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spk16: Ladies and gentlemen, thank you for standing by. During the presentation, our participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At the time you have a question, please press the 1 by the 4 on your telephone. If at any time in the conference you need to reach an operator, please press the star for a better zero. And welcome to Avery Dennison's earnings conference call for the second quarter ended on July 1st, 2023. This call has been recorded and will be available for replay from 5 p.m. Eastern time today through midnight Eastern time July 28th. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 220-206-92. Now, I would like to turn it over now to John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.
spk03: Thank you, Tommy. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules A4 to A9 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release. On the call today are Mitch Boutier, Chairman and Chief Executive Officer, Dion Stander, President and Chief Operating Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.
spk02: Thanks, John, and hello, everyone. We delivered $1.92 of EPS in the second quarter, up sequentially from previous quarters, a trend we expect to continue in coming periods. Volumes in our base business continued to recover from slow market conditions, largely destocking, while our Intelligent Labels platform accelerates adoption in new categories. While it's good to see the continuing sequential improvements in our materials businesses and the building momentum in Intelligent Labels, the pace of our recovery is slower than anticipated. Our results for the quarter were below our expectation due to lower revenue, particularly in June, something the team was able to largely offset through cost reduction actions. Clearly, our intel in April understated the magnitude of the market challenges, particularly inventory builds. That, combined with the fact that the drop-off in volume was steeper in Q4 and Q1, we assumed the duration of the lower volume period would be shorter. We got that part wrong. What we have been clear on and remain confident in is that this period of challenging results will soon pass. While the pace of sequential volume improvement that we assumed mid-year, June and July specifically, did not accelerate as anticipated, volumes continue to recover. Our underlying business is bouncing back as it always does. This, combined with the continued execution of our strategies to drive outsized growth in higher value categories, particularly intelligent labels, positions us well to continue to deliver GDP plus growth and top quartile returns over the long run. Now, as you all know, I've decided to step down as CEO at the end of August, and I'm handing over the reins to Dion, while I'll continue as chairman of the board. It has been a privilege to lead Avery Dennison over much of the past decade, and I am proud of what the team has accomplished during my tenure. We've accelerated our growth, improved margins, achieved world-class employee engagement scores, and significantly advanced our sustainability objectives. And I could not be more confident than I am now in our position and prospects. I've been planning and preparing for this transition for years, and as I've shared with a number of you, there are a few reasons behind my decision to step down as CEO. One of the most important is that I have found a leader in Dion that I'm confident will lead us to success in the next phase of our journey as a company. Dion has been a close partner of mine over the years. Over his 20-year career with the company, he demonstrated strong leadership and has a proven track record, including successfully transforming the Solutions Group and helping lead the acceleration of our Intelligent Labels platform. I am extremely pleased that he will be our next CEO, and I look forward to our future success under his leadership. Now, before handing the call over to Dion and Greg, let me conclude by thanking our team. This is a team sport. and I thank the entire organization for their dedication, focus, and excellence in delivering our continued and collective success. I look forward to continuing to serve our stakeholders and supporting Dion and the leadership team to achieve new heights in my role as executive chairman. Over to you, Dion.
