Q2 2025 Avery Dennison Corp Earnings Call

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Unknown Executive: Welcome to Avery Dennison's earnings conference call for the second quarter ended on June 28, 2025. This call is being recorded and will be available for replay after 4 p.m. Eastern time today and until midnight Eastern time, July 29th, 2025. To access the replay, please dial 1-800-770-2030. or 1-609-800-9909 for international calling.

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welcome to Avery Benson's earnings conference call for the second quarter, ended on June 28th, 2025

This call is being recorded and will be available for replay after 4 pm eastern time today.

And until midnight Eastern Time. July 29th 2025.

To access the replay. Please. Dial 1-800 7702030.

Unknown Executive: The conference I.E. number is 585-5706.

Or 16098009909 for international callers.

John Eble: I'd now like to turn the call over to John Eble. Vice President of Finance, please go ahead. Thank you, Tiffany.

The conference ID number is 5855706.

Speaker Change: I'd now like to call over to John edley Avery Dennison. Vice President of Finance. Please go ahead.

Unknown Executive: 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-8 of the financial statements accompanying today's earnings For more information visit www.ghansham.com We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results.

Speaker Change: Thank you. Tiffany, please note that you're out. Today's discussion will be making references to non-gaap financial measures.

Speaker Change: The non-gaap measures that we use are defined qualified and reconciled from gap. On schedules, A4 to A8 of the financial statements accompanying today's earnings release

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

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

Deon Stander: On the call today are Deon Stander, President and Chief Executive Officer, Greg Lovins, Senior Vice President and Chief Financial Officer, and William Gilchrist, our new Vice President of Investor Relations. I'll now turn the call over to Deon. Thanks, John. And hello, everyone. We delivered a solid second quarter with earnings above the midpoint of expectations and strong free cash flow in a dynamic environment. This result again demonstrates the strength and resilience of our franchise, with multiple levers in our portfolio to deliver in a range of scenarios. As anticipated, changes in trade policy throughout the quarter had both direct and indirect impacts on our business.

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

Speaker Change: On the call today are dyin standard president and chief executive officer Greg Levens, senior vice, president and Chief Financial Officer and William Gilchrist, our new vice president of investor relations. I'll now turn the call over to Dion.

Dion: Thanks John and hello everyone.

Dion: With earnings above, the midpoint of expectations and strong, free cash flow in a dynamic environment.

Dion: This result again demonstrates the strength and resilience of our franchise with multiple levers in our portfolio to deliver in a range of scenarios.

Deon Stander: We successfully continue to leverage our proven playbook to mitigate the direct cost increases through strategic sourcing adjustments and select pricing surcharges, and to minimize the impact of sourcing demand reduction, particularly in apparel and general retail categories in the solutions group. The Materials Group delivered strong productivity and margins on modest volume growth in the quarter. Strong Product Mix Bolstered Margins, underscoring the effectiveness and importance of our strategy to continue expanding our position in high-value, more differentiated categories. High-value categories constitute over a third of our materials group sales, and these products continue to outpace the base in the second quarter, with particular strength in graphics and reflective solutions.

Dion: As anticipated changes in trade policy throughout the quarter had both direct and indirect impacts on our business.

Dion: We successfully continue to leverage our proven Playbook to mitigate the direct cost increases through strategic sourcing adjustments, and select pricing, search charges and to minimize the impact of sourcing demand reduction, particularly in apparel and general retail categories in the solutions group.

Dion: The materials group delivered, strong productivity, and margins on Modest volume growth in the quarter.

Strong product, mix both did margins underscoring, the effectiveness and importance of our strategy to continue expanding our position in high value, more differentiated categories.

Dion: High value categories, constitute over a third of our materials group sales and these products continue to outpace the base in the second quarter with particular strengths in graphics and reflective Solutions.

Deon Stander: For overall volume, growth in North America was strong, particularly in film categories. While Europe was down, and emerging market growth was solid. Softer growth in Europe and Asia was partly attributable to a strong second quarter last year in which customers pulled orders forward in anticipation of a price increase. Volume in both regions was slightly below expectations, particularly in paper categories, including a modest impact from lower demand for U.S. exports. Solutions Group delivered solid margins in the quarter, up compared to prior year, despite a decline in apparel and general retail categories, which was partially offset by low double-digit growth in other categories, resulting in a modest decrease in overall sales.

Dion: For overall volume growth in North America was strong, particularly in film categories. While Europe was down and emerging market growth was solid.

Dion: Softer growth in Europe and Asia was partly attributable to a strong second quarter last year in, which customers pulled or orders forward in anticipation of a price increase.

Dion: Volume in both regions was slightly below expectations. Particularly in paper categories including a modest impact from lower demand for US exports.

Dion: Solutions group delivered, solid margins. In the quarter up compared to Prior year, despite a decline in apparel and general retail categories, which was partially offset by low double-digit growth in other categories, resulting in a modest decrease in overall sales.

Deon Stander: Overall apparel sales were down 6% in the quarter. As you can see on slide 7, borders are down high single digits in April and improved in May and June, exiting the quarter down low single digits. Despite the reduction in sourcing demand during this period, consumer demand for apparel continues to exhibit resilience today. Within high value solutions, Embellix, a high growth platform driven by performance athletic categories and fan engagement in team sports, was down in the quarter on lower sourcing demand and slower orders from prominent U.S. performance brands. We anticipate a strengthening of Embellex's growth trajectory later this year, partially driven by the 2026 World Cup.

Dion: Overall, apparel sales were down 6% in the quarter.

Dion: As you can see on slide 7.

Dion: orders are down high single digits in April and improved in May, and June exiting the quarter down, low, single digits,

Dion: Despite the reduction in sourcing demand during this period.

Dion: Consumer demand for apparel continues to exhibit, resilience to date.

Dion: Within high value Solutions embel a high growth platform driven by performance, athletic categories and fan engagement in team sports.

Dion: Was down in the quarter on Lower sourcing demand and slower orders from prominent us performance brands.

Dion: We anticipate a strengthening of imbalances, growth trajectory later this year partially driven by the 2026 World Cup.

Deon Stander: Vescom, our suite of productivity and media solutions for the retail shelf edge, was up roughly 10% in the quarter on the successful rollout of our productivity solutions at CVS Health, which was completed earlier in the quarter.

Vestcom our suite of productivity and Media Solutions. For the retail shelf, Edge was up roughly 10% in the quarter on the successful rollout of our productivity Solutions at CVS Health which is completed earlier in the quarter.

Deon Stander: Turning to Enterprise-Wide Intelligent Labels. Sales were comparable to prior year and up mid-single-digit sequential. Apparel and general retail categories were down mid-single digits, while food, logistics and other categories were up mid-teens collectively. In apparel and general retail, customers reduced orders and inventory levels as they re-evaluated their sourcing, timing and strategy. We anticipate growth in these categories will normalize over time. In food, we delivered strong growth in the quarter. As our strategic collaboration with Kroger continues to ramp as expected. and we continue to see strong momentum in our pipeline with other grocery. In logistics, we delivered strong growth compared to prior year and sequentially.

Turning to Enterprise wide intelligent labels.

Sales were comparable to Prior year and up mid single digits sequentially.

Dion: The parallel and general retail categories were down mid single digits while food Logistics. And other categories were up, mid teens, collectively.

Dion: in apparel and general retail customers reduced orders and inventory levels as they re-evaluated their sourcing timing and strategy

Dion: We anticipate growth in these categories will normalize over time.

Dion: Food. We delivered strong growth in the quarter as our strategic collaboration. With Kroger continues to ramp as expected.

Dion: And we continue to see strong momentum in our Pipeline with other grocery customers.

Deon Stander: Our share in the segment remains strong, and we continue to actively pursue new projects with other customers. From an overall operational perspective, this business has had to make adjustments to our global network due to shifts in trade policies. To counter this, we activated initiatives to reduce network inefficiencies and associated costs. With more than 70% of our Intelligent Label platform linked to apparel and general retail categories, near-term growth is likely to be impacted by trade policy. We expect growth in these categories will normalize over the cycle and are focused on accelerating controllable growth. The key rollouts planned for this year remain largely on track.

