Q1 2025 Avery Dennison Corp Earnings Call
Gregory Lovins Gregory Lovins Gregory Lovins
We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results.
Forward looking statements are made subject to the safe Harbor statement included in today's earnings release.
Speaker Change: On the call today are Dr Stander, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer, I will now turn the call over to Dion.
Dion: Thanks, John and Hello, everyone.
Dion: We delivered a strong first quarter in a dynamic environment with earnings per share up 4% ex currency.
Dion: In line with expectations, we grew volume in both segments with strong growth in high value categories and expanded overall margins.
Dion: Materials group delivered solid volume growth and strong margins as we continue to drive productivity across our businesses.
Dion: Our strategy to expand our position in high value categories, which makes up more than a third of the materials group sales is working well.
Dion: We delivered high single digit organic growth for these products in the first quarter with particular strength in graphics, and reflective solutions and industrial tapes.
Dion: Our leadership position in our base business is strong as we continue to differentiate ourselves through quality and service strong material science and process technology capabilities and sustainable innovation over the long term.
Dion: In the first quarter overall label volume in North America was up compared to prior year and improved significantly on sequential basis as customer working capital actions at year end normalized as expected.
Dion: Volume in Europe was up sequentially and down slightly compared to prior year in part due to the strong first quarter last year.
Dion: That benefited from some customer order pull forward related to the finished port strike in 2024.
Dion: Overall emerging market volume was solid with particular strength in the ASEAN region, while volume in China was comparable to prior year.
Dion: And the solutions group, we delivered strong top line growth and margin expansion driven by strong growth in the base business and low single digit growth in high value solutions.
Dion: Overall apparel growth was strong up mid single digits.
Dion: Within high value solutions, <unk> com, our market, leading suite productivity and media solutions for the retail shelf edge delivered strong growth driven by both existing customers and the rollout of our solutions at Cvs health.
Dion: This new program is on track and underway.
Dion: Embellished our high growth platform, driven by personalization and fan engagement and team sports and the performance to lead the category was down mid single digits in the quarter driven by softer sales for large U S performance brands and new program launches that benefited Q1 last year.
Dion: We expect <unk> growth to strengthen later this year, partially driven by the performance apparel brands preparing for the 2026 World Cup.
Dion: Turning to enterprise wide intelligent labels, we grew mid single digits on an organic basis in the first quarter in line with expectations driven by strong growth in apparel and food categories, partially offset by decline in logistics as expected.
Dion: And food, our strategic collaboration with Kroger focused on enabling more frequent and accurate inventory information to maximize freshness reduce waste and improve the consumer and associate experience is on track.
Dion: We are actively working on other large scale grocery pilots in our pipeline.
Dion: In logistics, our solutions continued to deliver strong returns for customers, helping drive increased routing accuracy and labor efficiency.
Dion: Actively engaged on key projects in the pipeline and do you expect more industry adoption through the cycle as previously discussed we don't foresee another large scale rollout in 2025.
Dion: In apparel and general retail key new programs are on track.
Dion: Retailers are adopting embedded technology to increase the return on their overall RFID program.
Unlocking additional value from loss detection and self checkout and general retailers are driving supply of compliance in new categories.
Dion: It is clear that physical items increasingly need a digital identity to help solve key industry challenges.
Dion: Our competitive advantages here are clear.
Dion: Sure.
Dion: We provide labeling materials that both decorate and provide information on most of the world's items and we are market leaders in the most ubiquitous broadly applicable sensing technology in UHF RFID.
Dion: This combined with our innovation leadership and go to market strategy uniquely positions us to lead and win in multiple industry segments with more than 350 billion units of opportunity at the nascent point of industry growth.
Dion: As such we continue to invest to capture the significant opportunity ahead as we grow the overall industry through both the solutions group as well as our channel partners and the materials group.
Dion: Shifting back to the total company level.
Dion: While we delivered a strong first quarter and our underlying business is on track macro uncertainty is elevated due to an evolving and dynamic trade policy environment.
Dion: Our near term global GDP growth outlooks have continued to reduce.
Dion: But it's not clear how things will play out the recent change in tariffs will likely have both direct and indirect impacts to our business. We expect the direct impacts to our material purchases to be relatively low and largely mitigated both Greg will provide some more details on this front momentarily.
Dion: Indirect impact of trade policy on macro demand is more uncertain in particular for discretionary categories taken.
Dion: Taken together it is more difficult to predict and forecast full year results and as such we have move to provide quarterly guidance.
Dion: As we have done in the past we are prepared for a lower volume environment should it happen and have initiated a proven scenario planning playbook across the organization to maximize opportunities and protect earnings in various environments. We are initiating actions such as activating temporary belt tightening identifying share gain opportunities.
Dion: And identifying trigger points for additional structural actions in the event of a broad economic slowdown.
Dion: Stepping back we have a proven track record of delivering strong results across cycles due to the strength of our overall franchise, we are industry leaders and more than 80% of our portfolio in large growing and diverse markets. We.
Dion: We are competitively advantaged, including a global scale footprint innovation and go to market strategy, we have catalysts for strong growth over cycles in multiple high value categories that provide differentiated growth potential and in emerging markets.
Dion: Durability of our portfolio, which is stronger than ever and the agility of our global team provides us multiple levers to delivering broad range of scenarios.
<unk> group has demonstrated strong resilience through and across cycles and has limited direct tariff exposure due to the regional nature of the business.
Dion: Solutions group is less cyclical than it was in previous downturns with roughly a third of its end market exposure now outside of apparel.
Dion: Lastly, we have a strong balance sheet with ample capacity and a disciplined approach to capital allocation that provides significant investment flexibility to drive earnings growth and expand EBITDA over cycles taken.
Dion: Taken together these elements enable us to continue delivering strong results over cycles.
Dion: I want to thank our entire team for their continued resilience focus on excellence and commitment to addressing the unique challenges that head with that.
Dion: Before I hand, the call over.