spk21: Thanks, Mitch. I'm extremely honored to become the company's next CEO, and I'm looking forward to partnering with you in your continuing role as chairman. As CEO, my focus will remain the same, to ensure the long-term success of the company by delivering exceptional value for all of our stakeholders. As Mitch noted, in the second quarter, we again delivered sequential improvement, with adjusted EPS up 13% as volumes in our label businesses ramped, new programs and intelligent labels continued to accelerate, and additional productivity initiatives were implemented. That said, earnings were modestly below our expectations, as inventory destocking in both label and apparel channels is taking longer than anticipated in slower market conditions. In this environment, we've activated additional measures to minimize the impact on our bottom line. We've accelerated temporary cost reduction actions, ramped up our restructuring initiatives, and paid back capital investments in our base businesses while protecting investments in our high-growth platforms, particularly intelligent labels. Now, a quick update on the quarter by business. Materials Group delivered strong margins despite low volume. The volume decline versus prior year is magnified by the level of inventory that was built last year compared with the inventory reductions taking place this year. Sequentially, volumes improved as inventory destocking began to moderate in the quarter. The pace of improvement in North America and Europe can be seen on slide six. We expect volume will continue to improve at a similar pace in Q3 and indications are that inventory destocking is now nearly complete in Europe, with North America roughly a quarter behind. Looking at emerging markets, South Asia, particularly India, continues to grow, while in East Asia, particularly China, demand remains muted. Materials margin was strong, expanding sequentially to nearly 16% in the quarter as volumes improved and structural and temporary cost-saving actions were implemented. Solution group sales were down mid-single digits in the quarter, as apparel volumes continue to be soft across channels. Apparel imports are down significantly, not only compared to prior year, but versus 2019 as well, which can be seen on slide six, as retailers and brands target inventory reductions and factor muted consumer sentiment into their near-term sourcing plans. Enterprise-wide, intelligent labels in non-apparel categories, including logistics, food, and other category expansions, continues to ramp significantly, which can be seen on slide 7, and we're up roughly 50% in the quarter. This growth was offset by a decline in apparel, driven by destocking in existing programs. We expect non-apparel growth to further accelerate throughout the second half of the year. enabling us to achieve roughly 20% growth for the platform overall in 2023, despite softer apparel volumes. As adoption in categories like logistics, food, and general retail accelerate and apparel rebounds, we expect the Intelligent Labels platform to be at a billion-dollar run rate in the coming quarters and to deliver 20%-plus growth in the coming years as we further advance our leadership position at the intersection of the physical and digital. As you all know, one of our key strategies is to drive outsized growth in high-value categories, and we continue to shift our portfolio towards these categories, both organically and through M&A. In solutions, we expect to benefit from a higher growth contribution in these categories as we move throughout the year, not only in intelligent labels, but external embellishments as well. In May, we closed the acquisition of Lion Brothers, a leading provider of external embellishments with roughly $65 million in annual revenue, expanding our position in this key growth platform. Solutions group margins were flat sequentially. We expect adjusted EBITDA margin will improve sequentially through 2023 as volume increases and additional productivity and cost reduction actions are implemented. Turning to the rest of the year, as volume in labels, materials, and intelligent labels ramps up, and additional structural cost-saving actions are implemented, we expect roughly 20% of sequential improvement in the third quarter. We expect further sequential improvement in the fourth quarter, and we now expect to achieve a $10 plus adjusted EPS run rate a couple of quarters later than previously anticipated. Stepping back, the underlying fundamentals of our business are strong. We're exposed to diverse and growing markets. We are industry leaders in our primary businesses with clear competitive advantages in scale and innovation. And we have a clear set of strategies that have been the keys to our success over the long term across a wide range of business cycles. We remain confident that the strategies we've formulated will continue to enable us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term. I want to thank our entire team continuing to raise their game to address the unique challenges at hand and deliver value for all of our stakeholders. And with that, I'll hand the call over to Greg.
spk09: Thanks, Dion, and hello, everybody. In the second quarter, we delivered adjusted earnings per share of $1.92, up 22 cents sequentially, driven by benefits from productivity and temporary cost-saving actions and higher volume. Sales were down compared to prior year, roughly 10%, both ex-currency and on an organic basis, driven by a low teens volume decline, partially offset by higher prices. Adjusted EBITDA margin was 14.7% in the quarter, up 110 basis points compared to Q1, with adjusted EBITDA dollars up 10% sequentially. We generated $135 million of adjusted free cash flow in the second quarter, which was roughly in line with our expectations. As you may recall, I noted last quarter that we had higher inventories in certain areas across the company, partially related to strategic inventory builds in areas such as RFID chips and also in components in which we experienced supply disruptions over the last couple years. For the latter, we are focused on driving improvements across the businesses We made good progress in the second quarter and expect to make further progress as the year unfolds. Our balance sheet remains strong. We continue to execute our disciplined capital allocation strategy, including strategic acquisitions such as Lion Brothers, which closed in the second quarter, and continuing to return cash to shareholders. In the first six months of the year, we returned $216 million to shareholders. through a combination of share repurchases and