Dion: In logistics, we delivered, strong growth, compared to Prior year and sequentially. Our share in this segment remains strong, and we continue to actively pursue new projects with other customers.

Dion: From an overall operational perspective. This business has had to make adjustments to our Global Network due to ships and trade policies to counter this. We activated initiatives to reduce Network inefficiencies and Associated costs.

With more than 70% of our intelligent label platform, linked to apparel and general retail categories.

Dion: Near-term, growth is likely to be impacted by trade policy.

We expect growth in this categories will normalize over the cycle and our focused on accelerating controllable growth.

Deon Stander: The performance of our recent launches and pilots, particularly within food and logistics, where ROIs are exceeding expectations, instills confidence in the long-term growth trajectory of this plant.

Deon Stander: Shifting back to the Total Company. Given the near-term uncertainty, we are taking a cautious approach to forward expectations. and expect third quarter earnings per share to be comparable to prior year. We are prepared for a range of scenarios and will continue to leverage our proven playbook to safeguard earnings while driving key initiatives to deliver strong profitable growth, given the strength of the overall franchise. We are industry leaders in more than 80% of our portfolio in large, growing, and diverse markets. We are competitively advantaged, including our global scale, footprint, innovation, and go-to-market strategy. We have catalysts for strong growth over cycle in multiple high-value categories that provide differentiated growth potential and in emerging markets.

Dion: Key rollouts plan for this year remain largely on track and the performance of our recent launches and Pilots particularly within food and Logistics where rois are exceeding expectations instills confidence in the long term growth trajectory of this platform.

Dion: To the total company.

Given the near-term uncertainty. We are taking a cautious approach to Ford expectations.

Dion: And expect third quarter earnings per share to be comparable to Prior year.

Dion: We are prepared for a range of scenarios and will continue to leverage our proven Playbook to safeguard earnings, while driving key initiatives to deliver strong profitable growth.

Dion: Given the strength of the overall franchise.

Dion: We are industry leaders in more than 80% of our portfolio in large growing and diverse markets. We are competitively advantaged, including our global scale footprint, Innovation and go to market strategy.

Deon Stander: Our strong franchise and agile global team provides us multiple levers to deliver in a broad range of scenarios. The materials group has demonstrated strong resilience through and across cycles and has limited direct tariff exposure due to the regional nature of the business. Solutions Group is less cyclical than it was historically, evident by the second quarter results. Lastly, we have a strong balance sheet with ample capacity and a disciplined approach to capital allocation that provides significant inflexibility, including organic and M&A investments, to accelerate our strategic objectives and expand EVA oversight. Taken together, these elements will enable us to navigate the dynamic environment and deliver superior earnings growth over the cycle.

Dion: we have catalysts for strong growth over the cycle in multiple high-value categories that provide differentiated growth potential and in Emerging Markets

Dion: Our strong franchise and agile. Global team provides us multiple levers to deliver in a broad range of scenarios materials, 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 historically, evident by the second quarter results.

Dion: Lastly, we have a strong balance sheet with ample capacity and a disciplined approach to Capital. Allocation, that provides significant inflexibility including organic and m&a Investments to accelerate our strategic objectives and expand Eva over Cycles.

Deon Stander: While I'm confident in our long-term earnings progression, I'm not satisfied with our current growth and earnings trajectory, particularly within our IL platform. Here, we are taking action to improve network efficiency, as well as expand innovation to help accelerate growth. I want to thank our entire team for their continued resilience, focus on excellence, and commitment to addressing the unique challenges at hand.

Dion: Taken together. These elements will enable us to navigate the dynamic environment and deliver Superior earnings growth over the cycle.

Dion: While I'm confident in our long-term earnings progression. I'm not satisfied with our current growth and earnings trajectory particularly within our Ile platform. Here, we are taking action to improve Network efficiency, as well as expand Innovation to help accelerate growth.

Gregory Lovins: Over to you, Greg. Thanks, Deon. And hello, everybody. In the second quarter, we delivered adjusted earnings per share of $2.42, up 5% sequentially and comparable to prior year, as productivity offset lower volume and apparel and the net impact of pricing and raw material costs. As Deon mentioned, trade policy uncertainty during the quarter impacted our results. largely due to lower sourcing volume in apparel and general retail category. We estimate the indirect effect of tariffs lowered our earnings per share by more than $0.10 in the quarter. Compared to prior year, sales were down 1% on an organic basis.

Dion: I want to thank our entire team for their continued resilience focus on excellence and commitment to addressing the unique challenges at hand.

Greg Levens: Over to you, Greg.

Greg Levens: Thanks, Dione. And hello everybody.

Greg Levens: In the second quarter, we delivered adjusted earnings per share of $2.42 up 5% sequentially and comparable to Prior year.

Greg Levens: As productivity offset, lower volume and apparel, and the net impact of pricing and raw material costs.

A Zeon mentioned trade policy uncertainty during the quarter impacted our results.

Largely due to lower sourcing volume in apparel and general retail categories.

Greg Levens: We estimate the indirect effect of tariffs lowered, our earnings per share by more than 10 cents in the quarter.

Gregory Lovins: as positive volume mix was more than offset by deflation-related price reduction. Adjusted EBITDA margin was strong at 16.6% in the quarter, up 20 basis points compared to prior year. and we generated strong adjusted free cash flow of nearly $190 million in the quarter. Our balance sheet remains strong with the net debt to adjusted EBITDA ratio at quarter end of 2.3. and we continue to execute our disciplined capital allocation strategy, including returning cash to shareholders. In the first six months of the year, we returned roughly $500 million to shareholders through the combination of share repurchases and dividends.

Greg Levens: Compared to Prior year sales were down, 1% on an organic basis.

Greg Levens: As positive volume, mix was more than offset by deflation related price. Reductions

Greg Levens: Adjusted even top margin was strong, at 16.6% in the quarter up 20 basis points compared to Prior year.

Greg Levens: And we generated strong adjusted free cash flow of nearly 190 million dollars in the quarter.

Greg Levens: Our balance sheet remains strong with the net debt, to adjusted ibida ratio at quarter end of 2.3.

Greg Levens: And we continue to execute our disciplined Capital allocation strategy.

Including returning cash to shareholders.

Gregory Lovins: Early in the quarter, we announced a 7% increase to the company's quarterly dividend, up to $0.94 per share, a dividend we've consistently grown annually for more than a decade.

Greg Levens: in the first 6 months of the year, we returned roughly $500 million to shareholders to the combination of share repurchases and dividends

Greg Levens: Early in the quarter. We announced a 7% increase to the company's quarterly dividend up to 94 cents per share a dividend. We've consistently grown annually annually for more than a decade.

Gregory Lovins: Turning to segment results for the quarter. Materials group sales were down 1% on an organic basis. as modest volume mix growth was more than offset by low single-digit deflation-related price reduction. Organically, high value categories were up low single digits, and the base business was down low single digits. Looking at regional label materials, organic volume mix trends versus prior year in the quarter. North America was up low to mid-single digits. Europe was down low to mid-single digits as we lapped a strong prior year that included customer pull-forward ahead of price increases. Asia Pacific was up low to mid-single digits, and Latin America was up low single digits.

Greg Levens: Turning to the segment results for the quarter.

Greg Levens: Materials group sales were down, 1% on an organic basis.

Greg Levens: As modest volume mix growth was more than offset by low single digit, deflation related price. Reductions

Greg Levens: organically high-value categories were up low single digits.

Greg Levens: And the base business was down low single digits.

Greg Levens: Looking at Regional label materials, organic volume mixed Trends versus prior year in the quarter.

Greg Levens: North America was up low to mid single digits.

Greg Levens: Europe was down low to mid single digits as we lap the strong prior year, that included customer pool forward ahead of price increases,

Greg Levens: Asia Pacific was uploaded mid single digits in Latin. America was uploaded single digits.

Gregory Lovins: Compared to prior year, Graphics and Reflective Sales were up high single digits, and Performance Tapes and Medical were up low single digits organically. Materials Group continues to deliver strong margins with an adjusted EBITDA margin of 17.8% in the quarter. down to slightly compared to prior year and up slightly sequentially. Regarding raw material costs, excluding the direct impact of tariffs, we experienced modest sequential global raw material cost deflation in the second quarter, as expected. However, higher tariffs, primarily between the U.S. and Europe, began affecting us in the middle of Q2. We substantially mitigated the increased costs through strategic sourcing adjustments and the implementation of select pricing surcharges.

