Q2 2024 Avery Dennison Corp Earnings Call

Operator: Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode.

Speaker Change: Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode.

Operator: Afterward, we will conduct a question and answer session. At that time, we will have questions. If you have a question, please press star followed by the number one on your telephone keypad.

Speaker Change: Afterward, we will conduct a question-and-answer session. At that time, if you have a question, please press star followed by the number 1 on your telephone keypad.

Operator: Welcome to Avery Dennison's earnings conference call for the second quarter ended on June 29, 2024. This call is being recorded and will be available for replay after 4 p.m. Eastern Time today and until midnight Eastern Time on July 30, 2024. To access the replay, please dial plus 1-800-770-2030 or plus 1-609-800-9909 for international callers. The conference ID number is 5855706. I'd now like to turn the call over to John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead.

Mitchell R. Butier: Welcome to Avery Dennison's earnings conference call for the second quarter ended on June 29, 2024.

Speaker Change: This call is being recorded and will be available for replay after 4 p.m. Eastern Time, today and until midnight Eastern Time, July 30th, 2024. To access the replay, please dial plus 1-887-422-4222.

Speaker Change: 800-770-2030 or plus 1-609-800-9909 for international callers.

Speaker Change: The conference ID number is...

John C. Eble: I would now like to turn the call over to John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.

John C. Eble: 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-4 to A-9 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 Deon Stander, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Deon.

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

John C. Eble: The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules A-4 to A-9 of the financial statements accompanying today's earnings release.

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

John C. Eble: These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release.

John C. Eble: On the call today are Deon Stander, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer.

Deon M. Stander: Thanks, John, and hello everyone. We delivered another strong quarter with EPS of $2.42 in the second quarter, above our expectations, and we are raising our full year guidance. We now expect earnings of $9.30 to $9.50 per share for the year and are targeting roughly 20% earnings growth compared to prior years. Materials Group continued to demonstrate its resilience in the second quarter, again delivering significant volume and margin expansion as we lagged the impact of downstream inventory destocking last year and drove productivity across the business.

John C. Eble: I'll now turn the call over to Deon.

Deon M. Stander: Thanks John and hello everyone. We delivered another strong quarter with EPS of $2.42 in the second quarter, above our expectations and are raising our full year guidance.

Deon M. Stander: We now expect earnings of $9.30 to $9.50 per share for the year and are targeting roughly 20% earnings growth compared to prior year.

Deon M. Stander: Materials Group continued to demonstrate its resilience in the second quarter, again delivering significant volume and margin expansion as we lapped the impact of downstream inventory destocking last year and drive productivity across the business.

Deon M. Stander: Label volumes in Europe and Asia were above our expectations, while slightly below expectations for North America. Broadly, retail volumes remain soft relative to long-term trends as consumers continue to deal with the cumulative effects of high inflation, and we are not anticipating this to change in the second half of the year. Solutions Group delivered strong top-line growth in the second quarter, driven by both the base and high-value categories and expanded margins. The retail apparel channel was stronger than we expected.

Deon M. Stander: Label volumes in Europe and Asia were above our expectations, while slightly below expectations for North America.

Deon M. Stander: Broadly, retail volumes remain soft relative to long-term trends, as consumers continue to deal with the cumulative effects of high inflation, and we are not anticipating this to change in the second half of the year.

Deon M. Stander: Solutions Group delivered strong top-line growth in the second quarter, driven by both the base and high-value categories and expanded margins.

Deon M. Stander: Despite retailers and brands remaining cautious in their near-term sourcing plans, most have now met their targeted inventory levels following more than a year of de-stocking, and volume has normalized quicker than we anticipated for the upcoming back-to-school season.

Deon M. Stander: The retail apparel channel was stronger than we expected. Despite retailers and brands remaining cautious in their near-term sourcing plans, most have now met their targeted inventory levels following more than a year of destocking.

Deon M. Stander: and volume has normalized quicker than we anticipated for the upcoming back-to-school season.

Deon M. Stander: Year-to-date, enterprise-wide intelligent labels grew mid-to-high teens. In the second quarter, strong growth in general retail and logistics continued, while apparel was also strong as customers normalized order volumes and new rollouts continued. For the year, we are now targeting to deliver more than 20% volume growth and mid-teen sales growth in our Intelligent Labels platform, driven by a rebound in apparel and adoption in new categories. We anticipate sales growth in the third quarter will be similar to the rate we delivered in the first half.

Deon M. Stander: Year-to-date, enterprise-wide intelligent labels grew mid to high teens.

Deon M. Stander: In the second quarter, strong growth in general retail and logistics continued, while apparel was also strong as customers normalized order volumes and new rollouts continued.

Deon M. Stander: For the year, we are now targeting to deliver more than 20% volume growth and mid-teen sales growth in our Intelligent Labels platform, driven by a rebound in apparel and adoption in new categories.

Deon M. Stander: We anticipate sales growth in the third quarter will be similar to the rate we delivered in the first half.

Deon M. Stander: As for the fourth quarter, while likely a record revenue quarter, we expect growth in the quarter will be lower than previously anticipated, primarily due to the timing of customer rollout. As we have shared in the past, new customer rollouts can be uneven, particularly new categories, as well as by comparison to initial volume builds for new program adoption in prior years.

Deon M. Stander: As for the fourth quarter, while likely a record revenue quarter, we expect growth in the quarter will be lower than previously anticipated, primarily due to the timing of customer rollouts.

Deon M. Stander: As we have shared in the past, new customer rollouts can be uneven, particularly new categories, as well as by comparison to initial volume builds for new program adoption in prior years.

Deon M. Stander: I have high confidence in the significant long-term growth of our Intelligent Labels platform as we connect physical items with digital identities. In the near term, we are focused on accelerating adoption in key verticals, such as food and logistics. Overall, the ability of our solutions to help address industry challenges, such as labor efficiency, waste, transparency, and consumer connection in very large volume categories like logistics, retail, and food, is increasingly resonating with customers; key pilots, and rollers are delivering significant value and compelling proof points for broader segment adoption. We continue to invest to capture the significant opportunity head as we grow the size of the overall industry, further advancing our leadership position at the intersection of the physical and digital. Stepping back,

Deon M. Stander: I have high conviction in the significant long-term growth of our Intelligent Labels platform as we connect physical items with digital identities.

Deon M. Stander: In the near term, we are focused on accelerating adoption in key verticals such as food and logistics.

Deon M. Stander: Overall, the ability of our solutions to help address industry challenges such as labour efficiency, waste, transparency and consumer connection in very large volume categories like logistics, retail and food is increasingly resonating with customers.

Deon M. Stander: Key pilots and rollers are delivering significant value and compelling proof points for broader segment adoption.

Deon M. Stander: We continue to invest to capture the significant opportunity ahead as we grow the size of the overall industry, further advancing our leadership position at the intersection of the physical and digital.

Deon M. Stander: The underlying fundamentals of our business are strong. We are exposed to diverse and growing markets with clear catalysts for long-term growth. We are industry leaders in our primary businesses, with clear competitive advantages in scale and innovation. We have a clear set of strategies that we continue to evolve over time and are key to our success over the long term and across a wide range of business sites. Those strategies are to drive outsized growth in high-value categories, grow profitably in our base businesses, lead at the intersection of the physical and digital worlds, effectively allocate capital and focus relentlessly on productivity, and lead in an environmentally and socially responsible manner.

Deon M. Stander: Stepping back, the underlying fundamentals of our business are strong. We're exposed to diverse and growing markets with clear catalysts for long-term growth. We are industry leaders in our primary businesses with clear competitive advantages in scale and innovation.

Deon M. Stander: We have a clear set of strategies that we continue to evolve over time and are key to our success over the long term and across a wide range of business cycles.

Deon M. Stander: Those strategies are to drive outsized growth in high-value categories, grow profitably in our base businesses, lead at the intersection of the physical and digital.

Deon M. Stander: effectively allocate capital and focus relentlessly on productivity and lead in an environmentally and socially responsible manner.

Deon M. Stander: We remain confident that our strategies, along with our team's ability to execute in dynamic environments, will enable us to continue to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term. In summary, we delivered another strong quarter and raised our guidance for the year to deliver nearly 20% earnings growth in 2024. And while we are increasing our artwork for the year, the environment remains uncertain and warrants some degree of caution as we move through the second half. I want to thank our entire team for their continued resilience, focus on excellence, and commitment to addressing the unique challenges at hand. With that, I'll hand the call over to Greg.

Deon M. Stander: We remain confident that our strategies, along with our team's ability to execute in dynamic environments, will enable us to continue to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term.

Deon M. Stander: In summary, we delivered another strong quarter and raised our guidance for the year to deliver nearly 20% earnings growth in 2024.

Deon M. Stander: And while we are increasing our artwork for the year, the environment remains uncertain and warrants some degree of caution as we move through the second half.