dividends, as well as deployed $194 million for M&A. Turning to the segment results, materials group sales were down 12% ex-currency and on an organic basis, driven by a mid- to high-teens volume decline as inventory was being built downstream from us last year and is being reduced this year. On a sequential basis, volumes increased in the second quarter, with label materials volume up overall low to mid-single digits sequentially. As Dion highlighted, on slide six, you can see that label volume in combined North America and Europe ramped as we moved through the second quarter and into July, and we assumed that pace to continue for the remaining of the third quarter. Looking at label materials organic volume trends versus prior year in the quarter, North America and Europe were down roughly 25% to 30%. China was up significantly as we lapped the Shanghai area lockdowns from last year, and it was up low single digits sequentially. Latin America was up modestly and up mid single digits sequentially. Also, compared to prior year, graphics and reflective sales were up organically, high single digits. Materials Group delivered a strong adjusted EBITDA margin of 15.7% in Q2, up 150 basis points from Q1, and down one point compared to prior year, as benefits from productivity and temporary cost-saving actions were more than offset by lower volume. We expect adjusted EBITDA margin to continue improving sequentially. Regarding raw material costs, we have moved into a modest deflationary environment. Following a period of significant inflation, these lower costs are largely being passed along in price reductions to our customers. Shifting now to Solutions Group, sales were down 4% ex-currency and 7% on an organic basis, as low single-digit growth in high-value categories was more than offset by a high teens decline in the base business. as retailer and brand sentiment remains muted. GAAP operating margin was down in the quarter, largely due to an increased liability related to the recently disclosed jury verdict in the ADASA legal matter. The company continues to dispute this and is preparing to appeal. We've also largely completed any migration to alternative encoding methods for RFID tags. Adjusted EBITDA margin of 15.8% was down 320 basis points compared to prior year, driven by lower volume with continued strategic investments in intelligent labels and partially offset by productivity and temporary cost actions. We expect adjusted EBITDA margin to improve sequentially through the remainder of the year. Now, shifting to our guidance. In the third quarter, we expect adjusted earnings per share to be in the range of $2 to $2.20, up roughly 20 cents sequentially at the midpoint, similar to the level of improvement we delivered in Q2. In the third quarter, we expect label volume to continue to ramp at a similar pace as Q2, as inventory destocking further moderates. Intelligent label volumes in new categories will continue to accelerate, and further structural cost reduction actions are being implemented as we continue to focus on driving productivity across our businesses. Looking forward, we expect adjusted earnings per share will further increase sequentially in the fourth quarter. And, as Dion mentioned, we continue to anticipate achieving a $10 plus adjusted EPS run rate, albeit a couple quarters later than previously anticipated. We previously assumed the destocking period would end with a more accelerated ramp, like we have seen in these cycles in the past. In light of the broader macro uncertainty, we're currently seeing a more measured ramp. The anticipated sequential improvement across the next couple quarters and towards the $10 run rate is driven by the normalization of inventory destocking and label materials, the continued ramp and non-apparel intelligent labels volume, the impact of ongoing productivity actions, particularly structural cost reductions, and the normalization of apparel volumes. We've outlined additional full-year considerations on slide 13 of our supplemental presentation materials. We now estimate that incremental pre-tax savings from restructuring, net of transition cost, will contribute roughly $65 million, up $15 million from our April estimate. and we anticipate investing roughly $325 million on fixed capital and IT projects, down roughly $25 million from our previous outlook as we pare back capital investments in our base business. An anticipated impact from currency translation has increased slightly and now reflects a roughly $15 million headwind for the full year based on current rates. In summary, we're continuing to improve our results as we move through the year, And despite near-term challenges, we remain confident in our ability to continue delivering exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. We're committed to delivering on our long-term financial targets through 2025. And now we'll open up the call for your questions.
spk16: Thank you very much. And ladies and gentlemen, if you'd like to register your question, please press the 1 by the 4 on your telephone. You have three-tone prompt to acknowledge your request. If the question has been answered, if you'd like to withdraw your registration, you may press the 1 by the 3. If you're using a speakerphone, please lift your hands up for entering your request. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. One moment, please, for our first question. And we'll get to our first question on the line from John McNulty with BMO Capital Markets. Go right ahead.
spk13: Yeah, thanks very much for taking my question. And Mitch, let me be the first, but probably one of many to congratulate you on moving from the CEO role. And Dion, let me congratulate you for getting the CEO role. So thanks again to both of you for all the years of help, for sure. So I guess maybe just a question. Maybe there's two parts to it, though, if you'll forgive me. So it seems like, you know, you had raw materials that should have been down quarter over quarter, kind of low to mid single digits or so. Is that what you saw? And is that? what we should be thinking just given kind of what's going on in terms of deflation abroad? Is that something that we should be thinking about into 3Q? And then I guess tied into that, I know you normally, you know, you chase, I guess, to some degree, inflation on the way up. And then when deflation comes, you give it back. But with a lag, it doesn't seem like there was all that much of a lag this time around. So I guess, is that right? And is there any reason to think that that's you know, that something's changed in terms of how you give pricing back?