Greg Levens: Compared to Prior Year, graphics and reflective sales were up high, single digits, and performance tapes and medical were up low, single digits organically.

Greg Levens: 17.8% in the quarter.

Greg Levens: Down's, a slightly compared to Prior year and up slightly sequentially.

Greg Levens: Regarding raw material cost, excluding the direct impact of tariffs.

We experienced modest sequential Global raw material cost deflation in the second quarter as expected.

Greg Levens: However, higher tariffs are merely between the US and Europe, began affecting us in the middle of Q2.

Gregory Lovins: Overall, including our tariffs, our outlook sequentially in Q3 is for low single-digit inflation versus prior year. Shifting to solutions group, sales were down 1% organically. Outside of apparel and general retail categories, sales were up low double digit. with overall high-value categories up below single digits and base solutions down mid-single digits. Within high-value categories, VESCOM was up roughly 10 percent, driven by new program rollouts, and Embellix was down in the quarter, as Deon noted. Enterprise-wide intelligent label sales were comparable to prior year, and up mid-single digits sequentially in the second quarter. Food, logistics, and other categories combined were up mid-teens, offset by a mid-single-digit decline in apparel and general retail categories.

Greg Levens: We substantially mitigated the increase costs through strategic sourcing adjustments in the implementation of Select pricing. S charges.

Overall, including our tariffs, our outlooks sequentially in Q3 is for low single digit, inflation versus prior year.

Greg Levens: Shifting to solutions group sales were down. 1% organically.

Greg Levens: Outside of apparel and general retail categories sales were up low, double digits.

Greg Levens: With overall high-value categories, up below single digits and base Solutions down mid single digits.

Speaker Change: Within high value categories vestcom was up roughly 10% driven by new program rollouts and embellish was down in the quarter as D on noted.

Speaker Change: Enterprise wide intelligent label. Sales were comparable to Prior year and up mid single digits, sequentially in the second quarter.

Speaker Change: Food Logistics and other categories combined were up mid, teens offset by mid single digit decline in apparel and general retail categories.

Gregory Lovins: Solutions Group achieved a solid adjusted EBITDA margin of 17.1%, up 30 basis points compared to prior year, as benefits from productivity were partially offset by lower volume in apparel and growth investment.

Speaker Change: Solutions group achieved a solid adjusted. Evita margin of 17.1% up, 30 basis points, compared to Prior year, as benefits from productivity or partially offset, by lower volume and apparel and growth Investments.

Gregory Lovins: Now shifting to our outlook, for the third quarter, we expect adjusted earnings per share in the range of $2.24 to $2.40. Comparable to prior year at the midpoint as benefits from productivity and sales growth in the majority of our businesses. are offset by typical wage inflation and a top-line decline in apparel and general retail categories. Sequentially, historical seasonality trends have resulted in a mid-single-digit decrease in EPS. Primarily attributable to the August holiday period in Europe and the seasonal nature of the apparel business. Our guidance for Q3 assumes this typical seasonality, as well as a slight sequential benefit from currency translation.

Speaker Change: Now, shifting to our outlook for the third quarter, we expect adjusted earnings per share in the range of $2.24 to $2.40.

Speaker Change: Comparable to Prior year at the midpoint as benefits from productivity and sales growth in the majority of our businesses.

Are offset by typical wage inflation in the Topline, Decline and apparel in general retail categories.

Speaker Change: Sequentially historical seasonality Trends. Have resulted in a mid single digit decrease in eps.

Speaker Change: Primarily attributable to the August holiday period in Europe.

Speaker Change: In the seasonal nature of the apparel business.

Speaker Change: Our guidance for Q3 assumes this typical seasonality

As well as a slight. Sequential benefit from currency translation.

Gregory Lovins: While we've seen some signs of apparel industry improvement exiting Q2, the outlook remains uncertain and customer feedback and sentiment remains muted. We're assuming a continuation of soft apparel volumes in the third quarter.

Speaker Change: What we've seen some signs of apparel industry Improvement, exiting Q2.

Speaker Change: The Outlook remains uncertain and customer feedback and sentiment remained muted.

We're assuming a continuation of soft apparel volumes in the third quarter.

Gregory Lovins: We've also outlined some contributing factors to our full year results on slide 14 of our Supplemental Presentation Materials. To highlight a few of the key drivers, we now anticipate a $7 million currency translation benefit to operating income compared to our previous projection of a $7 million headwind. We now expect restructuring savings, net of transition costs, of approximately $50 million. as we continue to ramp up our productivity efforts. And while we're not giving guidance for the full year, we do anticipate returning to earnings growth compared to prior year in the fourth quarter. Assuming no significant shift in the macro.

Speaker Change: We've also outlined some contributing factors to our full year. Results on slide. 14 of our supplemental presentation materials.

Speaker Change: To highlight a few of the key drivers, we now anticipate a 7 million dollar currency translation benefit to operating income compared to our previous projection of a 7 million headwind.

Speaker Change: We now expect restructuring and savings net of transition cost of approximately $50 million

Speaker Change: As we continue to ramp up our productivity efforts.

Speaker Change: And while we're not giving guidance for the full year, we do anticipate returning to earnings growth compared to Prior year in the fourth quarter.

Gregory Lovins: And we continue to expect strong free cash flow across a wide range of scenarios, targeting roughly 100% conversion for the year.

Speaker Change: Assuming no significant shift in the macro.

Speaker Change: And we continue to expect strong free cash flow cross. A wide range of scenarios targeting roughly 100% conversion for the year.

Gregory Lovins: In summary, we delivered a solid second quarter with EPS above the midpoint of our expectations through a dynamic environment. We're well prepared for a variety of macro scenarios and well positioned to continue to deliver exceptional value to our stakeholders through our strategies for long-term profitable growth and disciplined capital allocation.

In summary we delivered a solid second quarter with EPS, above the, midpoint of our expectations through a dynamic environment.

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

Speaker Change: We're well prepared for a variety of macro scenarios and well positioned to continue to deliver exceptional value to our stakeholders through our strategies for long-term profitable growth and discipline Capital, allocation.

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

Speaker Change: Ladies and gentlemen.

If you would like to register a question, press star, followed by the number 1 on your telephone keypad.

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John Mcnulty: Our first question comes from the line of John McNulty from BMO Capital Markets. Please proceed with your question. Yeah, good morning, and thanks for taking my question.

Speaker Change: DMO Capital markets, please. Proceed with your question.

John Mcnulty: So I wanted to dig into solutions a little bit. You know, I understand the tariff stuff created some noise does look like, you know, maybe the trends were improving. But I guess, admittedly, back to school doesn't change. holiday season doesn't necessarily change all that much.

Speaker Change: Yeah, good morning and thanks for taking my question. Um, so I wanted to dig into Solutions a little bit. Um, you know, I understand the Tariff stuff created. Some noise does look like, you know, maybe the trends were improving, um, but I guess admittedly back to school doesn't change.

John Mcnulty: So I guess, can you speak to whether you see pent up demand, where we may see, you know, some some kind of quicker turnarounds going forward in as we get into the second half, and how the profitability of that might flow through?

John Mcnulty: And then I guess the other question I had on solutions was just, you know, you sound optimistic about, in particular, some of the excitement around the the food and grocery channel, at this point, is, is that something where you think we could see a conversion of of new business or a new account before the end of the year?

Speaker Change: Holiday season doesn't necessarily change all that much. Um, so I guess can you speak to whether you see pent up demand, um, where we may see, you know, some, some kind of quicker turnarounds going forward in as we get into the second half and how the profitability of that might flow through. And then, I guess the other question I had on Solutions was just, you know, you sound optimistic about, um, in particular, some of the excitement around the, the, the food and grocery Channel. Um, at this point is, is that something where you think we could see a conversion of of new business or a new account before the end of the year.