Deon M. Stander: I want to thank our entire team for their continued resilience, focus on excellence, and commitment to addressing the unique challenges at hand. With that, I'll hand the call over to Greg.

Gregory S. Lovins: Thanks, Deon, and hello everybody. In the second quarter, we delivered adjusted earnings per share of $2.42, up 6% sequentially and up 26% compared to the prior year, driven by benefits from higher volume and productivity. Compared to the prior year, sales were up 8% ex-currency and 7% on an organic basis, as higher volume was partially offset by deflation-related price reductions. Adjusted EBITDA margin was strong at 16.4% in the quarter, up 170 basis points compared to the prior year, with adjusted EBITDA dollars up 19% compared to the prior year and up 5% sequentially.

Gregory S. Lovins: Thank you, Deon, and hello, everybody.

Gregory S. Lovins: In the second quarter, we delivered adjusted earnings per share of $2.42, up 6% sequentially and up 26% compared to prior year.

Gregory S. Lovins: driven by benefits from higher volume and productivity.

Gregory S. Lovins: Compared to prior year, sales were up 8% ex-currency and 7% on an organic basis.

Gregory S. Lovins: as higher volume was partially offset by deflation-related price reductions.

Gregory S. Lovins: Adjusted EBITDA margin was strong at 16.4% in the quarter, up 170 basis points compared to prior year, with adjusted EBITDA dollars up 19% compared to prior year and up 5% sequentially.

Gregory S. Lovins: And we generated strong, adjusted free cash flow of $201 million in the first half of the year, up $137 million compared to the prior year. And our balance sheet is strong, with a net debt to adjust to the EBITDA ratio at quarter end of 2.2, and we continue to execute our disciplined capital allocation strategy, including investing in organic growth and acquisitions while continuing to return cash to shareholders. In the first six months of the year, we returned $177 million to shareholders through the combination of share repurchases and dividends.

Gregory S. Lovins: And we generated strong, adjusted free cash flow of $201 million in the first half of the year, up $137 million compared to prior year.

Gregory S. Lovins: And our balance sheet is strong, with a net debt-to-adjusted EBITDA ratio at quarter-end of 2.2. And we continue to execute our disciplined capital allocation strategy.

Gregory S. Lovins: including investing in organic growth and acquisitions while continuing to return cash to shareholders.

Gregory S. Lovins: In the first six months of the year, we returned $177 million to shareholders through the combination of share repurchases and dividends.

Gregory S. Lovins: In April, we announced a 9% increase in the company's quarterly dividend to $0.88 per share, a dividend we've now grown 10% annually over the past decade. Now, turning to the segment results for the quarter. Materials Group sales were up 6% ex-currency and on an organic basis compared to the prior year, driven by low double-digit volume growth, including a slight customer pull forward in Europe and Asia, partially offset by deflation-related price reductions. Looking at labeled materials organic volume trends versus the prior year in the quarter, mature markets were up significantly as we continue to lap downstream customer inventory destocking that took place last year.

Gregory S. Lovins: In April , we announced a 9% increase to the company's quarterly dividend to $0.88 per share.

Gregory S. Lovins: A dividend we've now grown 10% annually over the past decade.

Gregory S. Lovins: And as you'll recall, de-stocking in Europe was a bit more exaggerated than in North America, resulting in a larger rebound this year. Europe was up more than 25% and slightly ahead of our expectations, and North America was up high single digits. Emerging regions delivered strong volume growth above our expectations, with Asia up mid-single digits, with particular strength in India and ASEAN, and Latin America up mid-teen. Compared to the prior year, Graphics and Reflective Sales were up low single digits organically. Performance tapes in medical were down low single digits organically, as strength in industrial categories was more than offset by a decline in medical and personal care, partially driven by inventory de-stocking in those categories.

Gregory S. Lovins: Turning to the segment results for the quarter.

Gregory S. Lovins: Materials group sales were up 6% ex-currency and on an organic basis compared to prior year.

Gregory S. Lovins: driven by low double-digit volume growth, including a slight customer pull-forward in Europe and Asia, partially offset by deflation-related price reductions.

Gregory S. Lovins: Looking at labeled materials organic volume trends versus prior year in the quarter, mature markets were up significantly as we continued to lap downstream customer inventory destocking that took place last year.

Gregory S. Lovins: And as you'll recall, de-stocking in Europe was a bit more exaggerated than in North America, resulting in a larger rebound this year.

Gregory S. Lovins: Europe was up more than 25% and slightly ahead of our expectations.

Gregory S. Lovins: And North America was up high single digits.

Gregory S. Lovins: Emerging regions delivered strong volume growth above our expectations, with Asia up mid-single digits, with particular strength in India and ASEAN, and Latin America up mid-teens.

Gregory S. Lovins: Compared to prior year, graphics and reflective cells were up low single digits organically,

Gregory S. Lovins: The performance of tapes in medical was down low single digits organically, as strength in industrial categories was more than offset by a decline in medical and personal care.

Gregory S. Lovins: The Materials Group delivered a strong adjusted EBITDA margin of 17.9% in the second quarter, up more than two points compared to the prior year, driven by higher volume and benefits from productivity, partially offset by higher employee-related costs. Regarding raw material costs, globally, we saw low single-digit inflation sequentially in the second quarter. The increase was driven by higher paper prices, primarily in Europe. We have been addressing the cost increases through a combination of product reengineering and pricing actions, as we discussed last quarter.

Gregory S. Lovins: partially driven by inventory de-stocking in those categories.

Gregory S. Lovins: Materials Group delivered a strong adjusted EBITDA margin of 17.9% in the second quarter, up more than two points compared to prior year, driven by higher volume and benefits from productivity, partially offset by higher employee related costs.

Gregory S. Lovins: Regarding raw material costs, globally we saw low single-digit inflation sequentially in the second quarter.

Gregory S. Lovins: The increase was driven by higher paper prices, primarily in Europe .

Gregory S. Lovins: We have been addressing the cost increases through a combination of product reengineering and pricing actions as we discussed last quarter.

Gregory S. Lovins: And we've continued to see paper prices increase as we move through the second quarter and are expecting modest inflation sequentially in the third quarter. We are monitoring this dynamic closely and will continue to evaluate if further pricing actions are appropriate as we move through the back half. Given this dynamic and the typical volume seasonality from Q2 to Q3, we expect materials group margins to sequentially moderate in the third quarter. Shifting now to the Solutions Group, sales were up 11% on an organic basis and 14% ex-currency.

Gregory S. Lovins: And we've continued to see paper prices increase as we move through the second quarter and are expecting modest inflation sequentially in the third quarter

Gregory S. Lovins: We are monitoring this dynamic closely and will continue to evaluate if further pricing actions are appropriate as we move through the back half.

Gregory S. Lovins: Given this dynamic and the typical volume seasonality from Q2 to Q3, we expect materials group margins will sequentially moderate in the third quarter.

Gregory S. Lovins: Shifting now to Solutions Group, sales were up 11% on an organic basis and 14% ex-currency.

Gregory S. Lovins: With high value solutions up low double digits, and base solutions up mid to high teens, as apparel volume normalized ahead of expectation. Year-to-date, enterprise-wide intelligent label sales were up mid to high teens, with strong growth in apparel and non-apparel categories, particularly logistics and general retail.

Gregory S. Lovins: With high value solutions up low double digits, and base solutions up mid to high teens, as apparel volume normalized ahead of expectations.

Gregory S. Lovins: Year-to-date, enterprise-wide intelligent label sales were up mid to high teens, with strong growth in apparel and non-apparel categories, particularly logistics and general retail.

Gregory S. Lovins: The Solutions Group adjusted EBITDA margin of 16.8% was up 100 basis points compared to the prior year, driven by benefits from higher volume and productivity. Partially offset by higher employee-related costs and continued growth and best, margin improved 70 basis points sequentially, and we anticipate further sequential margin improvement in the second half, driven largely by productivity initiatives and higher volume. Now, shifting to our outlook for 2024.

Gregory S. Lovins: Solutions Group adjusted EBITDA margin of 16.8% was up 100 basis points compared to prior year.

Gregory S. Lovins: driven by benefits from higher volume and productivity, partially offset by higher employee related costs and continued growth investments.

Gregory S. Lovins: Margin improved 70 basis points sequentially, and we anticipate further sequential margin improvement in the second half, driven largely by productivity initiatives and higher volume.

Gregory S. Lovins: We have raised our guidance for adjusted earnings per share to be between $9.30 and $9.50, a 15 cent increase to the midpoint of the range, despite a roughly 5 cent headwind from currency translation, which is largely in the second half. At the midpoint, our outlook reflects 19% growth versus the prior year. This increase reflects our strong second quarter and a modest increase in our operational outlook for the second half. As you recall, our outlook includes four key drivers of earnings growth for 2024, which are all on track.