Dion: Want to officially welcome Greg back, it's really great to have him back and healthy and also take a moment to thank Danny <unk> not only for stepping in as interim CFO, while grade recovered, but for doing an excellent job Danny has now reverted back to focusing on strategy and M&A with.
Dion: Over to you Greg.
Thanks, Dan and yes, a big thanks to Danny for stepping in while I was out then I also want to thank everyone in the investment community, who reached out while I was gone and it's definitely great to be back.
Dion: So in the first quarter, we delivered adjusted earnings per share of $2 30.
Dion: Up 4%, excluding currency translation compared to prior year.
Dion: As benefits from higher volume and productivity, partially offset by the net impact of pricing and raw material costs as expected.
Dion: Compared to prior year sales were up 2% on an organic basis as higher volume was partially offset by deflation related price reductions.
Dion: And adjusted EBITDA margin was strong at 16, 4% in the quarter.
Dion: Up 10 basis points compared to prior year with strong margins in both segments.
Dion: Free cash flow was roughly negative $50 million in the quarter and in line with our expectations.
Dion: You may recall that free cash flow in the first quarter has historically been negative.
Dion: Driven primarily by the timing of customer rebates and employee incentive payments.
Dion: Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of two three which includes paying down 500 million euros of debt, which matured in March.
Dion: And we continue to execute our disciplined capital allocation strategy, including returning cash to shareholders.
Dion: And the first three months of the year, we returned $331 million through the combination of share repurchases and dividends.
Dion: We reduced our share count by $2 3 million shares compared to the same time last year.
Dion: So turning to the segment results for the quarter.
Dion: Materials group sales were up 1% ex currency and on an organic basis.
Dion: Driven by low single digit volume and mix growth, partially offset by deflation related price reductions.
Dion: Organically high value categories were up high single digits, including strong growth in our intelligent label in late channel and the base business was down low single digits.
Dion: In the first quarter, we reclassified roughly $10 million of intelligent label sales from the solutions group to the materials group.
Dion: To better reflect our unique advantage in providing the RFID materials to our strong converter network to further drive growth of intelligent labels in new categories.
Dion: Overall label materials volume was in line with expectations.
Dion: Looking at regional volume growth versus prior year in the quarter nor.
Dion: North America was up low single digits.
Dion: Europe was down low single digits as we lapped a strong Q1 2024, which included the pull forward Dion noted earlier.
Dion: Asia Pacific was up low single digits and Latin America was also up low single digits.
Dion: Compared to prior year, both graphics, and reflective and performance tapes to medical delivered strong results and we're up high single digits organically.
Dion: Materials group delivered a strong adjusted EBITDA margin of 17, 7% in the quarter up.
Dion: Up 70 basis points sequentially, and down 60 basis points compared to prior year.
Dion: As benefits from productivity and higher volumes were more than offset by the net impact of pricing and raw material input costs.
Dion: Due to the timing of deflation related price reductions through 2024.
Dion: Regarding raw material costs globally, we saw modest deflation sequentially in the first quarter.
Dion: Our current outlook is for modest inflation sequentially in the second quarter with higher higher tariffs impacting us by mid Q2.
Dion: Where applicable we are implementing surcharges to account for these higher costs.
Dion: Shifting to solutions group sales were up 5% on an organic basis with.
Dion: With base solutions up high single digits and high value solutions up low single digits.
Dion: Within our high value solutions best Com was up high single digits, driven by strong growth with both existing customers and new program Rollouts.
Dion: And <unk> was down in the quarter as Dion noted and we expect to return to strong growth in this platform as we move through the year.
Dion: Enterprise wide intelligent label sales were up mid single digits in the first quarter and in line with our expectations.
Dion: With strong growth in our converter channel.
Dion: Mid single digit growth in apparel and strong growth in food, partially offset by a decline in logistics as expected.
Dion: Solutions group delivered strong adjusted EBITDA margin of 17, 2% up 110 basis points compared to prior year.
Dion: As benefits from productivity and higher volume were partially offset by growth investments.
Dion: Now shifting to our outlook we.
Dion: We are working to mitigate the direct impacts of the recent tariff announcements, while also activating our proven playbook to manage throughout various scenarios.
Dion: As it relates to the direct impact of tariffs.
Dion: In both the current rate scenario as well as the scenario, where the previously announced tariffs revert after the 90 day pause.
Dion: Relatively small proportion of our material purchases are impacted less than 10% globally.
Dion: It's also important to note that the vast majority of our imports and exports between the U S, Canada, and Mexico, including RFID inlays, our U S MCA compliant.
Dion: The overall direct cost impact will likely represent low single digit inflation on our total raw material purchases.
Dion: In order to mitigate the potential impact we are implementing some sourcing adjustments and pricing surcharges.
Dion: The indirect impact or trade policy on macro demand is more uncertain.
Dion: The majority of our portfolio is anchored in consumer staples, but we also serve some more discretionary markets such as industrials durables and apparel.
Dion: And apparel retailers and brands, serving the U S market are assessing sourcing supply chain and pricing strategies.
Dion: Specialty for garments produced in China.
Dion: We estimate our apparel label sales in China for garments to be exported to the U S. A roughly $350 million annually.
Dion: Which represents just 4% of total company revenue.
Dion: Taking all of this into account our visibility for Q2 is currently stronger than for the back half of the year.
Dion: For the second quarter of 2025, we expect adjusted earnings per share to be up sequentially.
Dion: And the range of $2 30 to $2 50.
Dion: With sales growth in the majority of our businesses to be offset by a mid single digit decline in apparel.
Dion: Solving and overall sales roughly comparable to prior year.
Dion: We expect a sequential increase in earnings will be driven by our traditional seasonality as both the calendar and lunar new year has impacted our Q1.
Dion: As well as the ongoing business momentum and some of our high value categories, such as <unk> com and a sequential currency benefit assuming current rates.
Dion: This growth was partially offset by our annual wage inflation cycle that started on April one.
