 basis points sequentially.

And down 250 basis points compared to prior year, driven by lower organic volume.

Higher employee related costs and strategic investments in intelligent labels, partially offset by productivity and temporary cost actions.

We expect adjusted EBITDA margin will again improved sequentially in the fourth quarter.

Now shifting to our guidance and.

In the fourth quarter, we expect adjusted earnings per share to be in the range of $2 10.

The $2 25.

Up significantly compared to prior year, and a steady sequential improvement at the midpoint, despite the softer consumption environment.

In the fourth quarter, we expect organic sales growth compared to prior year.

Label materials volume to improve as inventory Destocking continues to moderate.

Intelligent labels volume in new categories, particularly logistics and food to continue to accelerate.

Further structural cost reduction actions to be implemented as we continue to focus on driving productivity across our businesses.

And more than a nickel sequential headwind from typical seasonality due to less shipping days in the fourth quarter.

We remain confident that we will steadily increase earnings to achieve a $10 plus adjusted earnings per share run rate.

So given the level of macro uncertainty the timing is difficult to predict.

The sequential improvement will be driven by the normalization of label materials volume to continued growth in non apparel intelligent labels.

The impact of ongoing productivity actions and 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 continue to estimate that incremental pre tax savings from restructuring net of transition cost will contribute roughly $65 million.

We anticipate investing roughly $300 million on fixed capital and it projects down roughly $25 million from our previous outlook as we've pared back capital investment slightly.

And the anticipated impact from currency translation has increased and now reflects a roughly $18 million headwind for the full year based on current rates.

And we continue to expect our full year adjusted tax rate will be in the mid 20% range.

In summary, we're continuing to improve our results and 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.

And we'll now open up the call for your questions.

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 suite on pump technology request.

To answer your question has been answered and you would like to withdrawing our registration. Please press the one followed by the three.

If you're 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 then return to the queue. If you have additional questions.

One moment please for the first question.

Yes.

Our first question comes from the line of George Staphos with Bank of America. Please go ahead.

Hi, everyone. Good day, Thanks for taking my question thanks for the detail.

My question to start how are you.

Or you're correct on is on intelligent label.

And.

The.

Less than expected growth in total.

Driven by apparel, if I understood the commentary.

<unk>.

And it sounded like it was apparel related to consumer sentiment.

That drove the variance and I guess, if you could provide more detail in terms of what was the expectation.

Entering your request.

A market in terms of consumer demand in terms of sentiment in terms of what your customers were saying.

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

Relative to what transpired in the third quarter and then in turn why you think that.

One moment please for the first question.

Crews over the next one to two quarters, thanks, and I'll turn it over.

Yes.

Our first question comes from the line of George Staphos with Bank of America. Please go ahead.

Thanks George.

If you recall, what we said earlier in the year was that we anticipated, but apparel wouldn't recover through the remainder of the year, but we would see slight sequential volume improvement.

Hi, everyone. Good day, Thanks for taking my question thanks for the detail.

My question to start how are you.

And as we showed I think on slide six George you can see what we had anticipated was the continued apparel imports that we've done so sequentially continue to have a full over a full period quarter.

Greg on is on our intelligent label.

And you.

The.

Less than expected growth in total are driven by apparel, if I understood the commentary correctly.

And in addition to that to continue to actually see somewhat surprising you that inventory to sales ratios are also declining.

And it sounded like it was apparel related to consumer sentiment.

And so the combination of that I think is really factoring into kind of more muted.

That drove the variance and I guess, if you could provide more detail in terms of what was the expectation in terms of market in terms of consumer demand in terms of sentiment in terms of what your customers were saying.

Near term sentiment as brands and retailers think about this sourcing the sourcing opportunities.

In addition to that.

We have seen the expansion of our non IRL apparel business significantly, particularly in logistics and food.

Relative to what transpired in the third quarter and then in turn why you think that improves over the next one to two quarters, thanks, and I'll turn it over.

Really are demonstrating the value to our customers that those solutions are able to bring.