spk09: Yeah, thanks, John, for the question. Overall, to your point, our raw materials, when we look from the first quarter to the second quarter, of course, it differs a little bit by region and commodity. But generally, to your point, we had about somewhere in the low to low to mid single digit deflation sequentially from Q1 to Q2. And that's basically what we would expect as we look forward into the third quarter as well. To your point, as I mentioned earlier in my prepared remarks, we have continued to be disciplined in our pricing. As you know, over the last couple of years, we've implemented a pretty significant amount of pricing actions given all the inflation that we've taken over that time. So given the deflationary or slightly deflationary trend we've seen here, we have given back a little more price to go with that deflation as we've gone into the second quarter.
spk21: John, what I just add to that, typically when we've seen such a steep rise in pricing, we expect that pricing to unwind over the time period as deflation continues to ramp as well. And I think the one thing I would stress is we continue to maintain strong pricing discipline in the industry as the industry leader to protect the health of the industry in the long term. And we will respond as appropriately, making sure that first we address some of the surcharges that are out there, and secondly, then making sure we're continuing to manage our overall margins as well. And I'd also remind everybody that during these times, we've been really leaning into productivity, and those are typically things that we hold on to in the longer term, the productivity gains we make as well.
spk16: Thank you very much. And we'll proceed with our next question on the line. It's from the line of Gushan Punjabi from Baird. Please go right ahead.
spk23: Yeah, hey, guys. I just want to echo my congratulations to you, Mitch, and Dion, and your new roles. Best wishes for the future. And thanks for all the help over the years also.
spk20: Thanks, Gunchal. Thanks, Gunchal.
spk23: Thanks, Mitch. Thank you, Dion. I guess, you know, just on your comments that you anticipate the $10 plus EPS run rate will be delayed a couple quarters. Are you implicitly guiding for 2024 EPS to be north of 10? And then related to that, you know, you have easier comparisons 4Q onwards with destocking also sort of behind you. But now we're at a point where consumer spending globally is also weaker. How are you thinking about that headwind, you know, both for the back half of this year and also 2024?
spk09: Yeah, Gancham. This is Greg again. So I think overall, as you said, you know, we're looking at last quarter we talked about expecting the back half to be at the $10 or $10 plus run rate. Pushing that out a couple quarters essentially means that moves more into the first half of next year. So overall, yes, that would mean next year we're looking at more than a $10 EPS run rate for the year. When we look forward from where we are here in the second quarter to getting to that $10 run rate, I would say there's four primary drivers of that trajectory change. One is really about less destocking in the labels business. So even though there's some signs of consumer demand in packaging categories as a little bit lower, We still saw a fair amount of destocking in Q2, and more normalization of that destocking will give us an increase, even if the markets are a little bit slower. We also continue to see the non-apparel intelligent labels growth, as Dion talked about, and you can see in the chart we included in our slides. And we're continuing to do productivity actions. We raised our productivity or our restructuring expectations for the year by about $15 million from where we were a quarter ago. So I would expect we're ending the year with about 15 cents more restructuring benefit than where we were in the second quarter as well. And then again, you know, Dion and I talked a little bit about the base apparel business being softer, and you can see that in some of the charts on our slides as well. So as that normalizes a little bit, we would expect some benefits there also. So those are really the four big drivers I see in getting us towards that $10 run rate over the next not too distant period.
spk21: Gancho, maybe let me just add a little context around where we see the markets at the moment. I think, as you recall, in times when we've seen significant volume declines, for example, in a recessionary period, they tended to be steep, but they tended to be a relatively steep recovery as well. And that's what we had been anticipating as we came through the second quarter, and we didn't see that in June. And I think that's largely down to the pace of inventory destocking, moderating. But as well, we've seen more uncertainty in the markets in the near term. I think there are a number of indicators at the macro level that are – contrary to each other, and I think that's driving further uncertainty. In our labels business specifically, we're going to continue to see that measured recovery you see on slide six. And for apparel, I think there is more muted sentiment now than there has been for a while, and a lot of How apparel goes over the next couple of quarters is going to relate to the results from back to school and then the implications for holidays as we move forward. As such, we're going to be continuing to focus on service execution for our customers, addressing our costs, as Greg has said, and making sure that we're continuing to drive on our share gains as we move forward into the market as well.