Dion: And the impacts of tariffs on apparel revenue that we've discussed.
Dion: We've also outlined some contributing factors to our full year results on slide 13 of our supplemental materials.
Dion: To highlight a few of the key drivers, we now anticipate a roughly $7 million headwind to operating income from currency translation.
Dion: <unk> recent rates, which is better than the roughly $30 million headwind, we expected at the beginning of the year.
Dion: And we now expect restructuring savings net of transition cost of more than $45 million, which is up $5 million from our expectations a quarter ago.
Dion: And we continue to expect strong free cash flow.
Dion: Across a wide range of scenarios.
Dion: In summary, we delivered a strong quarter in line with our expectations through a dynamic environment and.
Dion: And we are well prepared for a variety of macro scenarios and expect to grow earnings sequentially in the second quarter.
Dion: We are well positioned to continue to deliver exceptional value to all of our stakeholders through our disciplined strategies for our strategies for long term profitable growth and disciplined capital allocation.
Dion: And with that we'll open up the call for your questions.
Dion: 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 a confirmation of your request is your question has been answered and you would like to withdraw your registration. Please press star one again.
Culminate all participants we ask that you. Please limit yourself to one question and then return to the queue. If you have additional questions. Our first question comes from the line of Ghansham Panjabi with Baird. Please go ahead.
Speaker Change: Hey, guys good morning, Greg.
Dion: Greg Welcome back it's good to hear thank you again.
Dion: I guess first off.
Speaker Change: As it relates to the first quarter maybe.
Speaker Change: Maybe you can give us a frame of reference is as it relates to how you think tariff pre buying et cetera might have impacted the first quarter I think apparel was up mid single digits, and then youre, calling out <unk> is down mid single digits. So just any more color on there would be great and then I know youre staying away from annual guidance, but for RFID specifically.
Apart from just the tariff uncertainty is there anything good or bad plus or minus versus your outlook.
Speaker Change: Three months ago as it relates to 2025 in terms of new programs and so on and so forth. Thank you so much.
Ghansham: Hey, Ghansham, let me, let me address that.
Ghansham: In the first quarter, we actually Didnt see on aggregates any really pull forward because of tariffs overall and if you recall the sequence of events that led through each announcements in some what of the retraction of the announcements.
Ghansham: We're anticipating seeing some of our customer base adjusted that went through but.
Ghansham: We didn't actually see any material impact at all in the first quarter. What we did see in the really last few weeks of March if you recall posted 20% announcement of tariffs to China. We did see some retail brands apparel brands look at their sourcing decision their pricing decisions and that last couple of weeks that we saw slightly more muted demand there.
Ghansham: If you then look in the second quarter of our anticipation as you said.
Ghansham: We're looking we're expecting sort of mid single digit declines for apparel.
Ghansham: And what we're seeing so far at the start of the quarter is roughly about high single digit declines.
Ghansham: Based on the discussions we are seeing with brands and retailers really anchored around what are they trying to do to resolve the significantly high tariff rates basically currently in place with China.
Ghansham: And they are really focused on three actions one is what sourcing decisions can they make to move goods. We're actively involved with them and that that's actually one of our inherent strengths because of our global network. We see advantage for us in that regard. The second is that they are thinking through how do they leverage supplier partnerships and the whole ecosystem to help offset.
Ghansham: Some of those additional costs and then the third element is really as they think through what are they going to do in terms of pricing strategy. In this area, where they are actually holding largely on some of the pricing decisions. Because if you think through the supply chain a lot of what we provide them as price ticketing. For example that has a particular price point retail price points. Some couple of months.
Ghansham: Typically in advance we're going to hit the market they have to make decisions and determine what theyre actually going to price. These garments at and Thats really why there's a bit of a slowdown we anticipate that as they make these decisions in the very very short term that that will continue to see orders rise still anticipating given the visibility you have that apparel will be sort of mid single digit decline for the <unk>.
Ghansham: <unk>.
Ghansham: On our material side for what it's worth we haven't seen really any impact of tariffs. So far we've not seen really any pull forward of orders either in the first quarter.
Ghansham: And order patterns for the first three weeks, so far with our as expected, perhaps a little bit of elevated volume in North America is probably because we've all been discussing potential price surcharges, we don't expect that to be material in any way.
Ghansham: To your second quarter on RFID, I will say that accident, the tariffs and the macro uncertainty the underlying business is on track with what we thought it was going to be new recall at 10% to 15% range that we gave.
Ghansham: Again, one of the reasons why we're actually only focused on the second quarter is because even in that 10% to 15% range of apparel still makes up roughly 60% to 65% of our overall sales and given the uncertainty over there we thought it better that we focus on the second quarter and what we know now.
Ghansham: If I look across the rest of the segments Ghansham I don't see any change in the growth programs that we have planned which as you recall, we said with scale during the year. They are all on track and the way that wed anticipated and remain very confident in those overall.
Speaker Change: Our next question will come from the line of John Mcnulty with BMO capital markets. Please go ahead.
John Mcnulty: Yes. Good morning, Thanks for taking my questions. So a question on the working capital front.
Speaker Change: Relatively.
Speaker Change: Decent jump and I know normally that happens in the first quarter, but it seems bigger than usual is that a little bit of repositioning your own products and building up inventory ahead of tariffs or if not can you help us to understand maybe why why we saw that ramp up the way that it did and then just another kind of somewhat related.
Speaker Change: Issue on the on the low single digit impact from tariffs.
Speaker Change: How do you anticipate dealing with that.
Speaker Change: Is it again some of it may be moving working capital around ahead of it do you expect to be able to get it all through in pricing I know you mentioned, a little bit of price a little bit of efficiency improvements, but I guess, how quickly can you get that pricing through to help offset some of the tariff headwinds.
John Mcnulty: Yes, thanks for the questions John So on working capital, Yes, we can.
Speaker Change: Say there is anything.
Speaker Change: Really specific to call out I think when we look at.
Speaker Change: <unk> and turns and <unk> each of them.