And as I look forward then into Q4, we are anticipating a little bit more recovery in apparel.

Thanks George.

And we also have as I mentioned, the last time, a number of new apparel programs that are in rollout, sometimes those switch between quarters as they ramp we typically seen that overtime, but that will also add to our apparel aisle volume growth as we go into the fourth quarter George.

If you recall, what we said earlier in the year was that we anticipated that apparel wouldn't recover through the remainder of the year, but we would see slight sequential volume improvement.

And as we showed I think on slide six George you can see what we had anticipated was that continued apparel imports that we've done so sequentially continue to fall over a full period quarter.

Our next question comes from the line of John Mcnulty with BMO capital markets. Please go ahead.

And in addition to that to continue to actually see somewhat surprising you that inventory to sales ratios are also declining.

Hey, good morning, Thanks, Bruce and good afternoon, and thanks for taking my taking my question. So I guess my questions really about the guide. So <unk> did about 210, Youre basically looking for flat to up about 15 in <unk> and I guess, if I think about it.

So the combination of that I think is really factoring into kind of more muted apparel near term sentiment as brands and retailers think about this sourcing this sourcing opportunities.

In addition to that.

We have seen the expansion of our non IRL apparel business significantly, particularly in logistics and food.

The big RFID improvement, particularly in our logistics, you've got incremental cost saves, which seems like combine those would put you at the high end of the range without any assumption for less destocking at the core of falling raws or anything like that it sounds like maybe a little bit seasonality, but I guess, what am I missing in terms of the bad guys.

Really are demonstrating the value to our customers that those solutions are able to bring.

And as I look forward then into Q4, we are anticipating a little bit more recovery in apparel.

Because it seems like the outlook for <unk> or the guidance for <unk> is kind of unusually or extremely conservative.

Yeah. Thanks, John So I would say when we look at the guide at the midpoint when you adjust for that seasonality as you mentioned, we're up about 15% sequentially.

Our next question comes from the line of John Mcnulty with BMO capital markets. Please go ahead.

Obviously at the high end a bit higher than that when we look at what's driving that as you said, we're expecting pretty significant intelligent labels growth Q3 to Q4 as we've already talked about.

We are seeing the start of Q4 here sequential volumes in our label business continuing to improve as well as we've talked about as we see that steady improvement now while we're also seeing I think Dion mentioned this earlier, we are continuing to see more macro uncertainty.

<unk> seen the data on retail volumes in Europe continued to decline sequentially in the third quarter.

Generally I think we're seeing a bit mute.

Muted sentiment and cautiousness from whether it be apparel.

Retailers and brands as well as consumer packaged goods companies and so we're looking at that and trying to factor into our guidance a little bit of cost centers from them as they enter the inner at the end of the year and we'll see how that plays out as we get through holiday.

Because it seems like the outlook for <unk> or the guidance for <unk> is kind of unusually or extremely conservative.

Yeah. Thanks, John So I would say when we look at the guide at the midpoint when you adjust for that seasonality as you mentioned, we're up about 15% sequentially.

And how that sentiment evolved so right now we're just seeing some cautiousness there on the end user sites. So we're trying to factor that into our guide as well.

Obviously at the high end a bit higher than that when we look at what's driving that as you said, we're expecting pretty significant intelligent labels growth Q3 to Q4 as we've already talked about.

Fair enough thanks very much.

Our next question comes from the line of.

We are seeing the start of Q4 here sequential volumes in our label business continuing to improve as well as we've talked about as we see that steady improvement now.

Ghansham.

Choppy with Robert W. Baird <unk> company. Please go ahead.

What we're also seeing I think Dion mentioned this earlier, we are continuing to see more macro uncertainty.

Hey, guys good day.

I guess going back to your comments on Destocking.

Categories that were sort of firsthand on the destocking curve from <unk> of last year.

<unk> seen the data on retail volumes in Europe continued to decline sequentially in the third quarter.