Deon Stander: Thanks John for the question. Let me just deal with the first one. What we've seen really in the macro environment, John, if you take a step back, is continued kind of retail sales volume softness in Europe. There's, you know, and retail sales in the United States still only projected to grow sort of above 1%. And I think the parallel industry specifically itself has had been impacted by the whole tariff uncertainty, not just the tariff rate itself, but also when and where they get applied and when they become more certain. Those two things. when you add them together, have certainly had an impact on the way our customers have been thinking about their sourcing strategy.

Speaker Change: Well, thanks, John for the question. Let me just deal with the first 1. Um, what we've seen really in the macro environment. John, if you take a step back is continued kind of retail sales volume softness in Europe, there's, you know, and retail sales in the United States. Still only projected to grow, sort of above 1%. Um, and I think that parallel industry. Specifically itself has hadn't been impacted by the whole tariff uncertainty. Not just the Tariff rate.

Speaker Change: Itself. But also, when and where they get applied, and when they become more certain, those 2 things,

Deon Stander: So in the early days, remember we said we saw some orders being held as apparel retailers and brands trying to determine where they were going to source and how they were going to price those when they landed in the United States, particularly. That has slowly improved as we've gone through the second quarter, but the sentiment from our customers still remains fairly muted. In the discussions we have with them, they're still saying they're waiting for more clarity to really understand exactly when they're going to be able to do that. Now, overall apparel consumption remains relatively robust to date.

Speaker Change: when you add them together, have certainly had an impact on the way. Our customers have been thinking about this sourcing strategy. So, in the early days, remember we call? We said we saw some orders being held as a parallel retailers and Brands trying to determine where they were going to source and how they were going to price those when they landed in the United States. Particularly

Deon Stander: What I think we're going to see as we move forward, at least anecdotally what I hear from customers, is that they're going to continue to watch how inflationary pressures impact the consumer demand, particularly impact in apparel, because likely we're going to see inflationary pricing in the apparel industry as we move forward in the second half. And they're trying to judge how much sourcing volume they then anchor themselves on relative to support that demand. And those ranges that we get from customers tend to vary as well, John.

Speaker Change: That has slowly improved as we've gone through the second quarter but the sentiment from our customers Still Remains fairly muted and the discussions we have with them, they're still saying they're waiting for more clarity to really understand exactly when they going to be able to do that. Now, overall, apparel consumption remains relatively robust to date. Um, what I think we're going to see as we move forward, at least anecdotally when I hear from customers,

Deon Stander: So we're taking an approach we say that we're assuming in the third quarter continues for the low single-digit demand in our business for apparel and general retail overall. To your second question around food and grocery, I am very optimistic because while the impact that we've seen on apparel and general retail has been to have sort of mid-single-digit declines in the second quarter, outside of that, food logistics and other categories have actually grown mid-teens and really good, strong growth in food and logistics as well in both of those specific categories. And what we do know and what we believe at the moment is that outside of the impact that tariffs have had, largely on apparel and general retail, the rest of our business is largely on track to where we originally assumed.

Speaker Change: Is that they're going to continue to watch how inflationary pressures impact the consumer demand particularly impact in apparel. Because it's likely we're going to see inflationary pricing in the apparel industry as we move forward. In the second half and they're trying to judge how much Source in volume, they then anchor themselves on relative to support that demand. Um and those ranges that we get from customers tend to vary um as well John. So we're taking an approach where you say that we are assuming in the third quarter continued, sort of the low single digit, um demand uh in in our business for apparel and general retail overall

Speaker Change: To your second question around food and grocery. Um I am very optimistic because while the impact that we've seen on The Apparel and general retail has been to have sort of mid single digit clients in the second quarter.

Speaker Change: Outside of that food Logistics and other categories, actually grown mid teens, and really good, strong growth in food and uh, and Logistics as well in both of those specific categories.

Deon Stander: And in particular, the rollouts that we had assumed as we went through this year are on Some of those rollouts in food and logistics, particularly in food, include also new customers as they go from pilot stage to rollout as well. And the results that we're seeing... particularly in food, from an ROI perspective, we're exceeding both the existing customers and some of our pilot customers' expectations. This gives us confidence in the fact that we're going to continue to see adoption as we go through the second half of the year into the start of 2020. for 26.

Speaker Change: And what we do know, and what we believe at the moment is that outside of the impact that terrorists have had largely on the parallel and general retail, the rest of our business is largely on track to where we originally assumed and in particular, the rollouts that we had assumed. As we went through this year on track, some of those royalties in food and Logistics or particularly in food. Include also new customers as they go from Pilot stage to roll out as well. And the results that we're seeing

Unknown Executive: Apologies.

Gregory Lovins: John, if I could just add one one thing to Deon's comments. So we had in the second quarter, as we talked about impacts and apparel down about 6%. Our assumptions for Q3 is our apparel business overall be down low single digits versus prior year. So we assume a little bit better based on that, the graph you see and how we're exiting Q2, assuming we stay roughly on the trajectory that we exited Q2.

Speaker Change: It particularly in food. Uh from our Roi perspective, we're exceeding both the existing customers and some of our pilot customers expectations. This gives us confidence in the fact that we're going to continue to see adoptions. We go through the second half of the year into the start of 25 for 26. Apologies.

Speaker Change: Yeah, Don if I could just add 1, 1 thing to dian's comments. So we had in the second quarter, as we talked about impacts in apparel down about 6%. Our assumptions for Q3 is our parallel, um, uh, business overall will be down low single digits versus prior year. So we assume a little bit better based on that the graph. You see, and how we're exiting Q2, assuming we stay roughly on the trajectory that we actually do.

Ghansham Panjabi: Your next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question. Hey guys, just following up on the last question in your comments, Greg, you know, just in terms of the apparel. You know, what are you baking in for our...

Speaker Change: Your next question comes from the line of gunam Punjabi with beard. Please proceed with your question.

Gunam Punjabi: Yeah, hey guys uh just following up on the last question in your comments. Greg, you know, just in terms of

Ghansham Panjabi: Second, your confidence underpinning the expected improvement in 4Q earnings on a year-to-year basis. What are some of those?

Gunam Punjabi: Is what what are some of the drivers we should consider as relates to that. Um, assumption.

Deon Stander: Ghansham, hi, let me deal with the first question. Let me just reiterate, we continue to see the impact of apparel and general merchandise, those two categories, through the tariff environment. And as I said, outside of those, our business is largely on track in the way we thought it would be.

Got some high. Let me deal with the first question. Um,

Deon Stander: We have two things that are going to happen in the second half of this year. I anticipate all things being equal. There's no further deterioration. We should see growth in IL in the third quarter. And then in the fourth quarter, we expect to see some of those new programs or the rollouts that we're seeing take traction in the fourth quarter as well.

Gunam Punjabi: Let me just reiterate in the it, we would continue to see the impact of apparel and General Merchandise. Those 2 categories through the Tariff environment and as I said, outside of those our business is largely on track in the way, we thought it would be. Um, we have 2 things that are going to happen in the second half of this year. Um, I, I anticipate all things being equal, there's no further deterioration, we should see growth and and I the third quarter, and then in the fourth quarter, we're expect to see some of those new programs or the rollouts that we're seeing take Traction in the fourth quarter as well.

Gregory Lovins: Sorry, sorry, Ghansham, I didn't get the second question didn't come through clearly. I'll fork you. Yeah, I think when we look at, you know, you see our guidance for the third quarter at the midpoint of about 232 or so. When we look into the fourth quarter and think about the trajectory going forward, typically, as we talked about in Q3, we have some unfavorable seasonality from Q2. We typically see some favorable seasonality from Q3 to Q4, somewhere in the low single-digit range from an earnings perspective. So that picks us up a nickel or so from that perspective.

Gunam Punjabi: Yeah, sorry, sorry. Gotcha. I didn't get the the second question didn't come through clearly.

Gunam Punjabi: As it relates to, the 4q earnings um, year over year.

Gregory Lovins: We're continuing to drive productivity actions, as we've talked about as well, and we're increasing our restructuring as well as driving other ongoing productivity across the business. So that gives us a bit of a pickup from Q3 to Q4. So when I look at sequentially, at least, those two items alone put us at or above prior year from an earnings perspective. And that's assuming really no improvement in an apparel or other parts of the portfolio. And we're really expecting, as Deion's talked about, to continue driving growth in outside of apparel and IL, continue driving growth in VESCOM versus prior year, et cetera.