Gregory S. Lovins: Now, shifting to our outlook for 2024, we have raised our guidance for adjusted earnings per share to be between $9.30 and $9.50.

Gregory S. Lovins: A 15 cent increase to the midpoint of the range, despite a roughly 5 cent headwind from currency translation, which is largely in the second half.

Gregory S. Lovins: At the midpoint, our outlook reflects 19% growth versus prior year.

Gregory S. Lovins: This increase reflects our strong second quarter and a modest increase to our operational outlook for the second half.

Gregory S. Lovins: As you recall, our outlook includes four key drivers of earnings growth for 2024, which are all on track.

Gregory S. Lovins: The Normalization of Label Volume Early in the Year; The Normalization of Apparel Volume Mid-Year; Significant Growth in Intelligent Labels and Ongoing Productivity Action. We've outlined additional key contributing factors to our guidance on slide 12 of our Supplemental Presentation Materials, in particular, in focusing on the changes from April.

Gregory S. Lovins: The Normalization of Label Volume Early in the Year, The Normalization of Apparel Volume Mid-Year, Significant Growth in Intelligent Labels, and Ongoing Productivity Actions.

Gregory S. Lovins: We've outlined additional key contributing factors to our guidance on slide 12 of our Supplemental Presentation Materials.

Gregory S. Lovins: We estimate roughly 4.5% organic sales growth, 50 basis points higher than our previous outlook, due to a slightly better volume and mix than previously anticipated. We continue to expect high single-digit volume growth, partially offset by deflation-related price reductions. We expect incremental savings from restructuring actions of more than $50 million, up $5 million from our previous outlook. And we now anticipate a headwind from currency translation of roughly $10 million in operating income for the year compared to our previous outlook of a roughly $5 million headwind.

Gregory S. Lovins: In particular, in focusing on the changes from April ,

Gregory S. Lovins: We estimate roughly 4.5% organic sales growth, 50 basis points higher than our previous outlook due to a slightly better volume and mix than previously anticipated.

Gregory S. Lovins: We continue to expect high single-digit volume growth, partially offset by deflation-related price reductions.

Gregory S. Lovins: We expect incremental savings from restructuring actions of more than $50 million, up $5 million from our previous outlook.

Gregory S. Lovins: And we now anticipate a headwind from currency translation of roughly $10 million in operating income for the year compared to our previous outlook of a roughly $5 million headwind.

Gregory S. Lovins: As you may recall, we've historically seen lower sequential volume seasonally in the third quarter, driven by the August holiday period in Europe and the timing of back-to-school shipments and apparel, which historically has resulted in a mid-single-digit sequential decline of EPS in Q3 from Q2. And we anticipate that Q3 EPS this year will be consistent with that historical pattern. In summary, we delivered another strong quarter, increased our outlook for earnings growth, and remain confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation.

Gregory S. Lovins: As you may recall, we've historically seen lower sequential volume seasonally in the third quarter.

Gregory S. Lovins: Driven by the August holiday period in Europe and the timing of back-to-school shipments and apparel.

Gregory S. Lovins: which historically has resulted in a mid-single-digit sequential decline of EPS in Q3 from Q2.

Gregory S. Lovins: And we anticipate Q3 EPS this year will be consistent with that historical pattern.

Gregory S. Lovins: In summary, we delivered another strong quarter, increased our outlook for earnings growth, and remain confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation.

Gregory S. Lovins: And we look forward to sharing more about our long-term objectives and strategies with all of you at our Investor Day in September and hope to see you there. And now we'll open up the call to your questions.

Gregory S. Lovins: And we look forward to sharing more about our long-term objectives and strategies with all of you at our Investor Day in September , and hope to see you there.

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

Operator: Ladies and gentlemen, if you would like to register a question, press star followed by the number one on your telephone keypad. You will hear confirmation of your request. If your question has been answered and you would like to withdraw your registration, please press the pound key to accommodate all participants.

Speaker Change: Ladies and gentlemen, if you would like to register a question, press star followed by the number 1 on your telephone keypad. You will hear confirmation of your request.

Speaker Change: If your question has been answered and you would like to withdraw your registration, please press the pound key 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.

Operator: 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. Your first question comes from the line of McNulty, John, with BMO Capital Markets. Please go ahead.

Speaker Change: One moment, please, for the first question.

Speaker Change: Your first question comes from the line of McNulty, John , with BMO Capital Markets. Please go ahead.

John Patrick McNulty: Yeah, thanks for taking my question. I guess the question would be on the solutions business, and in particular, I guess, tied to the intelligent label side. So, obviously, you pulled down or it looks like the revenue contribution for this year, and it sounds like a lot of it's going to be tied to just the timing of the rollout. So, does that just mean something got pushed out at the beginning of next year, or are you just not seeing the pilot programs necessarily move to the next step as quickly as you were thinking?

John Patrick McNulty: Yeah, thanks for taking my question. I guess...

John Patrick McNulty: The question would be on the solutions business, and in particular, I guess, tied to the intelligent label side.

Speaker Change: Obviously, you pulled down, it looks like, the revenue contribution for this year, and it sounds like a lot of it's going to be tied to just the timing of rollout. So does that just mean something got pushed out at the beginning of next year, or are you just not seeing the pilot programs necessarily?

Deon M. Stander: So, maybe you can give us a little bit of color on that. And then I guess the other question tied to that would just be around the solution margins. So, if we go back to kind of the pre-destocking that we saw in the apparel markets, you know, you were in the 18, 18 and change kind of EBITDA margin range. You're obviously coming in below that right now. Any reason now that it looks like some of that de-stocking is over to think that you shouldn't be able to get back into that 18 plus range as we kind of look out over the next 12 months?

Speaker Change: move to the next step as quickly as you were thinking. So maybe you can give us a little bit of color on that. And then I guess the other question tied to that would just be around the solutions margin. So if we go back to kind of the pre the de-stocking that we saw in the apparel markets, you know, you were in the 18 and change kind of EBITDA margin range. You're obviously coming in below that right now. Any reason, now that it looks like some of that de-stocking is over, to think that you shouldn't be able to get back into that, you know, 18 plus range as we kind of look out over the next 12 months?

Deon M. Stander: Hi John, this is Deon. Thanks for the question. I'll handle the first part, and I'll ask Greg just to comment on the second.

Deon M. Stander: I will just say that our original outlook for the year, when we planned the year, called for lower revenue growth relative to the volume growth that we planned. And we are now targeting, as I said in my notes, 20% volume growth this year with mid-teens revenue growth. We're anticipating in Q3 that we're going to see a similar growth rate for revenue as we've seen in the first half of the year. Now we expect revenue growth in the fourth quarter to be lower than previously anticipated, largely due to volume changes as it relates to customer rollout timing. There's a small element, John, also of mix.

Deon M. Stander: Hi John , this is Deon. Thanks for the question. I'll handle the first part and I'll ask Greg just to comment on the second. I will just say that our original outlook for the year, when we planned the year, called for lower revenue growth relative to the volume growth that we planned.

Gregory S. Lovins: And we are now targeting, as I said in my notes, 20% volume growth this year with mid-teens revenue growth.

Gregory S. Lovins: We anticipate in Q3 that we're going to see a similar growth rate for revenue as we've seen in the first half of the year.

Gregory S. Lovins: And now we expect revenue growth in the fourth quarter to be lower than previously anticipated.

Deon M. Stander: You'll recall that we have different price points across different segments, products, and use cases. But they all typically have the same margin profile, which I'll remind everyone is still above the segment average. And then finally, there will also be some deflation-related pricing impacts. I will say on that point that, if you recall, during 22 and 23, during the supply chain shortages, we did see inflation across the business, including in IL, which we are now addressing in the last few quarters over here.

Gregory S. Lovins: largely on volume changes as it relates to customer rollout timing.

Gregory S. Lovins: There's a small element, John , also of mix, and you'll recall that we have different price points across different segments and products and use cases, but they all typically have the same margin profile, which I'll remind everyone is still above the segment average.

Gregory S. Lovins: And then finally, there will also be some deflation-related pricing impacts.

Gregory S. Lovins: I will stay on that point.

Gregory S. Lovins: If you recall, during 22 and 23, during the supply chain shortages, we did see inflation across the business, including in IL, which we are now addressing in the last few quarters over here.

Deon M. Stander: If I turn to specifically the customer rollout pieces, there are two elements to this. So this is one, ongoing rollouts with existing customers, and then also anticipated rollouts from pilots that have moved slightly in their timing. And this is not unusual.

Gregory S. Lovins: If I turn to specifically the customer rollout pieces...

Gregory S. Lovins: There are two elements to this, so this is one, ongoing rollouts with existing customers.