Had slight increases or decreases from a detailed perspective versus prior year, but nothing really significant across the businesses.
Speaker Change: I'd say that we had some purchases in the fourth quarter of inventory.
Speaker Change: Got it.
Speaker Change: <unk> rebates that had some impact on our inventories as we exited last year in the payables went out in the first quarter here. This year. So it's a little bit of an impact for that but nothing really major that I would look at there.
Speaker Change: Talked about in the prepared remarks, we had incentive compensation payments. This year, obviously, a significantly higher that went out in Q1 of this year than it was in Q1 of 'twenty four given the Destocking and things we had in 'twenty three and the impact that had on incentive comp for that year. So that was a big piece of it as well as just higher customer rebate payments.
Speaker Change: It went out in the first quarter of this year.
Speaker Change: Given the improvement in 24 versus 23 as well so both of those things higher order of magnitude this year than they were a year ago. In Q1, I think when you talk about the tariffs as you said our expectation is if everything as of right now and and if they go back to the higher rates in a few months.
Speaker Change: Both of those scenarios results in basically low single digit impact on us from a tariff perspective, and we're looking at pricing surcharges as we talked about as well as looking at wherever we can.
Speaker Change: Shifting sourcing.
Speaker Change: To mitigate some of the tariff impact so it would be a combination of those things.
Speaker Change: We're looking at not 100% pricing, but but certainly in the U S. Looking at pricing surcharges that we would expect to go out relatively soon but we do have.
Speaker Change: Inventory in the second quarter. So we don't really start to see a big impact from that until we get kind of midway through the second quarter here.
Speaker Change: Our next question comes from the line of Jeff Zekauskas with J P. Morgan. Please go ahead.
Jeff Zekauskas: Thanks very much.
Speaker Change: So.
Speaker Change: I just wanted to see if I can.
Speaker Change: Describe what you said about the change.
Speaker Change: Apparel demand problem.
Speaker Change: Positive mid single digits to negative mid single digits in the second quarter is this.
Speaker Change: Mostly a China event.
Speaker Change: Or does it have to do with.
Speaker Change: Other Asian countries.
Speaker Change: That is do you see it more as a tariff events rather than an economic event.
Speaker Change: And then for Greg.
Speaker Change: The company bought back a lot of stock in the first quarter, you spent $260 million, which is more than you spend.
Speaker Change: For the entire 2023 and 'twenty four.
Speaker Change: Same time, what you <unk> you.
Speaker Change: Providing earnings guidance for 2025 and can only see a quarter ahead why did you buy so much stock even though the.
Speaker Change: The outlook seems to be popular.
Jeff Zekauskas: Thanks, Jeff.
Speaker Change: Yes, the change in from mid single digit to sort of negative mid single digits. Overall is based on what we can see at the moment I talked briefly about what we saw initial order demand looks like as we are working with our customers.
Speaker Change: To determine how best we can help them make sourcing changes things through the entirety of how to help them offset some of these costs, but also.
Speaker Change: Thinking through where we can help them do pricing changes for governments, whether it's in country or actually through the supply chain, even back into the United States.
Speaker Change: Largely this is really a China tariff issue at the moment.
Speaker Change: I would characterize it I think Greg made the point of saying, we have about $350 million roughly 4% of the company's revenue is on apparel tags and labels that get attached to governments that get exported to the United States.
Speaker Change: And.
Speaker Change: What we're seeing with customers over there is trying to determine how much they can move to other sourcing locations. We've done that historically for them for a very long time with our prime partner and that we actually see advantage for us in that.
Speaker Change: And the second piece is then how do they then also make decisions on what they're going to price point these into the.
Speaker Change: Into the markets ultimately when they arrive.
Speaker Change: Syed I did see it very easy to distinguish between if it's a tariff issue. If it's an economic issue because ultimately any high tariff. So that order of magnitude, we will have likely consume a volume impact at some point again, it's on a very small part of our business overall and that's the way I'd characterize it I think it also highlights.
Speaker Change: At least for me, Jeff just the broad strength of the franchise that we have this is a smaller part of this we have a significant opportunity in some of our high value category growth. There is a base business across the world outside of apparel in China continued to do well with competitive advantage over there we have a strong balance sheet that we're going to leverage as we move forward through the cycle as well.
Speaker Change: Alright, Thanks, and yes, Jeff on your question on share buyback nothing.
Speaker Change: Nothing has really changed from our approach to capital allocation I think you've heard us talk about that many times and how we think about capital allocation specific to share buybacks and our focus there over the years has been on.
Speaker Change: <unk> focused on generating a return on our share buybacks I think when you look at we started to increase purchases in late fourth quarter as well as Q1.
Speaker Change: The incident with the share price decline that we saw at that point in time with continued confidence ourselves and the intrinsic value of the company and the stock. So from that perspective, we increased the pace of our buybacks. Accordingly, as we think we can then generate a strong return so thats been our focus and how we think about buybacks of course, we use a grid based approach and we're disciplined in that but.
Speaker Change: When we think the share prices in a period, where it's declining and well below our intrinsic value. Then we will look to accelerate our purchases. So that's what we've done here in the last few months.
Speaker Change: The uncertainty that we're talking about with <unk> 2025, and full year guidance really came about in the last two or three weeks with the increased pace of.
Speaker Change: Tariffs and the changes that have happened there. So that's a little bit different than I think our approach. We will continue our approach on buyback I should say, we will continue with our capital allocation strategy as we always had.
Speaker Change: Wouldn't say that we're necessary going to buy $250 million of shares every quarter, but of course, we're going to continue executing our strategy. The way we have in the past.
Speaker Change: Our next question comes from the line of George Staphos with Bank of America. Please go ahead.
Speaker Change: Thanks, Hi, everyone. Good morning.
Speaker Change: Great to hear you back Greg and also congrats to Danny.
Speaker Change: My question's on.
Speaker Change: Again solutions in apparel tags, and so if we think about the amount of volume or revenue.