spk16: Thank you very much. We'll get to our next question on the line. It's from Anthony. Pettinari from Citigroup, please go right ahead.
spk11: Good afternoon, and congratulations to Mitch and Dion in the new roles. Thank you. Just following up on Gonsham's question, Can you discuss kind of the decision to pull the full year guide? You know, you've guided to 3Q and you discussed, you know, reaching $10 plus in 2024. So I'm just wondering about sort of the decision to give a number for 23 versus not giving a number. And I think you said that you expected 4Q to be above 3Q. Just wondering if you can talk about sort of the sources of potential uncertainty around 4Q or just that decision.
spk21: Anthony, let me address that first, and then Greg can follow up as needed as well. I think I made the point that we typically have seen a steeper decline and a more steeper recovery in periods when there's been recessionary environments. It's not a recessionary environment now, but the similar analogy that we would use as we move forward, we'd anticipate that there'd been a sharper recovery, particularly in June and July. And we've not necessarily seen that. We've seen volume sequentially improved. That combined with a more near-term market uncertainty and outlook, given some of the contrary indicators we're seeing over there, has led us to focus where we are in Q3 and continue to see the projection of our volume recovery in labels business. and assuming at the moment that our apparel business will not recover during Q3 at this stage. And then when we factor on top that, our accelerated IL non-apparel adoption rollout, we feel good about where we are as we look towards that 20 cents earnings growth in the third quarter.
spk16: Thank you very much. We'll proceed with our next question on the line. It's from Josh Spector with UBS. Go right ahead.
spk17: Yeah, thanks for taking my question and just echo my congrats to Mitch and Dion. Thank you. So just on the RFID non-apparel categories, obviously you're still forecasting quite strong growth there. Has anything changed in terms of timing and rollout? And then kind of related with that, you know, that chart you show on slide seven is pretty helpful about the bridge through the year. Looking at fourth quarter and that exit rate, is that the right way to think about kind of the stack when we get into 2024 as well? Thanks.
spk21: Josh, thanks for the question. Nothing has changed in terms of the timing of the current rollout on non-apparel. The biggest change has been on apparel softness. But let me go back to the non-apparel piece. Those programs are in-flight existing rollouts that we've seen in logistics and food, and they are tracking to plan. Our team continues to execute excellently in that regard and making sure we're delivering on those promises. As you look at the Q4 run rate, that That will indicate a degree of the exit run rate into next year, but also remember in logistics, it's the principal season when most packages and volume is shipped as well. So we tend to see a slightly lower entry point into Q3. That said, there continues to be new and other programs in logistics and food that will increase adoption as we go through 24 as well. And in addition, as apparel volume recovers, we also continue to see new apparel rollouts that we already have secured and will start to launch during the second half of this year.
spk16: Thank you very much. We'll get to our next question on the line. It's from the line of Mike Roxland with Truist Securities. Go right ahead.
spk14: Thank you, Mitch. Dion, Greg, John, I appreciate you taking my questions, and I'll just like to follow everybody's comments. Mitch and Dion, congrats on your new roles. Thank you. Just one quick question. I'm interested in talking about the cadence of the stocking in labor materials and 2Q, especially since you repeatedly called out June. So, you know, what happened in June, say, relative to April and May? Was there a deceleration in June? If so, what in markets? Obviously, Powell is one that you've called out repeatedly. Have there been other markets that were impacted? And can you comment on what you've seen thus far in July? Thank you.
spk21: Yeah, Mike. The difference in June that we saw, we'd anticipated a steeper ramp, as I think both myself and Mitch had said previously. And volumes did continue to ramp, but not at the pace that we'd expected. If you look at slide six, what you can see is the combination of April, May, and June continues to ramp. And in July, we're seeing a similar consistent ramp in our revenue through July month to date.