Gregory S. Lovins: and then also anticipated rollouts from pilots.

Gregory S. Lovins: that have moved slightly in their timing. And this is not unusual. We've spoken in the past about when you have new adoptions in new categories, timing can tend to be uneven, move intra-quarter.

Deon M. Stander: We've spoken in the past about when you have new adoptions in new categories, timing can tend to be uneven and move intra-quarter. For existing customers, there are two elements where we're seeing some volume impacts now as it relates to our existing customers with existing rollouts. One is the comparison with inventory builds in the launch phase in prior years, largely a fourth quarter issue in logistics. And secondly, as our customers move through their adoption journey, taking into account things like new category adoptions, mostly in general retail, and also infrastructure readiness. Are they ready to take on the next elements of their journey? And sometimes that's just a timing issue, and that's mostly in logistics.

Gregory S. Lovins: On our existing customers, there's two elements where we're seeing some volume impacts now as it relates to our existing customers with existing rollouts.

Gregory S. Lovins: One is the comparison with inventory builds in the launch phase in prior years, largely a fourth quarter issue on logistics.

Gregory S. Lovins: Secondly, as our customers move through their adoption journey, taking into account things like new category adoptions, mostly in general retail, and also infrastructure readiness. Are they ready to take on the next elements of their journey? Sometimes that's just a timing issue, and that's mostly in logistics.

Deon M. Stander: I would say, John, that all of our customers, whether they are in pilot, trial, or rollout, they're continuing to see significant value and returns on investment in leveraging this technology. And I would argue, having spoken to them, that their conviction in the adoption of technology is even higher. And additionally, we continue to see real strength in our pipeline across all segments, underpinning, again, my conviction that this long-term growth opportunity in this platform is significant. Yeah, thanks, Deon. And John, too.

Gregory S. Lovins: I will say, John , that with all of our customers, whether they be in pilot, trial, or rollout, they're continuing to see significant value.

Gregory S. Lovins: returns on investment.

Gregory S. Lovins: in leveraging this technology. And I would argue, and having spoken to them, that their conviction in the adoption of technology is even higher. And then additionally, we continue to see real strength in our pipeline across all segments.

Gregory S. Lovins: underpinning again my conviction that this long-term growth opportunities platform is significant.

Gregory S. Lovins: Yeah, thanks, Deon. And John, to answer your question on margins, I think, as we've shown over the last couple quarters, as the apparel segment or categories are normalizing, we've seen margins improve. We saw about a 70 basis point improvement here in Q2 versus Q1. I think I talked about in my prepared remarks and in our slides, even, that we expect that to continue improving as we move through the back half. So the short answer is yes, we would expect to get back to those 18% plus that we had, like you've mentioned, a year or two years ago. And that's an area we'd like to get back to, and we expect to be able to deliver as we

John: Yeah, thanks Deon. And John , to answer your question on margins, I think as we've shown over the last couple quarters is the apparel segment or categories are normalizing.

John: We've seen margins improve. We saw about a 70 basis point improvement here in Q2 versus Q1. I think I talked about in my prepared remarks and in our slides even that we expect that to continue improving as we move through the back half.

Speaker Change: So the short answer is yes, we would expect to get back to those 18% plus that we'd had, like you've mentioned, a year or two years ago, and that's an area we'd like to get back to, and we expect to be able to deliver, as we said.

Ghansham Panjabi: Your next question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Speaker Change: Your next question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Deon M. Stander: Hey guys, good morning. I guess I'm going back to the second quarter and some of the variances that drove the upside relative to, you know, your previous guidance. Was it as simple as just Europe and maybe apparel was a little bit better? And on the apparel improvement, how are you sort of disaggregating between, you know, some of the shipping challenges and some of the pull-forwards that we read about in the headlines in context of just the retailer earnings that have been out recently on the apparel side, just, you know, not showing any signs of growth?

Ghansham Panjabi: Hey guys, good morning. I guess going back to the second quarter and some of the variances that drove the upside relative to, you know, your previous guidance.

Ghansham Panjabi: Was it as simple as just Europe and maybe apparel was a little bit better? And on the apparel improvement, how are you sort of disaggregating between, you know, some of the shipping challenges and some of the pull-forwards that we read about in the headlines in context of just the retailer earnings?

Speaker Change: that have been out recently on the apparel side. Just, you know, I'm not showing any signs of real improvement.

Deon M. Stander: Ghansham, let me deal with that. Yes, at the high level, the variances are largely in our labels business from a volume perspective, largely in Europe, and then from apparel, where we've seen sooner than expected normalization. That will also continue during the second half of the year. On apparel specifically, I think there's a couple of dynamics at play over here. Certainly, the macro environment still remains very uncertain, and apparel is largely driven by consumer sentiment, which is not robust.

Speaker Change: Let me deal with that. Yes, at the high level, the variances are largely in our

Speaker Change: Labels business from a volume perspective largely in Europe and then from apparel where we've seen sooner than expected Normalization that still will also continue during the second half of the year on apparel specifically I think there's a couple of dynamics of play over here Certainly there the macro environment still remains very uncertain and apparel is largely driven by consumer sentiment, which is not robust

Deon M. Stander: It's also true that what we've seen more recently in discussions with our customers there is that their inventory levels are now at where they would need them to be off. This is after a year of continuous de-stocking, and we're starting now to see some degree of an uptick in import volumes, and typically, our volumes precede those, so our performance in Q2, which is slightly out of expectation, would suggest we'd see more of an uptick in import volumes across the two segments across North America and Europe as we move forward.

Speaker Change: It's also true that what we've seen more recently in discussion with our customers there is that their inventory levels are now at where they would need them to be off. This is after a year of continuous destocking.

Speaker Change: and we're starting now to see some degree of uptick in import volumes and typically our volumes precede those.

Speaker Change: So our performance in Q2, which is slightly above expectation, which suggests we'd see more uptick in import volumes across the two segments across North America and Europe as we move forward.

Deon M. Stander: I think the only other piece I'd call out is that, as always in apparel, you get a vast range of variances in terms of how customers do. Some of them are doing very well, some of them are not doing so well, and that's probably reflected in some of the earnings releases that you've seen more recently. I think Ghansham just answered the first question.

Speaker Change: I think the only other piece I'd call out is that, as always in apparel, you get a vast range of variances in terms of how customers do. Some of them are doing very well, some of them are not doing so well, and that's probably reflected in some of the earnings releases that you've seen more recently.

Deon M. Stander: I think, Ghansham, just to answer the first part of your question, yes, the two big drivers of the Beat and Q2 were the better performance in Materials Europe as well as the under...

Speaker Change: I think, Ghansham, just to answer the first part of your question, yes, the two big drivers of the Beat and Q2 were the better performance in Materials Europe as well as the apparel as Deon just explained.

George Leon Staphos: Your next question comes from the line of George Staphos with Bank of America. Please go ahead.

Speaker Change: Your next question comes from the line of George Staphos with Bank of America. Please go ahead.

George Leon Staphos: Hi, thanks very much. Thanks for taking my question. And good morning, everybody. Good afternoon.

Deon M. Stander: So my, my two-parter question on solutions. You know, first of all, just piggybacking on the question that Ghansham teed up. So from what your customers said or are seeing, was there any pull forward ahead of any potential tariff-related issues, or do you think that's really been a non-event for you in the quarter? If you could provide any color there, I'd missed kind of the nuances there.

Speaker Change: Hi, thanks very much. Thanks for taking my question, and good morning everybody. Good afternoon. Hi, George. So, my two-parter, one question on solutions, you know, first of all, just piggybacking on the question that Ghansham teed up,

George Leon Staphos: So, from what your customers said or are seeing, was there any pull forward ahead of any potential tariff-related issues, or do you think that's really was a non-event for you in the quarter, if you could provide any color there? And if you did, just now, I'd missed.

Deon M. Stander: And then, you know, the discussion that we've had and that you've just had as well on volume versus revenue growth and the implied sort of reduction in ASP, how much of that, Deon, is actually coming from just, hey, you're coming up the learning curve, you're seeing improved manufacturing economics. And you're passing that along because that's how you get adoption, you know, help us parse that versus the other deflation that might be occurring based on, you know, the supply chain issues from a year and two ago. Thank you.

Deon Stander: The discussion that we've had and that you've just had as well on volume versus revenue growth and the implied sort of reduction in ASP, how much of that, Deon, is actually coming from just, hey, you're coming up learning curve, you're seeing improved manufacturing economics, you're passing that along because that's how you get adoption? You know, help us parse that versus the other deflation that might be occurring off of, you know, the supply chain issues from a year or two.

Speaker Change: The discussion that we've had and that you've had as well on volume versus revenue growth and the implied...