Speaker Change: That is looking to move from China to elsewhere.
Speaker Change: Elsewhere.
Speaker Change: Recognize theres going to be some inertia would you be able to satisfy that from your existing locations in other countries right now.
Speaker Change: Or would there be some leakage I E. Either because you don't have the capacity in place or for some other reason and if so would there be a way to quantify that.
Speaker Change: Related question.
Speaker Change: And we totally understand that the uncertainty might lead to delays in some of the pilots, but I just want to make sure that I'm understanding it correctly coming into the year the outlook for IL growth was 10% to 15% with the lower end of that range.
Speaker Change: Seemingly being relatively baked in based on what you knew right. Now. So can you help us understand how that may have changed or what the outlook should be as we sit here today, Kevin again, so much volatility in the last few weeks. Thank you.
Speaker Change: Sure.
George Staphos: On the first on your first question George.
George Staphos: What we've historically seen and time is this probably means for the last decade as we've helped customers move their sourcing for apparel into other countries, Bangladesh, Vietnam, Cambodia, Thailand.
Latin America Eastern Europe.
George Staphos: Is that we've actually over that time built up a fairly robust network is one of the things.
George Staphos: Keep reiterating is one of the advantages. We have is one of the reasons partners work with us in that regard.
George Staphos: I will also say that there is still a substantial amount of garmin still being sourced in China, it's vertical supply chain that it hasnt that country combined with highly efficient manufacturing still makes it an attractive destination to source apparel and.
George Staphos: Even relative to some other lower cost environments.
George Staphos: And particularly because in some of those other countries. There is not still yet the full value chain established domestically theres not every piece of componentry that you will need to make dominance and see still having to export in those countries as well typically when we see movements, we have more than ample capacity to be able to deal with it and we do that both through our typical approach into.
George Staphos: Productivity, improving our own processes, but also just in terms of ship management.
George Staphos: And as we've continued to invest in assets, where we see higher returns as well.
George Staphos: And the scale of the magnitude.
George Staphos: If the existing tariffs stay at the same rate.
George Staphos: We anticipate roughly 10% or so of what remains non China to still be probably be exported back out to some other regions. This is largely as it relates to U S volume.
George Staphos: And we know within our network, we can manage that across our network.
George Staphos: Again, I'll point to whether the industry has enough garment manufacturing and vertical capacity to absorb that approach it.
Probably a question Mark there. It will also take time to stand up factories for manufacturing to stand up those supply chains.
George Staphos: So I think there is an advantage for us and we're involved in conversations with all of those with those customers just turning to IL.
George Staphos: I was very clear when we talked to this last time I saw that 10% is really strong certainty around that largely because it was based on existing market for existing customers, where they were either growing although we had new programs that are already in rollouts and we would just fulfilling those programs and then the additional 5% we talked about was the new program Rollouts.
George Staphos: Speculative, but plan for specific time in the variability could come if that timing changed.
George Staphos: In that 10% clearly we still have a very large portion of apparel George that's exited roughly 60 or 65% is still apparel and so any volatility or uncertainty as it relates to apparel, particularly the applicability of tariffs now makes it more difficult to understand and that's why I made the point absent the tariffs.
George Staphos: Vacations, our IOL business.
George Staphos: This is on track the programs that we plan to rollout our rolling up the programs that we are destined to rollout yet from a timing perspective still look to be on that case, we're seeing significant increased interest from our food channel on the strength of what they've seen that the Kroger rollout, which so far we are in 25.
George Staphos: Percentage of their stores on track for the rollout over there.
George Staphos: And we continue to see really strong interest from the pilots that we havent food have actually expanded even further and logistics. We continue to seek further interest as well, although I will still say that's more likely to be at 26 application rather than the 25 applications.
George Staphos: And in general retail.
George Staphos: We've seen high levels of retailers wanting to drive compliance and it's one of the reasons. We've stood up our materials group channel program, because we access all of those channel partners and we've made a clear focus for us sell to enable them to be a mechanism for activating industry adoption from which we will benefit significantly as well.
Speaker Change: Our next question will come from the line of Mike Rockford with <unk> Securities. Please go ahead.
Mike Rockford: Yes, Thank you Dion Greg.
Speaker Change: Thanks for taking my questions.
Speaker Change: Greg Nice to have you back and wishing you continued good health.
Speaker Change: Thank you.
Speaker Change: Just.
Speaker Change: Two quick ones for me just in terms of intelligent label supply globally, it seems to be increasing.
Speaker Change: Competitive dynamic obviously it was negatively impacted.
Speaker Change: Just six vertical.
Speaker Change: With the potential to further negative impacts.
Speaker Change: Like what are you doing to try to.
Speaker Change: To mitigate any further share erosion in logistics and then just also following up on comment you just made in response to George's question about deployments for 2026. It sounds like there is something in the Pike with respect to <unk> with logistics. So any additional color you can give us around.
Speaker Change: Deployments that could potentially happen next year. Thanks sure.
So Mike I think I've spoken previously about where we see the overall competitive landscape to be for IL I'll, just remind everybody that.
Speaker Change: It's not just in a singular note. It's a series of nodes of the chip manufacturing. That's led US there has been taken that chip and putting it onto an inlay specifically designed an attenuated for its applicability, whether it's food logistics apparel whatever the case I mean, we all will beat us on that.
Speaker Change: Much of our intellectual property centers that youre going to have to manage data on that device. So again, we're world leaders in that then you have to have some form of hardware software that sort of hardware that resistant replay partner in that area and then on the softer side Theres a whole stack of software options that enable you to make sense of what that data means whether it's applications for reading whether it's ER.
Speaker Change: <unk> systems, and we selectively play have both.
Speaker Change: Stood up applications, including our <unk>, so I'd say across that ecosystem. We remain the go to person to enable large scale rollout and adoption. It is also typically when that rolls off that we tend to be the only or largely predominant supplier and then in time sourcing decisions changed within brands retailers and customers that may bring on us.