spk09: I think, Mike, part of it is really about, as Dion said a couple times here, it's really about, you know, when historically we've seen more of a sharper recovery in cycles like this. And this is part of it goes back to the question on Q4 guidance as well. What we have seen throughout the quarter is a pretty steady ramp up across the quarter and continuing into July. And that's what we show on the chart on slide six that you can see there. And that's how we built our outlook into Q3. Part of the challenge here has been really calling the pace of the recovery, which is why we're confident that we'll get to the $10, and the question is the timing of that, and how does that pace go, and do we see a ramp up, a steeper ramp up near the end of the destocking period, or does it stay in a more steady flow? So that's how we've been thinking about things, and what we've been seeing is a more steady increase over the last few months.
spk16: Thank you very much. We'll get to our next question on the line. So Jeff Zucalkis from JPMorgan Securities. Go right ahead.
spk10: Thanks very much. On slide seven, the way I understand it is that intelligent labels in the quarter were about flat. And in the first quarter, I think they were up a little bit. So in order to grow 20% this year, do you have to grow 40% in the second half, roughly? And secondly, I think, you know, the UPS and the workers are, maybe they have a tentative agreement. But if it turns out that there's an extended UPS strike, does that put your projections in some jeopardy?
spk21: So Jeff, yes, our performance year to date, if you look across the two quarters, is roughly flat for apparel. And that's largely been driven by the apparel softness that has been more pronounced than we'd anticipated. As I said, our IL non-apparel ramp-up is on track and on pace with what we'd anticipated and is continuing to ramp through the second half of the year. So that does imply, yes, a greater than 40% growth rate as we go through the second half of the year, and we feel good about that. As it relates to UPS specifically, we don't comment on specific customers, but logistics is a big part of our ramp as we move forward through this. And as we always do for every significant program rollout that we do, Jeff, We do a lot of scenario planning to make sure that we're ready for all eventualities. We've done that in this case. If there was to be any strike in the logistics sector of any period, then we would anticipate some impact, but we have made sure all our efforts are focused on continuing for service excellence to continue to validate the strength of the business case that, in this instance, the logistics industry really feels strongly about.
spk16: Thank you very much. Thank you for that. We'll proceed with our next question on the line. It's from George Stafos with the Bank of America. Please go ahead.
spk06: Thanks very much. Hi, everybody. Good morning. I'll echo what everybody has said. Mitch and Dion, congratulations. Mitch, in particular, congratulations on all the positives and the value creation you brought to Avery over your tenure. With that being said, in the matter at hand, Given the uncertainty that you're seeing, things are steadily getting better, but you're uncertain enough such that it's difficult for you to project for the full year, hence the lifting of the guide for the year, as Anthony was pointing out. You gave us several points as to why you feel you get to $10 of earnings power, but what exit rate on volume do we need to be seeing? What other specific quantification would you give us in terms of margin productivity and so on, such that you feel you are at that, let's call it 250 of earnings by the first quarter. So again, particularly what kind of volume run rate do we need to see into the first quarter of 24 for you to feel comfortable about that guide to a $10 of earnings power for the first half of 24?
spk09: Yeah, thanks for the question, George. Overall, when we look at, you know, even where we were in Q2 with the amount of destocking we had in the second quarter, and we would estimate that's probably more than a couple weeks in North America and Europe. And if we were to normalize for that amount of destocking and also normalize for apparel, our base apparel business was down, I think, more than 20% in the quarter. And you can see the charts on apparel imports as well. As both of those would normalize, we would be closer to 250 run rates already at this point from the normalization of those things. So that's how we would think about it as we get through the destocking, even in the lower volume, somewhat lower volume environment that we're in, or demand environment, I should say. So we get through the destocking and see eventually here's some normalization of the apparel demand and starting to normalize the apparel demand. That's how we feel like we get back to that $10.00.
spk16: Thank you very much. We'll get to our next question on the line is from Christopher Couch with Loop Capital Markets. Go right ahead.
spk15: Yeah. Hi. So I had a sort of a bigger picture question about the broader RFID adoption, less about the cadence of growth over the next couple of quarters. I guess it was early 21, you guys did a pretty comprehensive update and talked about the commercial momentum you had in IL and and different categories beyond apparel that you were targeting and, and the base, the, you know, the business case, the adoption case for those, for those target markets. And so I'm just wondering as, as if you, as you, you know, continue to get momentum and traction beyond item level apparel, I'm just curious if the use case that you anticipated back then is still intact. Are those involved evolving at all? Are there any, new sort of adoption cases for RFID that are emerging, like predictive analytics, anything like that. I'm just wondering if everything's sort of evolving and developing as you kind of expected strategically, you know, a couple few years ago.