Speaker Change: sort of reduction in ASP. How much of that, Deon, is actually coming from just, hey, you're coming up learning curve, you're seeing improved manufacturing economics,

Speaker Change: You're passing that along because that's how you get adoption, you know, help us parse that versus the other deflation that might be occurring off of, you know, the supply chain issues from a year and two ago. Thank you.

Deon M. Stander: Sure, George, and I assume the second question relates more to Illinois, so I'll address it that way.

Operator: I assume the second question relates more to I.L. as well address the cut way.

Deon M. Stander: Yes, exactly on the first one, we've not.

Deon M. Stander: Sure, George. And I assume the second question relates more to IL, as I'll address it that way. Yes.

Deon M. Stander: On the first one, we've not necessarily seen any visible signs of apparel pull-forward as a result of tariffs. However, I think there is clearly a lot of discussion amongst retailers as to what the likely outcome will be of a more tariff-intensive future, if that turns out to be the case.

Deon Stander: On the first one, we've not necessarily seen any visible signs of a parallel pull forward as a result of tariffs.

Speaker Change: On the first one, we've not necessarily seen any visible signs of apparel pull forward as a result of tariffs. I think there is clearly a lot of discussion.

Deon Stander: I think there is clearly a lot of discussion amongst retailers as to what the likely outcome will be of a more tariff-intensive future if that turns out to be the case. But at the moment we've not seen anything. You recall in the second quarter what we did see was some degree of pull forward from the third quarter as it related more to the Red Sea shipping crisis that was happening with goods having to go round the Cape of Good Hope rather than go through the Suez Canal. There's an element of that, but generally when we look across it, we don't tend to see anything that suggests there's been some degree of pull forward.

Speaker Change: amongst retailers as to what the likely outcome will be of a more tariff-intensive future if that turns out to be the case.

Deon M. Stander: But at the moment, we've not seen anything. You recall in the second quarter, what we did see was some degree of pull-forward from the third quarter as it related more to the Red Sea shipping crisis that was happening, with goods having to go around the Cape of Good Hope rather than go through the Suez Canal. There's an element of that, but generally, when we look across it, we don't tend to see anything that suggests there's been some degree of pull-forward. But there may be in tiny bits as well.

Speaker Change: But at the moment we've not seen anything. You recall in the second quarter what we did see was some degree of pull forward from the third quarter.

Speaker Change: As it related more to the Red Sea shipping crisis that was happening, with goods having to go around the Cape of Good Hope rather than go through the Suez Canal, there's an element of that, but generally when we look across it, we don't tend to see anything that suggests there's been some degree of pull forward.

Deon Stander: There may be in tiny bits as well. I think our observation of where we've been in the second quarter as a release is that it's just been like the more, the slightly quick and normalisation of a parallel and we anticipate.

Deon M. Stander: I think our observation of where we've been in the second quarter of the release is that it's just been a slightly quicker normalization of volume and apparel than we'd anticipated. We said it would start in the second half of the year, and we've clearly seen a little bit earlier than that. As it relates to volume and revenue passing for IL, I think if you look back over the last five years, George, I'd characterize that we've always seen that ASPs have declined in the past, typically in that kind of mid-single-digit range, and that's not unexpected as the technology curve has ramped up and more volume has come to play.

Speaker Change: in tiny bits as well. I think our observation of where we've been in the second quarter of the release is that it's just been a slightly quicker normalization of volume in apparel than we'd anticipated. We said it would start from the second half of the year, and we've clearly seen a little bit earlier than that.

Deon Stander: We said it would start from the second half of the year, and we said clearly seem a little bit earlier than that.

Deon Stander: As it relates to volume and revenue passing for I.L. I think if you look back over the last five years, George, I'd characterize that we've always seen that ASPs have declined in the past. Typically in that kind of mid, single digits range, and that's not unexpected as the technology curve is ramped up and more volume has come to plan. Actually, those declines in time have actually also helped accelerate new segment adoptions and locked new opportunities.

Speaker Change: As it relates to volume and revenue passing for IL.

Speaker Change: I think if you look back over the last five years, George, I'd characterize that we've always seen that ASPs have declined in the past, typically in that kind of mid-to-late

Speaker Change: single digits range and that's not unexpected as the technology curve is ramped up and more volume has come to play and actually those declines in time have actually also helped accelerate new segment adoptions and unlock new opportunities.

Deon M. Stander: Actually, those declines in time have actually also helped accelerate new segment adoptions and unlock new opportunities. I think as we're moving forward, I believe we'll see some moderation in those types of declines, largely because some of the bigger gains have already been made. We're continuing to lean into where we see our scale advantage, particularly in our innovation process manufacturing and innovation at the product level, which we think has fundamentally underpinned our competitive advantage over this period and we believe will continue to underpin our competitive advantage moving forward.

Deon Stander: I think as we're moving forward, I believe we'll see some moderation in those types of declines, largely because some of the big gains are already being made. We're continuing to lean into where we see our scale and the scale advantage, particularly in our innovation process. Manufacturing and innovation is a product level, which we think has fundamentally underpinned our competitive advantage over this period and we believe will continue to underpinned our competitive advantage moving forward. I think at the end of the day, pricing is but one element that has come to bear in the market. I think the bigger element is we move forward is the value creation that customers are seeing, which is a very personal discussion that we're having with customers now is what value are they creating, which is why the ROI is looking so high.

Speaker Change: I think as we're moving forward, I believe we'll see some moderation in those type of declines, largely because some of the bigger gains have already been made.

Speaker Change: And we're continuing to lean into where we see our scale advantage, particularly in our innovation process manufacturing and innovation at the product level, which we think has fundamentally underpinned our competitive advantage over this period and we believe will continue to underpin our competitive advantage moving forward.

Deon M. Stander: I think at the end of the day, pricing is but one element that has come to bear in the market, and I think the bigger element as we move forward is the value creation that customers are seeing, which is a very pertinent discussion that we're having with customers now about what value are they creating, which is why the ROI is looking so high. The more that we move to enabling a broader solution, being that kind of one throat to choke for customers across each node of that ecosystem, the more likely we are to capture

Speaker Change: I think at the end of the day, pricing is but one element that has come to bear in the market, and I think the bigger element as we move forward is the value creation that customers are seeing, which is a very...

Speaker Change: pertinent discussion that we're having with customers now is what value are they creating which is why the ROI is looking so high and the more that we move to enabling a broader solution being that kind of one throat to choke for customers across each node of that ecosystem the more likely we are to capture more value in that regard.

Deon Stander: And the more that we move to enabling a broader solution, being that kind of one throw to choke for customers across each node of that ecosystem, the more likely we are to capture more value in that regard.

Michael Roxland: Your next question comes from the line of Rocksland Mike; we trust security. Please go ahead.

Michael Andrew Roxland: Your next question comes from the line of Roxland Mike with Trust Security. Please go ahead.

Speaker Change: and many others. . . . . . . . . . . . .

Speaker Change: Your next question comes from the line of Roxland Mike with Trust Securities. Please go ahead.

Deon M. Stander: Yes, thanks Deon, Greg, and John for taking my questions, and congrats on a good quarter. Thanks, Mike.

Michael Roxland: Yes, thanks.

Michael Roxland: The under I can draw for taking my questions and we can grasp on a good quarter.

Michael Andrew Roxland: Yes, thanks Deon, Greg, and John for taking my questions and congrats on a good quarter.

Deon M. Stander: Just wanted to get more, Deon, more color from you regarding that delay in customer deployment in 4Q. I think you mentioned logistics. Does it involve any other vertical as well, maybe general retail, just because given the various SKUs, the greater number of SKUs in general retail, maybe that's what's taking a little bit longer to deploy? And can you comment on those deferrals? When do you expect them to hit in 2025? And lastly, just on deflation, can you comment on any approaches you're using to reduce material costs, improve productivity, and the like to offset the deflation you're experiencing? Sure, Mike.

Mike: Thanks, Mike.

Michael Andrew Roxland: Just wanted to get more color from you regarding that delay in customer deployment in 4Q. I think you mentioned logistics. Does it involve any other...

Speaker Change: vertical as well, maybe general retail, just because given the various SKUs, the greater amount of SKUs

Speaker Change: in general retail. Maybe that's what's taking a little bit longer to deploy. And can you comment on for those deferrals, when do you expect them to hit in 2025?

Speaker Change: And lastly, just on the deflation, can you comment on any approaches you're using to reduce material costs, improve productivity, and the like, to offset the deflation you're experiencing?

Deon M. Stander: Sure, Mike. Let me clarify exactly on logistics. This is not an impact of the rollout. The rollout has largely been, at least for our large logistics customer, been done as we went through the back end of last year. The biggest quarter was the fourth quarter in which we both rolled out and deployed, and then we've gone through this half this year basically servicing that, albeit, I have to say, on lower overall parcel, softer parcel demands across the market.