They started to inflect higher on a year over year basis at this point and then related to that it seems like many of the CPG customers are actually being much more aggressive on kind of inventories just given the higher cost of holding inventory given interest rates and also inflation how is that factoring in in terms of the outlook for the first half of next year. The way you see it at this point and then also more importantly.

I think we're seeing a bit.

Muted sentiment and cautiousness from whether it be apparel.

Retailers and brands as well as consumer packaged goods companies and so we're looking at that and trying to factor into our guidance.

Little bit of cost centers from them as they enter the inner at the end of the year and we'll see how that plays out as we get through holiday.

As it relates to the $10 of run.

Run rate earnings.

And the timeline of that.

And how that sentiment evolved so right now we're just seeing some cost census, there on the end user sites. So we're trying to factor that into our guide as well.

Thanks Ghansham.

I think the the thing that we've seen more recently is that kind of more broader macro uncertainty and slow consumption and Greg I think called out, particularly in Europe macro retail data volume is actually sequentially down each month over the last couple of months and we do see consumer package goods volume still below last year.

Fair enough thanks very much.

Our next question comes from the line of.

Ghansham Panjabi with Robert W. Baird <unk> company. Please go ahead.

And the large number of consumer packaged goods companies as well.

Hey, guys good day.

That caution whether it's in that particular end market or also in apparel I think it's just part of what we're seeing as a consequence of a high interest rates and its impact on consumers and how they react.

I guess going back to your comments on Destocking.

Categories that were sort of firsthand on the destocking occurred from <unk> of last year.

If they started to inflect higher on a year over year basis at this point and then related to that it seems like many of the CPG customers are actually being much more aggressive on kind of inventories just given the higher cost of holding inventory given interest rates and also inflation how is that factoring in in terms of the outlook for the first half of next year. The way you see it at this point and then also more important.

And so we.

We're seeing we're starting to see some of the sequential improvement from inventory Destocking, particularly for the <unk> that went in first.

And you've seen that in our results and you continue to see that even in our forecast for the fourth quarter Ghansham.

As I think about it now given that uncertainty it makes it very difficult to call when that $10 run rates will happen and Thats why we think it will happen that at points during next year, but the timing of an uncertain.

As it relates to the $10 of run.

Run rate earnings.

The timeline of that.

Thanks Ghansham.

I am very confident in the fundamentals of our business and I am confident that when volume really does return we can trc, a clear path to that $10 plus run rate as we move forward.

Our next.

<unk> is from the line of <unk>.

And the large number of consumer packaged goods companies as well.

Jeff Zekauskas with Jpmorgan Securities. Please go ahead.

That caution whether it's in that particular end market or also in apparel I think it's just part of what we're seeing as a consequence of high interest rates and its impact on consumers and how they react.

Yeah.

Thanks, very much I have a two part question.

I was looking at your bar graph for volumes on slide six.

And when you measure it.

And so we.

We're seeing we're starting to see some of the sequential improvement from inventory Destocking, particularly for the catches that went in first.

It looks like Q4 of 22 was $1 two insurance Q.

Q4, and October was one four so it looks like the volume is up 16%.

And you've seen that in our results and you continue to see that even in our forecast for the fourth quarter Ghansham.

Is that right.

And second.

<unk> got two tranches of debt you've got both about 1% right.

<unk> got 300 and.

August.

I am very confident in the fundamentals of our business and I am confident that when volume really does return we can see a clear path to that $10 plus run rate as we move forward.

2024, and you've got $5 33.

In the first quarter of 'twenty five is your intention to pay those down or to refinance.

Yeah, Jeff So I guess are in the Bar chart I think.

Our next.

<unk> is from the line of.

<unk>.

Jeff Zekauskas with Jpmorgan Securities. Please go ahead.

I think what the scale I think you can't quite make that direct conclusion from that scale.

Yeah.

Thanks, very much I have a two part question.

What we're seeing is if you recall last year in Q4 really in October we are still seeing some stocking up particularly in Europe and then we started to see in November that pretty sharp downturn towards.

I was looking at your bar graph for volumes on slide six.

And when you measure it.