spk21: Yeah, Chris, thank you. In apparel, what we saw the industry really drive adoption around was effectively inventory productivity and visibility. And that case actually holds true for many industries and verticals if you look further along, Chris. If you remember, we said that apparel's addressable mark was about 40 billion units, logistics was about 60 or 65, and food was north of 200 billion. So a significant order of magnitude if we're able to prove the value of the solutions that we provide. And we've now come to realize that those are really in four categories. One is helping reduce waste, whether that's food waste, the promise of reducing food waste, the promise of waste in the supply chain. Again, reemphasizing how labor efficiency and supply chain effectiveness becomes more pronounced when you use technology like RFID. The third one is really an emerging piece, which is around being able to provide the sustainability, circularity, and transparency of items and the mechanism for measuring that. And the final one is we're starting to see also a better way for brands to directly more connect with their consumers. And so when we look into each one of these verticals, and particularly the ones that are in flight now, logistics and food, we see use cases that are reinforcing the need to address those problems in food, really trying to understand how you shine a light on provenance down the supply chain, and then use that to drive food freshness in store and less waste. The waste, as you know, could be 30% to 50% of everything produced in the United States gets wasted typically. We produced a report that showed that, I think, last year. In logistics, using the technology to really understand how do you avoid miss shipments and miss sorts is one example, but then also traceability as well, and that is to come. We're engaged with a number of alternative places, the ones we already have both in food and logistics, proving out the economics of those business cases. What we've come to realize is that as in apparel, the typical use cases apply across all the industry players when it's once been established. And it's the reason why, Chris, we've been leaning so far forward in not just dealing with customer problems, but trying to activate markets. Because in that activation of markets, we can see the benefits spreading across all of them.
spk16: Thank you very much. And we'll get to our next question on the line. It's another follow-up question from the line of John McNulty with the BAMO Capital Markets. Go right ahead.
spk13: Yeah, good morning. Maybe I can kind of sneak two in here since we've round-tripped it once already. So I guess the first one would just be in the solutions business, going from 1Q to 2Q, you saw revenues up, and presumably the mix got better because it looks like Intelligent Labels was at least flat, if not up at least a little bit. So why wasn't there any improvement in the OI? And then I guess the second thing that I just wanted to flush out a little bit is I think you're always busy with new projects, new pilots in the RFID or intelligent labels area, but obviously there are some chunky ones like we've seen the big home goods one that you've had with a customer. We've seen a new big logistics one. I guess as you look out over the next 12 months or so, are there other large-scale projects, that maybe haven't been announced yet, but that you see in the pipe that they could make it to the finish line in the next 12 months that we should be at least considering. Thanks.
spk09: Thanks, John. So, on your first question, you know, looking at solutions from Q1 to Q2, well, as you said, we saw the sequential improvements in the non-apparel portions of IL. Really, the base apparel business is where we saw a pretty significant decline. And we actually had within that even an unfavorable mix. So from Q1 to Q2, despite that portion of intelligent labels, the rest of the segment had an unfavorable mix sequentially. And that's really what we had to benefit from the volume growth sequentially Q1 to Q2. Some of the productivity actions we had an unfavorable mix sequentially as well.
spk21: And John, just to your question on any large-scale programs that we look forward, the short answer is yes, there are a number that are in flight at the moment. I was actually just with an executive of a fast casual chain during this last week, rediscussing some of the extended applications that we're going to work with them on both transparency and freshness as well. And we see similar things in grocery around freshness. And in addition, in logistics, we're engaged with a number of other industry players as well. And so in time, those will become more pronounced and we'll start the rollout and adoption of those I'll also say, as I reiterate, I think earlier on, in apparel, we've recently just also closed out four new apparel accounts, and they will be starting to roll out from the third and fourth quarter into next year.
spk16: Thank you very much. We'll get to our next question on the line. As another follow-up from the line of George Staffos with Bank of America, go right ahead.
spk06: Thank you. Hi, guys. Two quickies to wrap up for me. So when we talk about destocking and apparel, some of the discussion in the past has been your customers ultimately will mark down to move inventory. And so destocking is not an issue. And that was the expectation in terms of why destocking should have been done by now a year after those retail headlines started coming out. So where is this inventory that needs to continue to be destocked? What have your customers told you in terms of why they're still in this position, recognizing it is what it is? And then secondly, back to organic volume, when should we expect positive volumes for Avery across its key segments and product lines? recognizing IL is going to be growing. But in total, is that a fourth quarter phenomenon or is that a first quarter phenomenon? Thank you.