Gunam Punjabi: All 4 key. Um, yeah, I think when we look at, you know, you see our guidance for the third quarter uh as a midpoint of about 232 or so. When we look into the fourth quarter and think about the trajectory going forward, typically, as we talked about in Q3, we have some unfavorable seasonality from Q2, we typically see some favorable seasonality from Q3 to Q4, uh, somewhere in the low, single digit range, from a earnings perspective, so that picks us up a, a nickel or. So, from that perspective, we're continuing to drive productivity actions as we've talked about as well. And we're increasing our restructuring as well as driving other ongoing productivity across the business. So that gives us a bit of a pickup

From Q3 to Q4.

Gregory Lovins: So, you know, those things all together give us confidence that we'll see earnings growth in the fourth quarter.

Gunam Punjabi: So when I look at um sequentially at least those 2 items alone, put us at or above prior year, uh, from an earnings perspective and that's assuming really no improvement in an apparel or other parts of the portfolio. And we're really, you know, expecting is Deon talk about to continue driving uh growth and outside of apparel and iel. Uh, continue driving growth investcom versus prior year, Etc. So you know those things all together. Give us uh confidence, we'll see uh earnings growth in the fourth quarter.

George Staphos: Our next question comes from the line of George Staphos from Bank of America. Please proceed with your question. Hi, everyone. Good morning. Thanks for the details.

Our next question comes from the line of George Staples from Bank of America. Please proceed with your question.

Unknown Executive: I just want to welcome you.

Unknown Executive: I guess I wanted to piggyback on IL as well.

George Staphos: So did you see any kind of pickup specific to the setting of tariffs in Vietnam, and that being established and then the term orders coming because customer at least knew what their sourcing and costs would be out of that country? And just looking at the chart and trying to put your commentary together, are you still down year on year in apparel orders into July? Or are you actually now up modestly? I know you're saying down low single digits in the quarter, but July, where were you?

George Staples: Hi everyone. Good morning. Thanks for the details. Um, I I just want and welcome. Give me, um, I guess I I wanted to piggy back on iel, uh, as well. So, did you see any kind of pickup specific to the to, um, setting of tariffs in Vietnam and that being established and then in turn orders coming? Because customers at least knew what what, their sourcing and costs would be out of that of that country and just looking at the chart and trying to put your commentary together. Are you still down year in year in apparel orders? Um, into July or are you actually now up modestly? Uh, I know you're saying down, uh, low single digits in the

Gunam Punjabi: Quarter, but July, where were you?

Deon Stander: Thanks, George. As it relates to the question specifically on Vietnam, we did see during the quarter, as expected, some volume was being moved from China to other regions, notably, particularly Vietnam, and South Asia as well. This is before, this is during the time of the 10% tariff rate around the rest of the world, George. And so there was a slight pickup in Vietnam IL orders relative to a slight decrease in China. But that all was contained within the overall Q2 performance of apparel and general merchandise being more muted because of the broader tariff impact. I will say, though, that as we've seen some of the other tariff rates begin to set, or at least indicated the magnitude where they're going to be, we continue to see customers, the apparel side, calibrate what they're going to do from a sourcing perspective moving forward.

Thanks George. Um, as it relates to the question specifically on Vietnam, we did see during the court as expected. Some volume was being moved from China to other regions, notably particularly Vietnam and South Asia as well. This is before this is during the time of the 10%, um, tariff rate around the rest of the world, George. Um, and so there was a slight pickup in Vietnam, Ile orders relative to slight decrease in China. But that all was contained, within the overall Q2 performance of apparel and General Merchandise, being more muted because of the broader tariff impacts.

Deon Stander: And of course, for our advantage, George, as you know, we have manufacturing facilities and support facilities in each one of these countries. So as customers choose to move volume, we have the ability to help them in that regard, both core products, base products, and IL as needed. From an overall apparel perspective, our current apparel volumes and orders are roughly flat to prior year to date. That's the way I'd characterize it.

Gunam Punjabi: I will say though that as we've seen some of the other tariff rates begin to begin set or at least indicated the light, the, the the magnitude where they're going to be, we continuously customers the apparel side calibrate, what they're going to do, from a sourcing perspective, moving forward. Um and of course for our advantage, George as you know, um, we we have manufacturing facilities and support facilities in each 1 of these countries. So, as customers, choose to move volume, we have the ability to help them in that regard, and move the volume. Both core products based products and ILS, as as, as needed from an overall apparel perspective, our our current, uh, apparel volumes and orders are roughly flat to Prior year, year to date. That's the word characterize it.

Matt Roberts: Our next question comes from the line of Matt Roberts from Raymond James. Please proceed with your question. Hey, good morning, everybody. Yeah, I'll shift gears just a little bit here. There were probably, share repurchases to date are near record annual level. Transcripts provided by Transcription Outsourcing, LLC.

Speaker Change: Our next question comes from the line of Matt Roberts from Raymond James. Please proceed with your question.

Matt Roberts: Hey, good morning everybody. Um,

Matt Roberts: Should growth in IL or rollouts continue to be slower than expected? At what point do you think you would need to do inorganic growth? call that out earlier. So at what point would you need to pivot there to start seeing greater margin contribution from other high value categories? Thanks for taking the question. Hey, thanks, Matt. So I think as we talked about last quarter, you know, we're continuing to execute our capital allocation strategy, continuing with the way we've approached it in the past. We talked about, you know, we ramped up share buybacks in Q1, I think I mentioned a quarter ago, that we'd continue doing that, likely not the same pace we had in Q1, but we were going to continue to do that while the share price was where it was lower paced in Q1, but continuing to do that.

Speaker Change: Shift gears just a little bit here. Um maybe we'll probably share my purchases to date or or near record annual levels, you still training at evaluation, we got first the S&P. So how should we think about free cash flow in 25 and potential for further repurchases?

Speaker Change: Allows continued to be slower than expected at at what point do you think you would need to to inorganic growth? You seem to kind of

Call that out earlier. So at what point would you need to to Pivot their to start seeing greater margin contribution from other high-value categories. Thanks for taking the question.

Gregory Lovins: And we'll continue to execute that capital allocation strategy. We feel good about the balance sheet, it gives us capacity to invest organically in the business, capacity to continue returning cash through an increase in dividend, as we did last quarter, as well as continue to do share buybacks. And then we have capacity for M&A as well. So we feel good about that. And that's an area we're continuing to drive opportunities, of course, not just in IL, but across our high value categories, looking at M&A opportunities to continue to expand our proportion of the portfolio that's in high value categories.

Yeah, thanks Matt. So I I think as we talk about last quarter, you know, we're continuing to execute our Capital allocation strategy continuing with the way we've approached it in the past. Um, we talked about, you know, we ramped up, share BuyBacks and q1. I think I mentioned the quarter ago that we've continued doing that. Like, we not the same Pace we had in q1, but we were going to continue to do that while the uh, the share price was, uh, where it was compared to our, uh, expected intrinsic value. So, that's something we continue to do, uh, in the second quarter. Again, a slower Pace in q1, But continuing to do that, and we'll continue to, uh, execute that Capital allocation strategy. We feel good about the balance sheet. It gives us capacity to invest organically in the business, uh, capacity to continue returning, cash through an increase in dividend, as we did last quarter, as well as, uh, continuing to do share BuyBacks.

Deon Stander: And Matt, let me just add to Greg's comment, we've, we've been very deliberate in managing our capital allocation consistently over a very long period, in a very disciplined way as well. Our leverage ratio is around 2.3 at the moment. And we see that management leading us to have an ability if we need to lean forward when we see market dislocations, or asset dislocations in terms of prices, always focused on how we think about executing a strategy. Our M&A pipeline remains very robust. And when we see the opportunities, they align with our strategy, we'll continue to execute.

Matt Roberts: And then we have capacity for m&a as well. Uh so we feel good about that and that's an area where continuing to drive uh opportunities. Of course not just in ill but across our high-value categories. Um looking at m&a opportunities to continue to expand our proportion of the portfolio. That's in high value categories. And Matt let me just add to Greg's comment, we we've been very deliberate in, man.