It looks like Q4 of 22 was $1 two insurance Q.

Converters, starting to destock and Thats whats carried through so now when we've gone through Q4.

Q4, and October is one four so it looks like the volume is up 16%.

We're still seeing volumes below prior year in Q3 picking up a bit in Q4 closer and closer to where we were obviously back to that early part of Q4 levels, but overall, yes, you cant make a direct comparison there I think in the third quarter, our volumes were down mid teens versus prior year.

Is that right.

And second.

<unk> got two tranches of debt <unk> got both about 1% right.

<unk> got 300 and.

August.

And when you look at that obviously last year, there was stocking up going on in the third quarter and it was actually our highest quarter of stock build last year and then obviously we are still taking some some inventory down here this quarter at a rate of about I think more than a week in North America, and a little bit less than that in Europe. So that's how we think about those two things from a debt.

2024, and you've got $5 33.

In the first quarter of 'twenty five is your intention to pay those down or to refinance.

Yeah, Jeff So I guess, starting a bar chart I think.

<unk>.

I think what the scale I think you can't quite make that direct conclusion from that scale.

Perspective, some of that depends on.

<unk> opportunities and things like that and how they evolve over the next year or two and how that capital allocation plays out.

Absence of M&A or or something major in from that perspective, and I think we'd be looking at next year, probably continuing to pay down the debt with cash flow.

Converters, starting to destock and Thats whats carried through so now when we've gone through Q4.

But again that will determined a little bit on what the opportunities are and how we proceed from an M&A perspective.

Our next question from the line of Josh Spector with UBS Securities. Please go ahead.

Hi, yes, thanks for taking my question.

Want to ask on margins within the solutions segment. So your sales were up in <unk> year on year like your EBIT down.

Margin did improve but it was fairly marginal.

Some of the things you called outlet higher investment that cost et cetera.

So.

One can you give any granularity around the different pieces of <unk> and then two when you look at next year and say you get volume growth within intelligent labels you have some easier comps, what's the right incremental we should be thinking of on that growth.

Perspective, some of that depends on.

<unk> opportunities and things like that and how they evolve over the next year or two and how that capital allocation plays out.

Absence of M&A or or something major in from that perspective, then I think we'd be looking at next year, probably continuing to pay down the debt with cash flow.

Yes. Thanks, Josh This is Greg So I think when you when you look at overall solutions in the quarter as you can see our organic growth in the quarter was about half a point.

But again that will determined a little bit on what the opportunities are and how we proceed from an M&A perspective.

But the majority of that driven by the intelligent labels growth as we've already talked about it around 10 points and base apparel in our base business down in this segment was down.

Our next question from the line of Josh Spector with UBS Securities. Please go ahead.

Now when we look at that half a point of growth, we had a little bit of price up in volumes overall were down a little bit in the quarter, particularly in the base as I mentioned, a second ago and I think as you probably heard us talk about in the past and the solution segment, we need a point or so of growth in order to offset things like wage inflation and things like that that are.

Hi, yes, thanks for taking my question.

Want to ask on margins within the solutions segment. So your sales were up in <unk> year on year like your EBIT down.

Margin did improve but it was fairly marginal.

Some of the things you called out with higher investment that cost et cetera.

An annual increase in cost of that business. So we had we had year over year employee costs go up.

So.

As well as the investments that we've been making intelligent labels from a carryover perspective as well as investments as we were ramping up the new programs here. So those are really the areas that I.

Impacted margins in the quarter. So we were happy to see the sequential improvement that we've made in Q3, even though were still below prior year. We do expect further sequential improvement in Q4, I would say a point or so from where we were in Q3 and I would expect and when we look next year to get back closer to the margin rates, we were at last year and the solution segment overall.

Yes. Thanks, Josh This is Greg So I think when you when you look at overall solutions in the quarter as you can see our organic growth in the quarter was about half a point.

But the majority of that driven by the intelligent labels growth as we've already talked about it around 10 points and base apparel in our base business down in this segment was down.