Speaker Change: Sure, Mike. Let me clarify exactly on logistics. This is not an impact of rollout. The rollout has largely, at least for our large logistic customer, has been done as we went through the back end of last year. The biggest quarter was the fourth quarter in which we both...

Speaker Change: rolled out and deployed, and then we're going through this half this year is basically servicing that, albeit, I have to say, on lower overall parcel, softer parcel demands across the market.

Deon M. Stander: As it relates specifically to the question around what happens in terms of timing, I made the point of saying that we see the greatest variance of timing relative to our expectations, typically in new pilots that are moving to rollout, and often in these newer segments. We saw the same in apparel when we first started. You have an estimate of timing as a number of factors that come into play at that point, not just the returns that the customers are going to see, which have so far proved to be very, very good, but also the timing of how they then culturally adopt that, either in the supply chain or in the stores or both, and sometimes that can change according to their own specific dynamics.

Speaker Change: as it relates specifically to the question around what happens in the timing.

Speaker Change: I made the point of saying that we see the greatest variance of timing relative to our expectations typically in new

Mike: Pilots that are moving to rollout and often in these newer segments. We saw the same in apparel Mike when we first started

Mike: You have an estimate of timing, there's a number of factors that come into play at that point, not just the returns that the customers are going to see, which so far proved to be very, very good, but also the timing of how they then culturally adopt that, either in the supply chain or in the stores or both.

Deon M. Stander: The typical movements we see are intra-quarter, within a year, and typically on a 12-month basis, so anything that we see that may be slightly delayed in one quarter typically tends to move forward to the second or third quarter thereafter.

Mike: and sometimes that can change according to their own specific dynamics. The typical movements we see are intra-quarter, within a year, in a typical 12-month basis. So anything that we see that may be slightly delayed in one quarter typically tends to move forward in the second or third quarter thereafter.

Deon M. Stander: After your question on deflation, it's been part of our core strength as a company to relentlessly drive productivity. I touched on that earlier in my prepared remarks as well. And we've taken that approach significantly in our intelligent labels platform. I think it's one unique piece that we are able to bring to bear. If you think about our materials business, the world leader in role-to-role process manufacturing, and the capability that goes within that.

Speaker Change: After your question on deflation, it's been part of our core strength as a company is relentlessly driving productivity. I touched on that earlier in my prepared remarks as well.

Speaker Change: And we've taken that approach significantly in our Intelligent Labels platform. I think there's one unique piece that we are able to bring to bear. If you think about our materials business is...

Speaker Change: the world leader in role-to-role process manufacturing and the capabilities that goes within that.

Deon M. Stander: And we've been able to leverage that capability to apply it to a new segment that has enormous volume growth potential on our IL platform. So being able to apply that capability has given us a significant advantage when it comes to the cost of manufacturing our items. It's something we're constantly focused on. And then, as we move forward, we'll continue to leverage our innovation, our material science innovation, our process innovation, and our solutions innovation to further augment how we're going to create further value or change, provide a further step change or function change in our competitive differentiation with the rest of the market.

Speaker Change: And we've been able to leverage that capability to apply to a new segment that has enormous volume growth potential in our IL platform.

Speaker Change: And so being able to apply that capability has given us a significant advantage when it comes to...

Speaker Change: The Cost of Manufacturing of Items. It's something we're constantly focused on.

Speaker Change: And then as we move forward, we'll continue to leverage our innovation, our materials science innovation, our process innovation, and our solutions innovation.

Speaker Change: to further augment how we're going to create further value or provide a further step change, function change, in our competitive differentiation with the rest of the market.

Joshua David Spector: The next question comes from the line of Josh Spector with EBS. Please go ahead.

Speaker Change: Next question comes from the line of Josh Spector with EBS. Please go ahead.

Deon M. Stander: Hi, good morning. I wanted to ask about RFID in a similar vein, just now we're talking about volume and pricing a little bit more. Has anything changed in the competitive dynamics within RFID to require greater pricing actions? Or are we now at a phase of rollout where there's any price cuts that we need to consider? So when you talked about historically, or when you raised the bar and said 20% growth in RFID, is that more volume, and do we need to think about price separately from that? Or do you think about that more as organic? Thanks. Thanks, Josh.

Joshua David Spector: Yeah, hi, good morning. I wanted to ask about RFID in a similar vein, just

Joshua David Spector: Now we're talking about volume and pricing a little bit more. Has anything changed on the competitive dynamics within RFID to require greater pricing actions?

Joshua David Spector: Or are we now at a phase of rollout where there's any price downs that we need to consider? So when you talked about historically, or when you raised the bar and said 20% growth in RFID, is that more volume and we need to think about price separate from that, or do you think about that more as organic? Thanks.

Deon M. Stander: Thanks Josh. To your last question, the change is more in volume. As it relates to the competitive dynamics, I'm sorry, and the timing of those customer rollouts as it relates to the volume. As it relates to the competitive dynamics, we clearly see competitive dynamics in the Illinois market. It's a growth industry, it's always going to attract more capital, but our focus has been on maintaining and expanding our leadership share in this.

Speaker Change: Thanks, Josh. To your last question, the change is more in volume. As it relates to the competitive dynamics...

Speaker Change: I'm sorry, and the timing of those customer rollouts as related to the volume.

Speaker Change: As it relates to competitive dynamics, we clearly see competitive dynamics in the I.L. market. It's a growth industry. It's always going to attract more capital.

Speaker Change: But our focus has been on maintaining and expanding our leadership share in this, and we do this in a couple of ways, not least on the elements that I touched on, Joss, which is around our innovation at a process level, at a product level, and the social level, but also in the way that we're helping to activate industries. We've been investing ahead of the curve to ensure that we can activate industries like logistics and like food, and you've seen the outcome of that. We are the people leading the logistics segment industry, and we're doing a similar process with some of the pilots who are looking into food, whether it's in grocery or whether it's in QSR as well. I actually think overall that if I look forward, I have very high conviction that our capability and the way that we play a role somewhat uniquely across each node of the ecosystem of intelligent labels.

Deon M. Stander: And we do this in a couple of ways, not least on the elements that I touched on, Josh, which are around our innovation at a process level, at a product level, at a social level, but also in the way that we're helping to activate industries. We've been investing ahead of the curve to ensure that we can activate industries like logistics and food, and you've seen the outcome of that. We are the people leading this logistics segment industry, and we're doing a similar process with some of the pilots we're looking into food, whether it's in grocery or whether it's in QSR as well.

Deon M. Stander: I actually think overall that, if I look forward, I have very high conviction that our capability and the way that we play a role somewhat uniquely across each node of the ecosystem of intelligent labels, whether it's from inlay manufacturing all the way through to managing data and providing services, gives us a position where, particularly when new customers come on board as they think about adopting the technology as a significant decision for their C-suite, they're looking for Our experience has shown over time that we are then the disproportioned leader in our share overall, something that we think even this year we're going to continue to maintain, if not expand.

Speaker Change: whether it's from inlay manufacturing all the way through to managing data and providing services.

Speaker Change: gives us a position in which, particularly when new customers come on board, as they think about adopting the technology being a significant decision for their C-suite, they're looking for somebody with credibility, scale, and global reach and experience to be able to do that. And it tends to position us better than anybody else.

Speaker Change: Our experience has shown over time that we then are a disproportionate leader in our share overall, something that we think even in this year we're going to continue to maintain, if not expand.

Matthew Burke Roberts: Your next question comes from the line of Matt Roberts with Raymond James. Please go ahead.

Speaker Change: Your next question comes from the line of Matt Roberts with Raymond James. Please go ahead.

Matthew Burke Roberts: Hey, good afternoon, everybody. Thank you for the time. Surprise, surprise.

Matthew Burke Roberts: Hey, good afternoon, everybody. Thank you for the time.

Matthew Burke Roberts: Surprise, surprise. I will ask about RFID. So maybe given the the timing issue in 2024, could you now envision with that timing, like growth of more than 20% in 2025? And

Deon M. Stander: I will ask about RFID. So maybe given the timing issue in 2024, could you now imagine with that timing, like growth of more than 20% in 2025? And if you could provide any examples or timing or magnitude of those initial food or QSR rollouts, or how we should think about that a little bit farther.

Matthew Burke Roberts: If you could provide any examples or timing or magnitude of those initial food or QSR rollouts or how we should think about that a little bit farther, I think that could certainly be helpful. Thank you all.

Deon M. Stander: Sure, Max. Let me just start by saying the reason why we have such conviction in the long-term growth potential of this platform. You know, if you think about apparel being, let's say, 45 billion units, and we're roughly 40 percent penetrated with IL now through that. Logistics, by contrast, is 65 to 70 billion units. We have just one customer in the industry that has now started to adopt it.

Deon M. Stander: I think that could certainly be helpful. Thank you all. Sure, Max. Let me just start by saying...