Speaker Change: Second real service supply, but we tend to remain the majority supplier. That's what we've seen in every instance in apparel. We've seen this in logistics and I know I suspect in time as the other segments are all will be similar to our aim is to make sure we're maintaining a majority share.
Speaker Change: Because we will disproportionately benefit then as these new segments rollout and we're doing that really in three things, we're continuing to really lean into our innovation capability and during this year, we will see new innovation proprietary innovation that we bring to market that was going to help unlock some of these new segments, even further and we will benefit from that we lean into our.
Speaker Change: Process engineering rolls roll manufacturing capability, and producing billions of items to maintain our low cost leadership.
Speaker Change: The world in this area and that also provides us.
Speaker Change: <unk> advantage and I think the final thing is that we've learned over time as the team that most people call for the first time, how to position the value creation that the.
Speaker Change: This technology will provide and then we back that up with support throughout the network with your at source.
Speaker Change: Wherever you're in garments are sourcing through sourcing whether youre in the supply chain or even in retail where we help retailers do cultural reduction so.
Speaker Change: We continue to see that as a predominant in key focus for us is maintaining our advantage in that area I think on the color as it relates to 2006 and logistics, all I will say and I'm not going to comment on individual programs Mike.
Speaker Change: Is that in the extended pilots that we currently have going outside of <unk>, which is our largest customer every one of those pilots is actually extended slightly some of them fairly largely and they still in the pilot phase where they are testing the returns that they will see largely anchored on.
Speaker Change: Labor efficiency or rotting accuracy, they all direction you there and if.
Speaker Change: There is not one of the largest logistics providers that we're not engaged with now.
Speaker Change: If things continue to progress in the way. They are then I don't I don't see why that would not see another progress moving forward as we go through the next year or so, but again that will be subject to how that particular customer sees it as a priority within all of their other strategic priorities.
Michael Whitehead: Our next question comes from the line of Michael Whitehead with Barclays. Please go ahead.
Michael Whitehead: Great. Thanks, good morning team.
Michael Whitehead: I wanted to follow up on the raw materials side, I think you've talked about inflation are going into <unk>, you, obviously flagged some of the tariff impact.
Michael Whitehead: But we've also seen chemical prices like propylene come down quite a bit of weight. So can you just walk through the broader raw material basket and what youre seeing in the key areas and how that sort of all netting out.
Michael Whitehead: Two inflationary in Q2.
Michael Whitehead: Sure. So yes, I think when we look at our peer raw material basket, we have got kind of sequentially looking forward relatively stable, maybe we had low single digit inflation in the first quarter from Q4 to Q1, mostly paper a little bit on our films and chemicals deflationary as well I think when we.
Michael Whitehead: Look forward to Q2, we see relatively stable outlook a little bit of.
Michael Whitehead: Maybe a little bit of deflation from a raw material basket potentially offset by some of the tariffs.
Michael Whitehead: That I talked about earlier than probably start impacting us here in the middle of the quarter. So I think from that perspective overall, its probably relatively stable.
Michael Whitehead: That's how we're thinking about it right now most of our dynamics over the last few quarters have really been on the paper side more so than on the chemicals or film side for us.
Matt Roberts: Our next question comes from the line of Matt Roberts with Raymond James. Please go ahead.
Michael Whitehead: Yes.
Matt Roberts: Hey, good morning, Greg welcome back globally here at all as well.
Speaker Change: Thank you John.
Speaker Change: Sound confident in the new program Rollouts and don't want to belabor questions already product too much.
Speaker Change: But thinking about the RFID supply chain more broadly.
Speaker Change: What type of cost impacts or tariff exposures are your suppliers.
Speaker Change: <unk> in the RFID value chain facing that could drive cost higher for the retailer whether that be wafers for circuits made in China, and whether those are exempt theyre not or anything on the reader or printer side and do any cost increases there at uncertainty employer partners own planning and then.
Speaker Change: Timing of those rollouts or have those investments really already been made from retailers that makes the timing somewhat immune to ongoing uncertainty. Thanks for taking the question.
Let me see if I can address that.
Speaker Change: To the best of our knowledge, we're not anticipating.
Speaker Change: Potential tariff impacts on the predominant pieces that make up the RFID supply chain.
Speaker Change: On deliberately excluding semiconductors out of China at the moment. This chips because most of what happens from a semiconductor perspective that we use in the industries at the moment doesn't come out of China. There were some local for local China pieces and they get dressed over there.
Speaker Change: There may be very small elements, where they are using chemicals or other substrates to make those that may be subject to some of the limited tariffs, but theyre very opaque to us and I suspect very low impact overall.
Speaker Change: <unk>.
Speaker Change: In terms of hardware there are certainly hardware players that have got manufacturing based in Asia and there may be some incremental.
Speaker Change: Cost associated with that but I suspect like.
Speaker Change: We are doing all other companies are trying to make sure that mitigating those largely through sourcing changes.
Speaker Change: And so overall I would suspect that the increased tariff costs to retailers or customers will be very very limited.
Speaker Change: And in that regard I would also say that typically if you have such a small order of increase it's not a deterrent.
Speaker Change: We've seen the return on investment for these RFID programs that typically pays back within a year. The returns are so strong that they would.
Speaker Change: We offset any of those now in discussions that we've had with our existing planned rollouts that we have currently.
Speaker Change: This has come up a couple of times, but there's been no indication from any customers that suggest they will pull back I put that in the context of some of even our apparel customers who are wanting to rollout. There are clearly looking at the sourcing strategy, but they see still the value of doing this overall and that may change.
Speaker Change: As the environment changes over the next 60 to 90 days and we'll see once we know more we'll come back and let all of you know.
Josh Spector: Our next question comes from the line of Josh Spector with UBS. Please go ahead.
Speaker Change: Hi, its Chris Perrella on for Josh.
Speaker Change: I wanted to follow up on.
Speaker Change: On the capital spend as you follow our work with your customers to relocate them.