Now when we look at that half a point of growth, we had a little bit of price up in volumes overall were down a little bit in the quarter, particularly in the base as I mentioned, a second ago and I think as you probably heard us talk about in the past and the solutions segment, we need a point or so of growth in order to offset things like wage inflation and things like that that are.

Next question from the line of Anthony Pettinari with Citigroup Global markets. Please go ahead.

Good morning.

You've had this year where organic sales.

<unk>, 10% and I'm just wondering do you feel that there is any.

Market share shifts.

You'll increase in cost of that business. So we had we had year over year employee costs go up.

Either or materials or solutions are you potentially losing some share holding gaining.

Any kind of conclusions you can draw.

Looking at the last three quarters.

Anything that you would differentiate between materials and solutions.

Understanding solutions is getting a bit better.

Yes, Thank you Anthony.

I think our view is that largely the function of volume being down is just reflecting the inventory that was built during last year and the slow unwind of it as we go through this year.

And we know having looked at this very closely that we have maintained or even expanded share across our materials businesses in 2023.

Next question from the line of Anthony Pettinari with Citigroup Global markets. Please go ahead.

We've held and slightly expanded share and now based apparel business on our overall <unk> share continues to grow as well.

Good morning.

You've had this year where organic sales.

Down, 10% and I'm just wondering do you feel that there is any.

No that's.

Alex a continued focus by the teams on ensuring that they are really delivering excellent service and quality to our customers and helping them address some of the challenge that they themselves are facing right now.

Market share shifts.

Other materials or solutions are you potentially losing some share holding gaining.

Any kind of conclusions you can draw.

Looking at the last three quarters.

Next question from the line of Mike Rock plan, which was securities. Please go ahead.

Anything that you would differentiate between materials and solutions.

Understanding solutions is getting a bit better.

Alright, Thank you idea and Greg John for taking my question.

Yes, Thank you Anthony.

I just wanted to get your insight into what's happening in Europe.

I think our view is that.

Largely the function of volume being down is just reflecting the inventory that was built during last year and the slow unwind of it as we go through this year.

Your peers is cutting labor.

In Europe and continued weak demand. So what gives you the confidence at the bottom has been reached at this point and that demand in Europe will ultimately be approved.

And we know having looked at this very closely that we have maintained or even expanded share across our materials businesses. In 2023, we've held and slightly expanded share based apparel business on our overall <unk> continues to grow as well.

Well Mike.

I think we highlighted there is there is a degree of uncertainty as the rents of the macro environment and we've seen softer consumption in Europe.

And I think we've been very clear that we're not necessarily the calling the timing of the recovery, we do see slow sequential improvement.

And that reflects our continued focus by the teams on ensuring that they are really delivering excellent service and quality to our customers and helping them address some of the challenge that they themselves are facing right now.

And I think the thing that I always go back to is that at the end of the day, which serving ultimately across a multi cycle.

Countries, we serve markets that are both growing and diverse and typically our GDP plus and so at a point the markets will recover demand will come back.

Next question from the line of Mike Rock plan, which was <unk> Securities. Please go ahead.

We are ideally positioned in that regard we have leadership positions in both of our businesses and.

Alright, Thank you idea and Greg John for taking my question.

And we have strategies have continued to deliver successfully over the years and we have a team that leads the industry in both of our businesses as well.

I just wanted to get your insights into what's happening in Europe.

Here's is cutting labor.

And Mike I think I would add as we talked about I think last quarter. Historically, we've been in a period of a destock or downturn, we've seen volumes rebound or accelerate kind of quickly at the end of that cycle.

Production in Europe.

The weak demand. So what gives you the confidence at the bottom has been reached at this point in the demand in Europe will ultimately be approved.

Well, Mike I think.

What we've been talking about this year through this period is a little bit more steady improvement over the last number of months and quarters. As you can see in this bar graph that we showed.

We highlight that there is there is a degree of uncertainty as the rents of the macro environment and we've seen softer consumption in Europe.

And I think we've been very clear that we're not necessarily the calling the timing of the recovery, we do see slow sequential improvement.