Matt Roberts: Managing a capital, allocation consistently over a very long period in a very disciplined way as well. Our leverage ratio is at around 2.3, at the moment and we see that, um, management leading us to have an ability if we need to to lean forward when we see Market, dislocations or asset dislocations, in terms of prices always focused on how we think about executing a strategy. Our m&a pipeline remains very robust and when we see the opportunities and they align with our strategies, we'll continue to execute on them.

Jeffrey Zekauskas: Our next question comes from the line of Jeffrey Zekauskas from J.P. Morgan. Please proceed with your question. Thanks very much. Your graphics and reflective volumes have been up high single digit. first two quarter Do you expect a continuation in that trend? And what do you see as behind it?

Speaker Change: Our next question comes from the line of Jeffrey zukauskas from JP Morgan, please proceed with your question.

Jeffrey zukauskas: Uh, thanks very much. Um,

Gregory Lovins: And then secondly, your SG&A expense. you know, has been lower. year over year. sort of nicely lower. second quarter.

Jeffrey zukauskas: your graphics and reflective volumes have been up high single digits for the first 2 quarters of the year. Do you expect the continuation in that Trend? And what do you see as behind it?

Gregory Lovins: When I look at your 10k, it doesn't seem that your overall employee levels are so What's behind Thanks, Jeff. Yeah, we're pleased with our graphics and reflectors combined growth overall being sort of, you know, mid to high single digits across the two quarters. It's largely driven actually on our graphics business, with particular strength in Asia and North America. We're continuing to see some new customer acquisition in Asia, where we were getting more traction with what we call our paint protection films overall. And similarly, in North America, where what we call our cast color change films are having stronger attraction as the auto market moves into more and more customization of colors and so forth as they look forward.

And then secondly um your sgna expense you know ha has been lower um year-over-year for the first 2 quarters and sort of nicely lower in the second quarter. When I look at your 10K it doesn't seem that your overall employee levels are so different from what what's behind the decrease in sgna.

Jeffrey zukauskas: You could answer those 2 questions.

Gregory Lovins: And we expect largely this trend to continue through the remaining part of this year. In line with our expectations that our high value categories, particularly materials group and also in solutions group, will continue to deliver a greater, greater share of our portfolio in time.

Speaker Change: Thanks, Jeff. Yeah, we're pleased with our graphics and reflective combined growth overall, being sort of, you know, mid to high single digits across the 2 quarters. Um, it's largely driven actually on our Graphics business with particular, strength, in Asia, and North America. Um, we continue to see some new customer acquisition in, in Asia, where we, we're getting more traction with what we call our paint protection films, overall, and similarly in North America where our, what we call our cast color change film Pro um or or having stronger attraction as the auto market moves into more and more customization of of colors and so forth as they look forward. Um and we expect largely this trend to continue through the remaining part of this year.

Gregory Lovins: Yeah, Jeff, and on your second question on SG&A, so when we look at versus last year, of course, we've got continued restructuring actions that are benefiting both SG&A and cost of sales, but it's a mix between the two. So there is some benefit there, probably more so on the SG&A side from a headcount perspective, proportionally. And then we're obviously given the volume environment, particularly in apparel, general retails, we talked about, we're continuing to do discretionary cost reductions. Things like travel, et cetera, we're continuing to manage very well. Then we look from a year-over-year perspective in the first half.

Speaker Change: In line with our expectations, that our high-value categories, particularly material script and also send solutions group will continue to deliver a greater greater share of our portfolio in time to come.

Speaker Change: Yeah, Jeff and on your second question on sgna. So when we look at versus last year, of course, we've got continued restructuring actions, uh, uh, that are benefiting both sgna and cost of sales, but it's, uh, it's a mix between the 2. Um, so there is some benefit there, um, probably more. So, on the sgna side, from a headcount perspective proportionally. Um, and then we're actually obviously given the, the volume environment, particularly in apparel General retails, we talked about we're continuing to do discretionary cost, reductions um, things like travel Etc or continuing to manage.

Gregory Lovins: Last year, the first half, our performance was above our original target. So we had higher than average incentive compensation accruals. And this year, we're performing a little bit below, given our results, below our original expectations. So a little bit below our normal level of incentive comp accruals. So there's an impact across those three buckets versus last year.

Very well, then we look from a year-over-year perspective in the first half last year, the first half our performance was above our original Target. So we had higher than average uh, incentive compensation occurs. And this year, we're performing a little bit below. Given our results below our original expectations. So, a little bit below our normal level of incentive compared. So there's an impact across those 3 buckets versus last year.

Anthony Pettinari: Our next question comes from the line of Anthony Pettinari from Citi, please proceed with your question. Good morning. Deon, in your prepared remarks, you talked about not being satisfied with the growth trajectory in IL. And I think you talked about efforts to improve network efficiency and expand innovation. And I'm wondering if you could give a little bit more detail about sort of what activities you're pursuing there. And then just generally in terms of IL, maybe competitive intensity. I mean, do you feel that you're missing opportunities or growth is industry wide is slow? Or if you could just give us some kind of context for those comments and the activities that you're pursuing.

Anthony Pettinari: Comes from the line of Anthony pettinari from City, please proceed with your question.

Speaker Change: Uh, good morning.

Anthony Pettinari: um,

Speaker Change: Deon, in your prepared remarks, you talked about not being satisfied with the the growth trajectory in iel. And I think you talked about efforts to improve Network, efficiency, and expand Innovation. And I'm wondering if you could give a little bit more detail about sort of what activities you're pursuing there. And then just generally in terms of IL

Speaker Change: Maybe competitive intensity. I mean do you feel that you're you know, missing opportunities or growth is industry-wide is slowed or if you could just give us some kind of context for for those comments and and the activities that you're pursuing.

Speaker Change: Sure Anthony um and let me, let me reiterate, I'm not satisfied where we are with our iel, platform overall, in terms of its growth and actually our earnings trajectory as it stands at the moment. And that's the reason we're so focused on executing against our strategies and particularly driving our Innovation, as well. As I, I need specifically focus on the ill. Um, I made the point that when we were move, when the initial tariff, environment starts to emerge and there was initially tariffs that were set in Mexico relative to other countries and they changed. We were moving, um, using our Network to try and move around our, not our assets, but our actual manufacturing volume to make sure that we're taking advantage of whichever was the most, uh, tariff friendly place at that time. Now, of course that switched quite dramatically during that period as well.

Speaker Change: And while we have a very resilient Network, we can move things around there are always Associated costs. We've learned a lot out of that Anthony, as we move forward, we're taking some additional steps to make sure we're at the macro level. We're improving the resilience of how we use that Network. We're also thinking through how we use working capital to also make sure we continue to deliver Superior Service and meet the opportunities that are there. The second part of that is specifically Innovation for me Innovation, is always going to drive a differentiating ourselves in the market relative to competition. That's where our Focus has been. And we have accelerated our Innovation outcomes. Um, not just at the product level but at the social solution level as well and I'll give you a couple of examples of that.

Speaker Change: The product level as we look forward to what is going to be the bigger categories, which is largely food and the logistics. We've continued to really innovate through call. We were the first people in food to bring out a microwavable tagged as an example. Something that's needed when you get to stuff that is effectively Frozen, but we've also recently launched the first APR Association of plastic recyclers, recyclable tag, which is important when you get to, um, perishable items that are contained in plastic containers. And then the third element is we look forward for an innovation where you're going to be launching in the second half of this year. Some really strong new proprietary IP to do with the category expansion in food, as you go beyond Bakery into some of the other countries like protein and perishables. They will need more specific Technology Innovation and I think we're going to be able to really differentiate ourselves in that regard.

Speaker Change: I think on your second Point around competitive intensity.