Speaker Change: Is there how much flexibility do you have in the capital outlays or how much more of a step up as required to shift production or serve customers in a new region.
Speaker Change: And then I have a follow up question on U S demand given it's 30% of the revenue what are your U S based customers.
Speaker Change: Yes.
Speaker Change: So on the capital spend I think I may have touched on this chart sorry, Chris we don't anticipate really a significant step up in capital.
Speaker Change: Because we actually have available capacity, we have available ship mechanisms. We continue to work on productivity I think the things that I outlined overall.
Speaker Change: And we will and we always do continue to invest in capabilities and capacity in all of these regions, but it always returns based when we look at that from an EBITDA perspective.
Speaker Change: I cant remember Youll specific second question, maybe John can help them. It just color on U S demand right now U S demand for overall U S demand. Okay. Overall, just demand we are seeing at least on the materials business no change to overall U S demand I think for retailers and brands in apparel, certainly I think I've indicated there is a current.
Speaker Change: Slowdown in orders, specifically for China, as they think through their pricing strategies in the procurement strategies, but largely for the rest of where they source from those volumes continued to be steady as we expect.
Speaker Change: Our next question comes from the line of Anthony Pettinari with Citi. Please go ahead.
Speaker Change: Good morning.
Speaker Change: On the last earnings call you talked about expecting negative net price in <unk>, and then I think a little bit in <unk>, and then stabilizing and I'm. Just wondering is that kind of broad cadence still applicable or does it get pushed out a quarter as you implement surcharges or is the visibility.
Speaker Change: Just kind of out the window I am just curious how you kind of think about.
Speaker Change: The progression of net price.
Given the kind of cost environment that you talked about in <unk>.
Speaker Change: Yes, I think when we look at as you said versus last year, we had price down in the quarter and materials business to go with the year over year deflation as.
Speaker Change: As we work through that kind of final part of I guess, if that cycle of inflation deflation. We had for the last few years. So some price down in Q1 versus prior year, we'd have a little bit more in Q2 versus prior year and when we look sequentially. We had price down in the first quarter to go with that low single digit deflation that we had sequentially in the first quarter.
Speaker Change: I'll put the tariff impacts aside for a second but otherwise we would expect relatively stable environment from a pricing and raw material perspective from Q1 to Q2 sequentially.
Speaker Change: Now with the tariffs as we talked about we will look to implement some surcharges to manage part of that so you would expect some some benefit as we move through the second quarter from a price perspective, depending on what happens with the tariffs overall and everything of course, but you would expect some increase in price as we move through the second quarter to match that tariff surcharge.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of John <unk> with Jefferies. Please go ahead.
John: Thanks for taking the question and I'll Echo others' and welcoming back Greg glad to hear you're you are healthy and back in the seat.
Speaker Change: Thanks, I just wanted to start off with.
Speaker Change: With Slide 15, you gave a nice detailed sales breakout by end markets there.
Speaker Change: But it doesn't seem like you guys are considering.
Speaker Change: Logistics exposure as maybe a bit more cyclical in the current environment.
Speaker Change: Accurate team can provide some details around why that end market should be a bit more stable and.
Speaker Change: Maybe how you think you could touch on some of the logistics businesses.
Speaker Change: And how how much of that would be more for international transportation that could be impacted by tariffs trade wars and ongoing uncertainties.
Speaker Change: So.
Speaker Change: John the way, we think about the logistics piece, which is largely a function within our intelligent labels platform, but we also have some base business as well and on the materials side, where we've got a lot of VDI labels that go into bulk shipments.
Speaker Change: Let me break that into two pieces. So on the on our intelligent label side, we actually see less variability, even though there may be some economic impact to overall logistics.
Speaker Change: If there is a low volume environment.
Speaker Change: And largely because we have aligned with significant customer what our absolute volume will be for this year, whether that is affected by.
Speaker Change: Volume changes so it's largely I'd say largely secure in terms of where we hence why we see less variability I think as it relates to <unk>.
Speaker Change: There is more volatility in the volume of broader volume environment that impacts logistics shipments domestically in the United States for example, or internationally than some of our <unk> label growth that we typically see which goes and this will be slightly impacted but again its a smaller part of the overall business for us.
Speaker Change: So we see it as largely mitigated both within our within our control.
Speaker Change: Yes, I would just add to dan's points on much of that logistics slice of that pie outside of the.
Speaker Change: Intelligent labels portion that goes to logistics is really the majority of that is within our materials businesses and I think if you look over past recessionary periods.
Speaker Change: Our materials business has been pretty stable certainly not immune to the impacts of a downturn, but has been pretty stable throughout recessions, we have been able to hold or even grow margins in recessionary periods in that materials business. So we feel good about overall within materials, our ability to withstand the downturn is pretty strong and we've demonstrated that.
Speaker Change: Think over the last number of downturn that we've seen globally.
Speaker Change: Our next question is a follow up from the line of Jeff Zekauskas with Jpmorgan. Please go ahead.
Speaker Change: Yes.
Speaker Change: Thanks very much.
Speaker Change: In the quarter and intelligent labels.
Speaker Change: The general retail category too.
Speaker Change: And.
Speaker Change: Given that you expect a change in.
Speaker Change: Apparel dynamics in the second quarter.
Speaker Change: What do you expect for intelligent label growth in the second quarter.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Retail in the first quarter was up very low single digits.
Speaker Change: <unk>.
Speaker Change: As we saw compliance continues to be driven by some of these particularly large German retailer who is focused on additional categories. They brought in overall.
Speaker Change: Our outlook for apparel in the second quarter had originally been high single digits I'm, sorry, our outlook for overall IL had originally been high single digits for the quarter.
Speaker Change: <unk> when we started the year.
Speaker Change: We know now that if the apparel impact that we're seeing which we're saying is mid single digit decline for the whole business. We anticipate the range of our IOL growth to be probably in the mid single digits growth again highly variables could move quite a lot.