I think that steady improvement reflects a couple of things one is the.

The improvement of inventory levels at our converters in our direct customers over the last quarter or so.

And I think the thing that I always go back to is that at the end of the day, which serving ultimately across a multi cycle.

But also that cautiousness in kind of the slowdown in consumer demand at the same time, so I think that those two things hitting at the same time is leading to a more steady increase in our recovery rather than a more.

Countries, we serve.

Markets that are both growing and diverse and typically our GDP plus so at eight point the markets will recover demand will come back and we are ideally positioned in that regard we have leadership positions in both of our businesses.

Accelerated ramp at the end of that Destocking cycle, and I think that's why we're continuing to project.

Steady continued improvement quarter over quarter as we go forward.

And we have strategy to continue to deliver successfully over the years.

Our next question is coming from the line of Christopher <unk> with loop capital markets. Please go ahead.

We have a team that leads the industry in both of our businesses as well.

Hey, Mike I think I would add is we talked about I think last quarter. Historically, we've been in a period of a destock or downturn, we've seen volumes rebound or accelerate kind of quickly at the end of that cycle.

Two part question one.

Sort of piggyback off of some of the other commentary, but just on the.

The comments around the sequential improvement in demand in materials segment. Thus far into October just wondering if you could characterize that by sort of by geography <unk> by category.

We've been talking about this year through this period is a little bit more steady improvement over the last number of months and quarters. As you can see in this bar graph that we showed.

Think that steady improvement reflects a couple of things one is the improvement.

And then secondly in intelligent labels Theres, a number of RFID programs that are.

Improvement of inventory levels at our converters in our direct customers over the last quarter or so.

We're gaining traction for lack of better characterization and maybe that improving visibility helps give you confidence in around the commentary about the.

Staying ability of the 20% growth CAGR of 20% plus growth CAGR going forward I am just wondering if you could.

Accelerated ramp at the end of that Destocking cycle, and I think that's why we're continuing to project.

The extent that some of these programs are in conventional big box retailers, but beyond.

Steady continued improvement quarter over quarter as we go forward.

Apparel I'm just wondering if there's any evidence that would suggest that.

Our next question is coming from the line of Christopher <unk> with loop capital markets. Please go ahead.

The addressable Tam is expanding given the use case for that.

Two part question one.

Intelligent label, given what they're being attached to beyond apparel.

Sort of piggyback off of some of the other commentary, but just on.

Thank you for that.

The comments around the sequential improvement in demand in materials segment. Thus far into October just wondering if you could characterize that by sort of by geography <unk> by category.

Yes, Chris Let me just the first question then I'll get to the second we have seen slow sequential improvement in demand sorry in volume in our materials business in the first part of October Thats reflected in the Bar chart and I think that reflects both the continuation of the Destocking moderating.

And then secondly in intelligent labels Theres, a number of RFID programs that are.

Largely in Europe, as we said we think it's largely complete by the end of Q3, a little bit to go in Q4 in North America, and so we would anticipate volume to slowly sequentially improve in that regard.

We're gaining traction for lack of better characterization and maybe that improving visibility helps give you confidence in around the commentary about the.

Staying ability of the 20% growth CAGR of 20% plus growth CAGR going forward I am just wondering if you could.

As it relates to IL overall, our intelligent labels platform.

We have a high degree of confidence in that 20% growth rate. Let me tell you why Chris I think firstly.

The extent that some of these programs are in conventional big box retailers, but beyond.

We are really seeing our non apparel categories, largely now logistics and food continue to accelerate and you can see that both in Q3 and in Q4. These are actual rollouts that are happening in logistics customers and food customers that are in flight they are delivering real value for our customers and most importantly, as that value becomes more visible.

Apparel I'm just wondering if there's any evidence that would suggest that.

The addressable Tam is expanding given the use case for that.

Intelligent label, given what they're being attached to beyond apparel.

Thank you for that.