Speaker Change: Um, I don't see a change in competitive, intensity overall. Um, this is a space that continues to track capital, and we see, you know, balance competition all around the world, but we remain in that regard. The market leader. Um, we have the majority share, and I'm anticipating actually, this year, for our share to, to slightly increase as we not only roll out, for example, in apparel loss detection mechanism, we've spoken openly about their with index that will actually gain us shares in move forward. But also some of the new rollouts that are coming uh that I spoke about will also be largely where we are the significant majority provider. So I I might anticipate patients. Our share overall will continue to expand as we go to the second half of this year at a broader level in the industry. I think the industry given that the industry is like us is still anchored in 70% General uh merchandise General retail and apparel. I think we're seeing some of that impact that we seeing probably across the rest of the industry as well. That said I still think the industry has significant growth opportunities are

Speaker Change: Conviction in our growth trajectory remains undimmed. We still see this as a 300 billion unit or put differently 8 billion dollar opportunity where there and thereabouts As you move forward and we are seeing what we need to do to see for from an adoption process. We've had the first food customer go, we have a very, very strong pipeline for grocery retail coming up on that. But the first Logistics customer go. We're an active pilot expanded Pilots with Logistics customers.

Speaker Change: And so while that growth over years, as I've said, consistently maybe a little episodic. I still have strong conviction, our ability to grow that platform, uh, significant as we move forward over the next decade.

Unknown Executive: Our next question comes from the line of Mike Roxland from Truist Securities. Please proceed with your question.

Mike Roxland: Thank you Deon, Greg, John, and Gilly for taking my questions and congrats on a good performance despite the backdrop. My question is just wanted to follow up quickly on the growth in food and you mentioned, Deon, you know, obviously the significance of food, you have a strong pipeline. With respect to Kroger though, the company did announce plans in late June to close 60 stores over the next 18 months. So can you just give a sense of what that means for your IL deployments in baked goods and ultimately for any protein deployment with Kroger? Thank you.

Mike Roxland: Our next question comes from the line of Mike roxland from truest security, please proceed with your question.

Speaker Change: And a good performance despite the backdrop.

Mike Roxland: Um,

Yeah, my question is just wanted to follow up quickly on the growth in food and you mentioned Daniel obviously the significant food you have a strong pipeline, um, with suspected Kroger though the company did announce plans in late June to close 60 stores over the next 18 months. So can you just give a sense of what that means for your iel? Deployments in baked goods and ultimately for any protein deployment? Uh, with Kroger?

Deon Stander: Yeah, Mike. I'm not necessarily going to comment on specifically the reasons why some of our customers do what they do. I think, for me, that's just a normalization of the way they look at their real estate footprint. What I will say is our rollout with Kroger continues to be as expected. They're up to around about 700 stores now, midpoint of the year in terms of rollout. And recall, I think we said that it would take probably about a year to, sorry, a year and a half or so to sort of get to full rollout. That was just on the bakery item.

Deon Stander: So, a small number of stores will have no real impact on that at all, overall.

Deon Stander: We're actually in the process of discussion with that customer specifically around, given the returns that they're seeing as being as strong as they are, the ROI, how do we accelerate into some of the other categories we historically planned to, including things like proteins and so forth, as we move forward.

Thank you. Yeah, Mike, I I'm, I'm not necessarily in comment on a specifically the reasons why some of our customers do what they do. I think, for me, that's just a normalization of the way, they look at their real estate footprint. Um, what I will say is our roll out with Kroger continues to be as expected. They're up to around about 700 stores. Now the midpoint of the year in terms of the rollout and recall, I think we said that it would take probably about a year or 2, sorry, a year and a half or so, to sort of get to full roll out. That was just on the bakery item. So, a smaller number of stores will have no real impact on that at all. Overall, um, we're actually in the process of discussion with that customer specifically, around given the returns that they seeing, is being as strong as they are the ROI. How do we accelerate into some of the other categories of historically planned to, uh, including things like proteins? And so forth as we move forward, like,

John Dunigan: Our next question comes from the line of John Dunigan from Jeffreys. Please proceed with your question. Thanks for taking my question and congratulations as well on a good quarter in a tough environment.

Speaker Change: Our next question comes from the line of John dunigan from Jeffrey's please proceed with your question.

John Dunigan: I want to switch to Embellix and Vescom. Embellix, I'm a little bit less familiar with the business. It does seem like you do have some good visibility on that doing well in the back half of the year ahead of, I think it was the 2026 World Cup. But is this the type of business that will be pretty reliant on these larger, maybe global types of sporting events? It's been a bit of a rough first half, which may be just because of consumer discretionary spending. So maybe you could spend a little time kind of walking us through your expectations for growth in that business.

Thanks for taking my question and uh, congratulations as well on uh, on a good quarter and a tough environment. Um, I I want I want to switch to, um, embellish and investcom. Um, embellish, uh, you know, I'm, I'm a little bit less familiar with with the business. Um, it does seem like you do have some good visibility on that doing well, in the back, half of the year ahead of uh, I think it was a 2026 World Cup. Um, but is this is this the type of business that, you know, will be

Deon Stander: And then with Vescom, maybe just an update on how the rollout is going with CVS, anything you've kind of learned or been surprised about either positively or negatively with that program?

Pretty reliant on these larger, maybe Global types of of sporting events. Um, you know, it's been a, a bit of a rough first half which maybe just because of consumer discretionary spending. So, maybe you could spend a little time, you know, kind of walking us through your your expectations for growth in that business and then with bestcom, maybe just an update on on how the rollout is going with CVS. Um, anything you've you've kind of learned or been surprised about either positively or negatively uh, with that with that program.

Speaker Change: Sure. And thanks for the question. John, we touch on in Bic first. Um, You're right our performance. This, uh, first half of the Year hasn't been where we had hoped it to be. But in reflection of kind of where the apparel overall apparel Market is that we also see an impact of that as it's come through. Maybe if I break the the embellished business apart recall, this is a business in which we provide decoration to garments largely in team sports. That's 1 area.

Speaker Change: And increasingly in-state in customization, where we actually run the hardware and the software for when you go to a stadium and professional sports in the United States and you want to embellish, or customize the Garment with your name, we're actually the backbone of pretty much all of that. There's a second area where uh, we continue to take the same technology which is largely heat transfers embroidered batches Badges and patches. And we actually provide those to the large performance Brands around the world as they also do their own activity. Think about 2 largest performance brands in the world and 1 in Europe and the United States and then the third 1 is we also provide that to ad hoc events where there's either team sports happening or they're trying to drive fan engagement, increasingly in that piece. We're actually adding digital triggers to those embellishments so that you can get greater fan engagement directly with a brand or with your favorite player. And we have multiple examples of that where that's in flight at the moment. I'd say when I look at that overall, the biggest driver is actually our kind of what I call our large Performance Brand piece which is

Speaker Change: Let me just turn to vescom John. Um, we're very pleased with the roll out of our uh, with with that we've been doing with CVS recall investcom

Speaker Change: While we deliver analog price, shellfish pricing and Media Solutions is largely actually a data composition engine. We take a lot of data in pricing data, planning data promotional data. Um, and we ingest that and effectively, then in a proprietary fashion, put that out into short shelf, Edge, uh, labeling, um, most of our growth in the second quarter was down to do with CVS. You'll also know in the macro environment, that 1 of the other drugstore companies went to into chapter 11. So they had a small impact negatively, but we also saw growth in some of our other customers that we have in this environment, both in our grocery and Dollar Store customers as well, net to a sort of 10% growth. Um, and as we look forward, we can continue to see. I think solid growth as we go through the back end this year. And I do think this is a business for us that has brought a lot of resilience to our solutions group. When things are cyclically challenged in ultimately, in retail you either see 2 things happen 1, you see pricing changes which

Speaker Change: Benefits our business, or you see promotional changes. Which again, because we leveraging that same real estate. Uh, we're able to sell more Media Solutions on the back of it.

Joshua Spector: Our next question comes from Josh Spector from UBS, please proceed with your question. Hi, good morning. I had a question on the tariff cost impacts within 2Q and implied in 3Q. You made some comments about how you're taking some strategic pricing and also reallocating some of your sourcing to offset that.

Speaker Change: Our next question comes from Josh Spectre from UBS please. Proceed with your question.

Gregory Lovins: But I'd be curious to know if you think you're offsetting that cost within the quarter or within 2Q and 3Q, if there's a lag to that that you would potentially make up later in the year or maybe into next year. Yeah, so, you know, the inflationary impact from the tariffs really started impacting us kind of midway through the second quarter, given that we had, you know, inventory on hand and things when the tariffs first went into effect. So I would say overall, that was about a low or very low single digit impact from an inflationary perspective in Q2.