Speaker Change: Sure, Max, let me just start by saying the reason why I think we have such conviction in the long-term growth potential of this platform.

Speaker Change: You know, if you think about apparel being, let's say, a 45 billion unit and we're roughly 40% penetrated with IL now through that.

Speaker Change: Logistics, by contrast, is 65 to 70 billion units. We have just one customer in the industry that has now started to adopt.

Deon M. Stander: And then food, by comparison to that, is over 200 billion units, where they are just at the nascent stage. So the runway for this platform in connecting physical items with digital identities is substantial and will last for many years to come as well. The way that I think about our ability in each one of those segments is that we are engaged right now in discussions with all the logistics providers. In some instances, we're doing trials and pilots.

Speaker Change: And then food, by comparison to that, is over 200 billion units where they are just at its nascent stage. So the runway for this platform in connecting physical items of digital identities is substantial and over many years to come as well.

Speaker Change: The way that I think about our ability in each one of those segments is that we are engaged right now discussions with all logistics providers. In some instances, we're doing trials and pilots.

Deon M. Stander: And on the food side of things, we are continuing to drive very productive pilots across both quick service restaurants and grocery. As for the longer-term volume outlooks, we have an investor day coming up in September where we're going to be focusing on what our strategic plans and our outlooks are for the next five years, and we'll give more color at that point.

Speaker Change: And on the food side of things, we are continuing to drive very productive pilots.

Speaker Change: across both quick service restaurants and grocery. As to the longer term volume outlooks, we have an investor day coming up in September where we're gonna be focusing on what our strategic plans and our outlooks are for the next five years, and we'll give more color at that point.

Jeffrey John Zekauskas: Your next question comes from the line of Jeffrey Zekauskas, JP Morgan. Please go ahead.

Speaker Change: Your next question comes from the line of Jeffrey Zekauskas, JP Morgan. Please go ahead.

Gregory S. Lovins: Thanks very much. I was hoping you would describe a little bit of what's going on in SG&A. And that SG&A expense was up $55 million year over year, or about 17%. And if you look at Avery for the past five years... The SG&A expense on a sequential basis in the second quarter goes down every year. So, is there something unusual in the second quarter, and how did raw materials change year over year in the second quarter?

Jeffrey John Zekauskas: Thanks very much. I was hoping you would describe a little bit of what's going on in SG&A expense.

Speaker Change: And that SG&A expense was up $55 million year-over-year, or about 17%. And if you look at Avery for the past five years,

Speaker Change: The SG&A expense on a sequential basis in the second quarter goes down every year.

Speaker Change: So, is there something that's unusual in the second quarter, and how did raw materials change year over year in the second quarter?

Gregory S. Lovins: Yeah, Jeff. So, the biggest driver versus last year is obviously that in 2023, we did not deliver results in line with our initial expectations for the year. So our incentive compensation accruals in 2023 were quite low, down to zero for corporate, for that matter, at the end of the year. This year, of course, as we talked about, we're raising our expectations or raising our outlook above our initial expectations. So incentive comp accruals are a bit higher, so there's a pretty sizable swing on that from a year over year perspective. So that would be the main driver versus the prior year. And second question.

Speaker Change: Yeah, Jeff, so, I mean, the biggest driver versus last year, obviously, in 2023,

Speaker Change: We did not deliver results in line with our initial expectations for the year.

Speaker Change: So our incentive compensation accruals in 2023 were quite low.

Speaker Change: down to zero for corporate, for that matter, at the end of the year. This year, of course, as we talked about, we're raising our outlook above our initial expectations, so incentive comp accruals are a bit higher. So there's a pretty sizable swing on that from a year-over-year perspective.

Gregory S. Lovins: Well, inflation versus prior year, overall, as I said, inflation sequentially was very low single digits versus prior year, high single digit deflation versus last year, really about half driven from paper year over year and the rest from chemical and film. So a little bit of sequential from paper, largely in Europe, year over year, still high single digit deflation, and Jeffrey, the only thing I'd also add to what Greg

Speaker Change: And second question...

Speaker Change: in place.

Speaker Change: Oh, Inflation vs.

Speaker Change: Prior year, overall, as I said, inflation sequentially was very low single digits versus prior year high single digit deflation versus last year.

Speaker Change: Really about half driven from paper, year over year, and the rest from chemical and film. So a little bit of sequential from paper, largely in Europe , year over year, still high single-digit deflation.

Deon M. Stander: Jeffrey, the only thing I'd also add to what Greg said is in last year, as you recall, when we were going through that significantly more challenging period, we did what we always do, which is to dramatically improve and strengthen on our cost management, particularly on some of our temporary costs as well, and we've seen as volume has recovered and normalized in the second quarter that some of those temporary costs have returned as well, and you'll see that contrast factor in, in addition to the incentive compensation.

Geoffrey: And Jeffrey, the only thing I'd also add to what Greg said is in last year, as you recall, when we were going through that significantly more challenging period, we did what we always do, which is to dramatically improve and strengthen on our cost management, particularly on some of our temporary costs as well. And we've seen as volume has recovered and normalized in the second quarter that some of those temporary costs have returned as well, and you'll see that contrast factor in, in addition to the incentive comp basis.

Anthony James Pettinari: Your next question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Speaker Change: Your next question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Deon M. Stander: I was wondering if you could talk a little bit about VESCOM, obviously not the biggest part of your business, but just, you know, how that business has been performing this year, you know, in terms of organic growth and maybe, you know, what's coming from volume or price. And then, you know, we've seen stories of large retailers adopting the digital shelf potentially in a big way. Just wondering what kind of VESCOM is set up potentially in a move towards a bigger digital shelf environment.

Anthony James Pettinari: I was wondering if you could talk a little bit about Vescom, you know, obviously not the biggest part of your business, but just, you know, how has that, how has that business been performing this year?

Speaker Change: You know in terms of organic growth and maybe you know what's coming from volume or price and then you know We've seen stories of large retailers Adopting you know digital shelf potentially in a big way. Just wondering how kind of best calm is set up

Speaker Change: potentially in a move towards a bigger digital shelf environment.

Deon M. Stander: Sure, Anthony.

Deon M. Stander: Sure, Anthony, let me just talk a little bit about Vescom and then I'll address your second point afterwards. Our Vescom business continues to do well overall, and it contributes in a number of different dimensions, not least the fact that it's a high-value segment business with greater-than-segment average margins, but also the access and the reach that the Vescom business has into a lot of the food customers that we never really had access to in the past, which has helped us on our food initiatives around intelligent labels, but also across drug dollar and so forth.

Speaker Change: Sure, Anthony, let me just talk a little bit about Vesco and then I'll address your second point afterwards.

Speaker Change: Our VESCOM business continues to do well overall, and it contributes in a number of different dimensions, not least the fact that it's a high-value segment business.

Speaker Change: with greater than segment average margins, but also the access and the reach that the Vescon business has.

Speaker Change: into a lot of the food customers that we never really had access to in the past, which has helped us on our food initiatives around intelligent labels, but also across drug dollar and so forth.

Deon M. Stander: I think this year, particularly in the second quarter, there was a degree of softness more related to the drugstore challenges that you're seeing openly in the market at the moment, but I will also say that as part of a reaffirmation of the kind of value that that business does in both providing productivity solutions, this is kind of shelf-edge labeling in-sequence, in walk-sequence, but also in terms of We've re-signed a significant U.S. retailer for a multi-year deal again, and we're expecting by the end of the year to get a new large U.S. retail banner as part of our customer portfolio as well.

Speaker Change: I think this year, particularly in the second quarter, there was a degree of softness more related to the drugstore challenges that you're seeing openly in the market at the moment.

Speaker Change: But I will also say that as part of a reaffirmation of kind of the value that

Speaker Change: that business does in both providing productivity solutions, this is kind of shelf-edge labeling, in-sequence, in walk-sequence.

Speaker Change: but also in terms of its media outlet, how you leverage that.

Speaker Change: Shelfage Technology to also provide consumer media promotions.

Speaker Change: We've re-signed a significant U.S. retailer for a multi-year deal again and we're anticipating by the end of the year to get a new large U.S. retail banner as part of our customer portfolio as well.

Deon M. Stander: When you think about specifically the shelf-edge becoming more digitized, digitization is an inevitable trend that we see moving, and that's actually a tailwind for us as a collective company and in a large part of our solutions business as well. I will note that our Vescom business, while it currently has an analog, let's call it an analog shelf label, the strength of the business is actually in its data composition engine. Our business takes in huge amounts of data, both point-of-sale data, planogram data, pricing data, and advertising information, and through that data composition, outputs currently to an analog label.

Speaker Change: When I talk, when you think about specifically the shelfage becoming more digitized, digitization is an inevitable trend that we see moving and that's actually a tailwind for us as a collective company and in a large part of our solutions business as well.