It becomes a compelling proof point for the broadest segment to think about adopting we saw that when apparel first adopted as well and we're seeing a mirror of that as we anticipate going forward I think the second thing is apparel is recovering and it will bounce back at a point now.

When that happens we are the market leader in apparel IOL overall, and it's not just the recovery of the volume in apparel. It will also be the continuation of new use cases, I think I spoke previously about our rollout.

Largely in Europe, as we said, we think it's largely complete by the end of Q3, but a little bit to go in Q4 in North America, and so we would anticipate volume to slowly sequentially improve in that regard.

The rollout with Inditex on a loss prevention application that is in addition to the inventory productivity, we typically see and we're continuing to see new retailers and brands rollout and I mentioned full previously and we have another four in flight right now large ones as well they will augment the apparel growth as well.

As it relates to IL overall, our intelligent labels platform.

We have a high degree of confidence in that 20% growth rate. Let me tell you why Chris I think firstly.

And I think the other piece to really consider is when you think about those non apparel categories like logistics through they are significantly bigger than apparel. If apparel is around this quarter the addressable market of 45 billion units.

<unk> is at least $65 to $70 billion and.

And food is on the order of 200 billion units and we are just at the start.

It becomes a compelling proof point for the broadest segment to think about adopting we saw that when apparel first adopted as well and we're seeing a mirror of that as we anticipate going forward I think the second thing is the apparel is recovering and it will bounce back at a point.

Of the adoption in those two categories. So the scale of the opportunity the potential that lies in front of us is tremendous and Thats. The reason, Chris that we've been investing to ensure that we can maintain and expand our market leadership position. We're not just here to make sure. We're solving some of these unique challenges for customers, but actually to try and ensure that we're activating.

When that happens we are the market leader in apparel overall, and it's not just the recovery of the volume in apparel. It will also be the continuation of new use cases, I think I spoke previously about our rollout.

The industries and the segments within and having seen the impact that we're having on those customers and the effect on how much they value our market leading team.

Our rollout with <unk> on a loss prevention application that is in addition to the inventory productivity, we typically see and we're continuing to see new retailers and brands rollout and I mentioned full previously and we have another four in flight right now large ones as well they will augment the apparel growth as well.

It reinforces the confidence by having that the future growth rate.

Our next question is from the line of Matt Roberts with Raymond James. Please go ahead.

And I think the other piece to really consider is when you think about those non apparel categories like logistics food. They are significantly bigger than apparel apparel is around this call to the addressable market of 45 billion units.

Hey, good afternoon everybody.

When I think about the investments, we're making in intelligent labels as well as <unk>.

<unk> is at least $65 to $70 billion and.

<unk>.

Carrying some inventory earlier.

And food is on the order of 200 billion units and we are just at the start.

When I think about the cash conversion.

Cycle for intelligent labels is that different than <unk>.

The rest of the system like is there a longer lag and when you have to invest in inventory to when you're able to book the revenue versus everything else. If theres any color you can provide them be very helpful. Thank you.

Yes, Matt I think in general terms the answer would be no. It is relatively similar to what we've been experiencing in the intelligent labels business over the last number of years.

The industries and the segments within and having seen the impact that we're having on those customers and the effect on how much they value our market leading team.

I think over the last few quarters as I've talked about we had built up some inventory and chips.

It reinforces the confidence that I have and that the future growth rate.

That's something we have driven starting last year, when we were starting to see some of the inventory.

Challenges there so thats why were we started that.

Our next question is from the line of Matt Roberts with Raymond James. Please go ahead.

But overall I think when we look at that from a normal ongoing process I wouldn't expect any different from what we've seen over the last few years.

Hey, good afternoon everybody.

And Matt the only thing I would add to that is typically when we look at some of these large scale rollouts. All focus is on consistent flawless execution, we have to make sure that we deliver not only the business case of proof of economics, but actually the reliance ensuring that we can provide everything they need and so we typically tend to invest to make sure that we have the capacity to both do that.

When I think about the investments, we're making in intelligent labels as well as <unk>.

<unk>.

Carrying some inventory earlier.