Josh Spectre: Well, hey, good morning. Um, I had a question on the Tariff cost impacts within 2 q and implied. In 3 Q, you made some comments about how you're taking some strategic pricing and also, you know, reallocating some of your sourcing to offset that but I'd be curious to know if you think you're offsetting that cost within the quarter or within 2 q and 3 Q. If there's a lag to that that you would potentially make up later in the year or maybe into next year.

Gregory Lovins: And overall, we largely offset that in the quarter with tariff related surcharges, as well as some sourcing shifts. So we did both of those things. And obviously, we started that, as soon as we found out about the tariffs on the sourcing shift piece. And that allowed us to offset that within the quarter, we will see some sequential further inflation, just given we'll have a full quarter of the tariff impacts in Q3, versus about a half a quarter in the third or in the second quarter. But again, we'd expect to offset that with surcharges and sourcing shifts.

Gregory Lovins: Now that's still waiting to see what happens in the next couple weeks, with areas like Europe, Malaysia, etc, where we have some open tariff items, I guess, for August 1. So we'll see what happens with those. And if there's something further we need to do to manage that.

Josh Spectre: Yeah. So you know, the, the inflationary impact from the Tariff really started, impacting us kind of Midway through the second quarter, uh, given that we had, you know, inventory on hand and things. When the tariffs first, uh, first 1 into effect. So I would say, overall, that was about a low or very low single digit impact from an inflationary perspective in Q2 and overall. We largely offset that in the quarter uh with tariffs related, search charges as well as some sourcing ships. So, we did both of those things and obviously, we started that as soon as we found out about the tariffs on the sourcing shift piece and that allowed us to offset that within the quarter. Um, we will see some sequential uh further inflation. Just giving. We'll have a full quarter of the Tariff impacts in Q3 versus about a half a quarter in the third or in the second quarter. Um, but again, we'd expect to offset that with search charges and sourcing ships. Now,

That's still waiting to see what happens in the next couple weeks, uh, with the areas like Europe, uh, Malaysia Etc, where we have some open terrifying items. Uh, I guess for August 1st, so we'll see what happens with those and if there's uh, something further we need to do to manage that.

George Staphos: Our next question comes from the line of George Staphos from Bank of America. Please proceed with your question. Thanks very much for taking the follow on. Hi, guys, a couple of things in sequence here.

Josh Spectre: Our next question.

Proceed with your question.

George Staphos: Number one, what were the exit rates, if you can talk to this in your materials businesses into the third quarter? Second question, you gave us a bit more detail in terms of what's happening within Embellex. When should we expect the volumes there to improve? The narrative this year has been we should expect at some point to pick up as we get into 26 ahead of World Cup. When will we actually see that? Do you expect that to be a positive in fourth quarter or really do we have to wait until 26?

Speaker Change: Thanks very much for taking the follow on. Hi guys. Uh a couple of things and um sequence your number 1. What were the exit rates if you can talk to this in your materials businesses into the third quarter?

Deon Stander: And then lastly, you talk about all the innovation, Deon, that's happening in food, logistics, and so on in IL. However, the 70% of your business that remains relatively stuck right now in general retail and apparel, what are you doing there from an innovation standpoint that will ultimately get you growth? or you just through it right now at the sort of the. stuck because of tariffs and where they're at and the uncertainty. Thank you guys. Good luck in the Thanks, George.

Speaker Change: Second question. Um, you gave us a bit more detail in terms of what's happening within mblex. When should we expect the volumes there to improve the narrative? This year has been? We should expect at some point to pick up as we get into, 26 ahead of World Cup. When will we actually see that? Do you expect that to be a positive and fourth quarter or really do? We have to wait until 26 and then lastly, um, you know, you talk about all the Innovation Dion that's happening in in food Logistics and so on in iel however the 70% um of your business. That's remains relatively stuck right now. Um in in in general retail and apparel, what are you doing there?

Speaker Change: Uh, from an innovation standpoint that will ultimately get you growth.

Speaker Change: Uh, or you just sort of right now at the, the sort of the stuff, because it's tariffs and where they're at in the uncertainty. Thank you guys. Good luck in the quarter.

Deon Stander: I'll go with this in reverse order. Let me just talk about innovation in apparel, specifically for IL. We are continuing to really lean forward in the innovation area there, George. I think the most visible one we actually did was really building on our lost detection suite of products, which we have brought to the market in a proprietary fashion, but largely with Inditex, but there's a lot of interest from other apparel customers. The second area we continue to look at is just the efficacy of how we can improve using our inlay design capability. How do you improve overall variable read rates as you go through a more dense store?

Deon Stander: How do you use less power to be able to read more activity in the store as well? All these things come together, ultimately, to then center around how do we help apparel retailers further drive towards, if they are interested in, for example, self-checkout, which we've done already for customers like John. Fast Retailing, which is Uniqlo, as you know it, and also Decathlon in Europe. So our innovation efforts have not stopped in apparel, and I think given our market leadership position over there, it's the one area we continue to sort of lean forward in. That's at the customer level.

Speaker Change: The text but there's a lot of interest from other apparel customers. The second area continues to look at. It is just the efficacy of how we can improve uh using our inlay design capability. How do you improve overall variable, read rates as you go through a more dense store? How do you use? Um more, how do you use less power to be able to read more activity in the store as well and all these things come together, ultimately to then center around. How do we help apparel retailers? Further drive towards if they are interested in, for example, self checkout, which we've done already for customers like um,

Deon Stander: We also continue to drive innovation at what I call our operating level, largely in how do we make sure that we maintain our low-cost leadership position. Better assets, faster assets, different processes, and we also have a number of proprietary innovations that will be coming out in the next couple of years around how do we actually improve and accelerate that speed in that regard. On embellics, I would say I know we're going to be expecting a growth really in the fourth quarter. That's when we'll see most of the growth start to come through from the embellics perspective.

Fast retailing which is uh unicorn as you know it um and also the castle on in Europe. Um so our Innovation efforts have not stopped in apparel and I think given our Market leadership position over there, the 1 area we continue to sort of lean forward and that's that the customer level. We also continue to drive Innovation and know what we I call our operating level um largely in how do we make sure that we maintain our low-cost leadership position? Um, better assets faster assets, different processes and we also have a number of

Speaker Change: proprietary innovations that will be coming out in the next couple of years around. How do we actually even improve and accelerate that speed in that regard? Um,

Unknown Executive: My assumption that, George, is still anchored on if we don't... And I don't see any significant deterioration in the broader apparel piece, because apparel as a result of tariffs also has an impact in bellicose, as I think I explained earlier to John overall. In terms of the exit rates for our materials group, we started off slightly slower in April in the second quarter than we anticipated and were slightly better in June. And our exit rates as we go through into July are looking similar to where we were in June, which is relatively flat overall. Mr. Gilchrist, there are no further questions at this time.

Speaker Change: On embellish I would say we're I know we're going to be expecting a growth really in the fourth quarter. That's when we'll see most of the growth start to come through from the embellished perspective, my assumption, that George is still anchored on. If we don't,

Speaker Change: See any significant deterioration in the broader apparel piece. There's a parallel as a result of the tariffs also has an impact in embellishments. I think I explained earlier to John overall in terms of the exit rates for our materials group. Um we started off slightly slower in the April in the second quarter in anticipating and was slightly better in June and our exit rates as we go through into July are looking similar to where we were in June, which is relatively flat overall.

Unknown Executive: I will now turn the call back to you for any closing remarks. Thank you, Tiffany. To recap, we delivered a solid quarter in a dynamic environment. We are well prepared for a variety of macro scenarios and well positioned to deliver superior value through the cycle. On a personal note, I look forward to working closely with all of you in the Avery Dennison investment community in the months and years ahead. Thank you for joining today.

Speaker Change: Mr. Gilchrist, there are no further questions at this time, I will now turn the call back to you for any closing remarks.

Speaker Change: Thank you, Tiffany. Can you recap? We delivered a solid quarter in a dynamic environment. We are well, prepared for a variety of macro scenarios and well, positioned deliver Superior value through the cycle.

Unknown Executive: This now concludes our call. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

Speaker Change: On a personal note, I look forward to working closely with all of you and the Avery Dennis and investment community in the months. And years ahead, 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 line.