Speaker Change: But that would that's currently where we see it at the moment.
Speaker Change: We'll say that if again, if you extract the apparel piece out of this.
Speaker Change: There is the uncertainty all the other programs that we have.
Speaker Change: And our expectations for them during the second quarter on track.
Speaker Change: We have time for one more question. Our final question is a follow up from the line of George Staphos with Bank of America. Please go ahead.
George Staphos: Thanks, very much I'll ask a couple of questions in sequence here. So you talk about the trigger points for additional structural actions.
Speaker Change: Dr. Greg can you talk a little bit about.
Speaker Change: What you mean by that I mean, we directionally now, but if you could put some detail around that or timing or what the trigger points might be which would then drive the actions.
Second question back to the earlier comment on sourcing in China, and I think I heard you Dion say that based on current tariffs.
Speaker Change: That roughly 10% of what you were seeing out of Europe.
Speaker Change: Your volume would look to be.
Speaker Change: Move to other countries from China, Correct me, if I was incorrect in sort of your interpretation of your answer there what happens if we go back to the prior tariffs.
Speaker Change: Way to sort of scale, what that movement might look like and whether you would still have the capacity to take on that volume.
Speaker Change: It moves in a new tariff regime, thanks, very much and good luck in the quarter.
George Staphos: Thank you George.
Speaker Change: Terms of the way, we think about let me address the sourcing piece first and then we'll get to the trigger points off doesn't between Greg and I will handle it.
Speaker Change: When I laid out what I thought is around 10% moving from the existing piece Thats.
Speaker Change: In China, it's probably at the upper end of what we would see possibly from a supply chain capacity perspective, I'm talking broader supply chain, let ourselves what we learn previous tariffs when they went up I think during the first administration.
Speaker Change: Prior to the bottom administration was that we saw tariffs increase and we still have more of a steady but slow migration over time, they weren't substantial enough to drive diverted action straight away and we were able to respond.
Speaker Change: If there is a more of a substantive requirements. So let's say over the next nine to 12 months people want to move by season substantial portions and the gating factors first is going to be can they get the capacity at apparel government will shoe manufacturing in those countries. There is a supply chain stand up to support all of that and then they typically tend to us and say can you help make that possible.
Speaker Change: Will.
Speaker Change: And generally even in the extreme such a situation like that.
Speaker Change: We will have the capacity to be able to address that.
George Staphos: Yes, George to your other question about <unk>.
George Staphos: Trigger points I think when we look at various trigger points of course, the the landscape on what happens with tariffs as you move across this quarter clearly it will be one thing we're keeping an eye on in terms of how that evolves and hopefully we end up with some negotiation when we get to a few months from now that they don't go back up or even the China ones hopefully.
George Staphos: Come down as we started to hear some some.
George Staphos: About last night, so hopefully we see some improvement there, but that's something we'll keep an eye on and how that evolves and then from that perspective.
George Staphos: That puts projections for GDP.
George Staphos: And the macro environment for this year. So we know that in our projections over the last couple of weeks have come down a little bit from a number of sources. So we'll continue to monitor that and see how that evolves and what of course, we will continue to be talking to our customers, particularly in apparel.
George Staphos: Given the China dynamics, there in understanding how they're how they're looking at things whether theyre shifting manufacturing to other regions like we just talked about et cetera. So there's a number of different trigger points will keep an eye on as we move through the quarter.
George Staphos: Following a similar playbook there hasnt, how we've done in recent downturn. So we look at 2020 or even in 2023, when we had the Destocking and we will look at temporary savings buckets, whether that'd be.
George Staphos: Volume driven actions or belt, tightening and discretionary spend reductions things like that and then we will look at.
George Staphos: Or are there other structural actions that will accelerate or not we already increased our restructuring taking its expectations for the year here.
George Staphos: In our in our numbers, we provided you this morning as well.
Speaker Change: The only thing I'd add to what Greg said is as you know we will actually tend to probably be see any changes in the macro environment. Prior to many other companies because of the role that we play in the supply chain. So whether it's in our solutions business. Our materials business, we are probably likely to see demand soften ahead of many other people as well and part of that.
George Staphos: Vantage then it allows us to.
George Staphos: Pull into play the playbook that Greg was talking about I think it's to me. It's just constantly underlines. The fact that the strength of the franchise. We have is really resilient, we've gone through down cycles and when they have happened in the past, we've actually been able to not only maintain margins on material materials business slight decrement in our solutions.
George Staphos: Business, but actually come about overall stronger both from a share perspective, and a market perspective overall and I don't see that changing as we move forward.
George Staphos: This time around I think we also have other levers that we are able to pull not least our high value categories. Some of which are somewhat immune to even cyclicality now pulled out best come as an example, this is a business for us where we're seeing significant growth because of some of the new customers. We brought on board, but typically in downturns when other pricing changes.
George Staphos: Or there is less volume you need more promotional activity and actually somewhat counterintuitively of ESCO business will actually thrive more in a downturn economic cycle again, highlighting the resilience of our solutions group is actually different to what it was even in 2020.
George Staphos: When we saw the last real significant change overall.
George Staphos: So I think overall I think we're well positioned.
George Staphos: Should growth continue we have all the innovation, we're bringing to the market.
George Staphos: The strength of our base business, but these great high value categories differentiate including IL.
George Staphos: Should things change, we have a really robust playbook that allows us to take action to protect earnings and take advantage of market dislocations, where we see opportunities as well.
Speaker Change: And that concludes our question and answer session. Mr. <unk> I will now turn the call back to you for any closing remarks.
Speaker Change: Thanks Regina.
To recap we delivered a strong first quarter in a dynamic environment, we are well prepared for a variety of macro scenarios.
Speaker Change: We expect to grow earnings sequentially in the second quarter. Most importantly, we are well positioned to continue delivering superior value through this cycle for all of our stakeholders.
Speaker Change: Thank you for joining today. This now concludes our call.
Speaker Change: 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.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sure.