When I think about the cash conversion.

Cycle for intelligent labels is that different than <unk>.

And from a people and from asset and then from a working capital perspective, but as that program. Then continues to rollout we typically end up normalizing.

Relative to all of our other working capital cash collection cycles as well.

Yes, Matt I think in general terms the answer would be no. It is relatively similar to what we've been experiencing in the intelligent labels business over the last number of years.

Great. Thank you very much.

And we have a follow up question from the line of George Staphos with Bank of America. Please go ahead.

I think over the last few quarters as I've talked about we had built up some inventory and chips.

That's something we have driven starting last year, when we were starting to see some of the inventory.

Hi, everyone. Thanks for taking the follow on.

John can you talk to.

Challenges there so that's why we started that.

Whats the payback return payback period is on some of the newer markets.

But overall I think when we look at that from a normal ongoing process I wouldn't expect any different from what we've seen over the last few years.

Relative to for IL relative to what you've seen with apparel.

Arguably especially with logistics.

Given the value of the products for your customers the payback might actually be quicker in the return higher can you talk to that can you index. It somehow and then just a quick follow on at the end of the day I wasn't clear are you expecting label materials to be up year on year and.

And from a people and from asset and then from a working capital perspective, but as that program. Then continues to rollout we typically end up normalizing.

In the fourth quarter, I know youre, making sequential improvement I know the comp was tough in October and November last year things dropped off.

Relative to all of our other working capital cash collection cycles as well.

Great. Thank you very much.

Would you have us know about your guidance for the fourth quarter in terms of what it means for material volume year on year in this segment. Thank you.

And we have a follow up question from the line of.

George Staphos with Bank of America. Please go ahead.

Thanks George.

Way that we've seen the payback period, particularly in apparel will stop the George has typically been in that sort of less than a year payback cycle typically and it varies by retailer and brand depending on the complexity of their retailers state depending on the complexity and the length of the supply chain and the diversity of their supply chain as well and you are right that in.

Hi, everyone. Thanks for taking the follow on.

John can you talk to.

Whats the payback return payback period is on some of the newer markets.

Relative to for IL relative to what you've seen with apparel.

Arguably especially with logistics.

Logistics.

Perhaps given the value of the products for your customers the payback might actually be quicker in the return higher can you talk to that can you index. It somehow and then just a quick follow on at the end of the day I wasn't clear are you expecting label materials to be up year on year in volte.

We will be seeing shorter paybacks, because the supply chain is more compressed it may not be as globally orientate. It initially in some of the pieces that we've seen.

And that's and we're at the infancy of some of the food work that we're doing right now our anticipation is that the food payback cycle will be similar to apparel within that year period as well because there is a supply chain across multiple suppliers that will also have a similar reasons to the way we've seen apparel in the past.

In the fourth quarter, I know youre, making sequential improvement I know the comp was tough in October and November last year things dropped off.

To your second question, we do anticipate sequential label volume improvement as we go through the fourth quarter and that reflects both the inventory destocking moderating further.

Would you.

And some slight demand improvement as we move as well forward.

George and George also I am not sure. If your question bigger last question was year over year sequential year over year, we also expect to see.

Volume is up in the label business is the answer is the same reason we start to lap that Destocking last year, we still got some destocking in North America in Q4, a little bit less in Europe, because we've already talked about so we do start to see volumes up in the fourth quarter versus prior year.

I would say when you're looking at the sales line as we've seen that sequential deflation as we move through the last couple of quarters. We do have some price down as we've talked about as well so it offset some of that volume increase, but but certainly we expect volume to grow a little bit year over year in the fourth quarter.

Mr Standards. There are no further questions at this time I will now turn the call over back to you for any closing remarks.

Thank you Carlos and thank you all for joining us on the call today, while the environment remains dynamic we are extremely confident in our position and prospects and our ability to generate GDP plus growth and top quartile returns over the long term. So 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 lines.

Q3 2023 Avery Dennison Corp Earnings Call

Request a DemoDemo

AVY

Avery Dennison

Earnings