Speaker Change: I will note that our Vescom business, while it currently has an analog, let's call it an analog shelf label, the strength of the business is actually in its data composition engine. Our business takes in huge amounts of data, both point-of-sale data, planogram data, pricing data, and advertising information.

Speaker Change: and through that data composition.

Deon M. Stander: We are also currently involved with most of the electronic shelf-edge trials as the engine that also outputs that to an electronic shelf label, so either analog or digital. I think that is going to be one of the strengths of this business moving forward, as electronic shelf labels may start to become an increasingly bigger part of retail, they will not be ubiquitous across all the stores. It will be in certain targeted segments, and so you'll still be dealing with a mixed estate, and the people best placed to deal with that mixed estate, I believe, are our Vescom.

Speaker Change: Outputs.

Speaker Change: currently to an analog label.

Speaker Change: We also are currently involved with most of the electronic shellfidge trials.

Speaker Change: as the engine that also outputs that to an electronic shelf label, so either analog or digital.

Speaker Change: And I think that is going to be one of the strengths of this business in moving forward is that.

Speaker Change: electronic shelf labels may start to become an increasingly bigger part of retail. It will not be ubiquitous across all the stores, it will be in certain targeted segments and so you'll still be dealing with a mixed estate and the people best place to deal with that mixed estate I believe is our Bestcom business.

George Leon Staphos: Your next question comes from the line of George Staphos with Bank of America. Please go ahead.

Speaker Change: Your next question comes from the line of George Staphos with Bank of America, please go ahead.

Gregory S. Lovins: Hi, thanks for taking my follow-on. So in materials, it seemed like, I mean, at least versus our model, margins were 50 to 100 basis points higher than we would have expected. How did margins fare relative to your initial expectations for the quarter? Again, Deon and Greg, how much operating leverage did we have? How much was your cost reduction program? How much of it was getting, if anything, some of the effects of your, you know, initial round of pricing? Any call there would be helpful as we project out for the rest of the year. Thank you.

George Leon Staphos: Hi, thanks for taking my follow-on. So, in materials, it seemed like, I mean, at least versus our model, margins were 50 to 100 basis points higher than we would have expected. How did margins fare relative to your initial expectations for the quarter?

George Leon Staphos: Again, Deon and Greg, how much, you know, was operating leverage, how much was your cost reduction program, how much of it was getting, if anything, some of the effects of your, you know, initial round of pricing? Any call there would be helpful as we, you know, project out for the rest of the year. Thank you.

Gregory S. Lovins: Yeah, thanks, George, for the question. I think the answer is a little bit of all those buckets that you mentioned. So, as we said, Europe is our largest region in the materials business, as we can see from the pie charts and the slides. And that business did have a stronger top-line quarter than we had anticipated, and that, of course, helped overall from a leverage perspective. We also, as I talked about earlier, raised our expectation for restructuring savings this year.

Speaker Change: Yeah, thanks George for the question. I think the answer is a little bit of all those buckets that you mentioned. So as we said, Europe is our largest region in the materials business. We can see from the pie charts and the slides.

Speaker Change: And that business did have a stronger top-line quarter than we had anticipated. And that, of course, helped overall from a leverage perspective.

Gregory S. Lovins: Some of that is coming in our materials business, so that helped a little bit. And that business continues to drive strong, ongoing ELS-type productivity as well. So, overall, a number of factors are playing into the quarter.

Speaker Change: We also, as I talked about earlier, raised our expectation for restructuring savings this year. Some of that is coming in our materials business, so that helped a little bit.

Speaker Change: And that business continues to drive strong, ongoing ELS type of productivity as well. So overall, a number of factors there playing into the quarter.

Gregory S. Lovins: I think, as I've said, really over the last couple of quarters, when we set our long-term targets through 2025, we talked about targeting around 17% EBITDA for our materials segment. And clearly, over the last four quarters, we've shown that we're on track to deliver that or better. And our expectation is we'll continue delivering on that target or a little bit above that target as we go forward. And as you know, we don't just – you've heard us say this a lot, but it's really how we're really focused and driving the business, focusing on the balance of top-line growth with margins and our capital efficiency to drive EVA.

Speaker Change: I think as I've said, you know, really over the last couple quarters, when we set our long-term targets through 2025,

Speaker Change: We talked about targeting around 17% EBITDA for our materials segment. And clearly over the last four quarters, you know, we've shown that we're on track to deliver that or better. And, you know, our expectation is we'll continue delivering at that target or a little bit above that target as we go forward.

Speaker Change: And as you know, we don't just, you've heard us say this a lot, but it's really how we're really focused in Drive2Business is focusing on the balance of top line growth with margins, with our capital efficiency to drive EVA.

Gregory S. Lovins: And we think that's the right recipe, ultimately, for driving a strong total shareholder return. And that's part of why we focus on that, but it really is focusing on the balance of growth, margins, and capital. And we'll continue to drive all three of those.

Speaker Change: And we think that's the right recipe, ultimately, for driving a strong total shareholder return. And that's part of why we focus on that. But it really is focusing on the balance of growth, margins, and capital. And we'll continue to drive all three of those levers.

Jeffrey John Zekauskas: Our final question comes from the line of Jeffrey Zekauskas with JP Morgan. Please go ahead. Thanks very much.

Speaker Change: Our final question comes from the line of Jeffrey Zekauskas with JP Morgan. Please go ahead.

Gregory S. Lovins: Thanks very much. If you had to allocate your $50 million in cost-savings... the cost of goods sold in SG&A, how would you allocate it? And for the quarter, if you look at the negative price mix in solution, was it about half of the negative price mix in material?

Jeffrey John Zekauskas: Thanks very much. If you had to allocate your $50 million in cost savings,

Jeffrey John Zekauskas: to cost of goods sold in SG&A, how would you allocate it? And for the quarter, if you look at the negative price mix in solutions,

Speaker Change: Was it about half of the negative price mix in materials?

Gregory S. Lovins: Yeah, on your first question, Jeff, I think it's probably, I don't have that on the top of my head, it's probably a relatively even split. We're continuing to drive, or maybe a little bit more, I guess, in cost of sales as we've driven a number of actions we talked about last year, a large initiative in Europe and the materials business, as well as, of course, we took advantage of the lower volumes that we had due to de-stocking last year to drive some further productivity in the solutions side at the same time.

Speaker Change: Go to www.Flydreamers.com for more.

Speaker Change: Yeah, on your first question, Jeff, I think it's...

Speaker Change: It's probably, I don't have that off the top of my head, it's probably a relatively even split. We're continuing to drive, or maybe a little bit more, I guess, in cost of sales as we've driven a number of actions. We talked about last year a large initiative in Europe in the materials business.

Speaker Change: As well as, of course, we took advantage of the lower volumes that we had due to destocking last year to drive some further productivity in the solution side at the same time. So, it's a combination, probably a little more heavily weighted in the quarter on the cost of sales side.

Gregory S. Lovins: So it's a combination, probably a little more heavily weighted in the quarter on the cost of sales side. Price mix, I think, is what we talked about in materials. We had double-digit volume growth, with top line growth about 6%. So, as you asked earlier, we had high single-digit, close to double-digit deflation year over year, prices down in the mid single digits to go with that in the materials business. On the solution side, price, volume, and revenue growth are relatively similar to slightly higher volume growth and revenue growth.

Speaker Change: Price mix I think is we talked about in materials We had double digit volume growth with top line growth about 6% So as you asked earlier, you know We had high single digit close to double digit deflation year-over-year Price down in mid single digits to go with that in the materials business on the solution side

Speaker Change: Price and volume in revenue growth is relatively similar to slightly higher volume growth than revenue growth.

Deon Stander: That concludes our question-and-answer session, Mr. Stander. I will now turn the call back over to you for the closing remarks. Thank you all for joining the call today. While the environment remains dynamic, we remain extremely confident in our position and prospects, and our ability to deliver GDP plus growth in top court hour turns over the long term.

Deon M. Stander: That concludes our question and answer session. Mr. Stander, I will now turn the call back over to you for your closing remarks. Thank you all for joining the call today.

Speaker Change: That concludes our question and answer session. Mr. Stander, I will now turn the call back over to you for the closing remarks.

Deon M. Stander: Thank you all for joining the call today. While the environment remains dynamic, we remain extremely confident in our position and prospects and our ability to deliver GDP plus growth and top quartile returns over the long term.

Operator: That concludes our call today. Thank you for joining us. You may now disconnect.

Stander: Thank you all for joining the call today. While the environment remains dynamic, we remain extremely confident in our position and prospects and our ability to deliver GDP plus growth and top quartile returns over the long term.

Deon Stander: That concludes our call today.

Stander: That concludes our webinar.

Operator: Thank you for joining. You may now disconnect.

Stander: Call today.