spk21: George, let me address the first question. Yes, the news that I think I mentioned this last time, the news that a number of retailers and brands have started to make progress on their inventory reductions is true, but it's not uniform, George. Across the whole apparel industry, there is variation in both brands and retailers and their ability to get at that. And we continue to see variation where some retailers and brands have high inventory levels and they've historically carried. And then with a more muted sentiment that they're factoring in, we're not seeing necessarily that inventory come out at the rate that we would have hoped and I suspect that they would have hoped as well.
spk09: Yeah, and George, on your second question, from an organic volume growth perspective, we would expect – We're anticipating at least as we're into the fourth quarter to see volume growth versus Q4 of last year as we start to obviously comp some of that destocking, but we would see that continue to improve as we moved into the beginning of 2024 as well.
spk16: Thank you very much. Mr. Booth, there are no further questions at this time. I will now turn the call back to you for any closing remarks.
spk02: All right. Well, thank you, everybody, for joining the call today. Clearly having a challenging period right now, but we remain extremely confident in our position and prospects and our ability to continue to deliver GDP plus growth and top quartile returns over the long run. Thank you all very much.
spk16: Thank you. Thank you, everyone. And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. I ask you to disconnect your lines. Have a good day, everyone. Thank you. Thank you. Thank you. you Ladies and gentlemen, thank you for standing by. During the presentation, our participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At the time you have a question, please press the 1 or the 4 on your telephone. If at any time in the conference you need to reach an operator, please press the star or the 0. And welcome to Avery Dennison's earnings conference call for the second quarter ended on July 1st, 2023. This call has been recorded and will be available for replay from 5 p.m. Eastern time today through midnight Eastern time July 28th. To access the replay, please dial 800-633-8284 or 402-977-9140 for international callers. The conference ID number is 220-206-92. Now, I would like to turn it over now to John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.
spk03: Thank you, Tommy. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules A4 to A9 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release. On the call today are Mitch Boutier, Chairman and Chief Executive Officer, Dion Stander, President and Chief Operating Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.
spk02: Thanks, John, and hello, everyone. We delivered $1.92 of EPS in the second quarter, up sequentially from previous quarters, a trend we expect to continue in coming periods. Volumes in our base business continued to recover from slow market conditions, largely destocking, while our Intelligent Labels platform accelerates adoption in new categories. While it's good to see the continuing sequential improvements in our materials businesses and the building momentum in Intelligent Labels, the pace of our recovery is slower than anticipated. Our results for the quarter were below our expectation due to lower revenue, particularly in June, something the team was able to largely offset through cost reduction actions. Clearly, our intel in April understated the magnitude of the market challenges, particularly inventory builds. That, combined with the fact that the drop-off in volume was steeper in Q4 and Q1, we assumed the duration of the lower volume period would be shorter. We got that part wrong. What we have been clear on and remain confident in is that this period of challenging results will soon pass. While the pace of sequential volume improvement that we assumed mid-year, June and July specifically, did not accelerate as anticipated, volumes continue to recover. Our underlying business is bouncing back as it always does. This, combined with the continued execution of our strategies to drive outsized growth in higher value categories, particularly intelligent labels, positions us well to continue to deliver GDP plus growth and top quartile returns over the long run. Now, as you all know, I've decided to step down as CEO at the end of August, and I'm handing over the reins to Dion, while I'll continue as chairman of the board. It has been a privilege to lead Avery Dennison over much of the past decade, and I am proud of what the team has accomplished during my tenure. We've accelerated our growth, improved margins, achieved world-class employee engagement scores, and significantly advanced our sustainability objectives. And I could not be more confident than I am now in our position and prospects. I've been planning and preparing for this transition for years, and as I've shared with a number of you, there are a few reasons behind my decision to step down as CEO. One of the most important is that I have found a leader in Dion that I'm confident will lead us to success in the next phase of our journey as a company. Dion has been a close partner of mine over the years. Over his 20-year career with the company, he demonstrated strong leadership and has a proven track record, including successfully transforming the Solutions Group and helping lead the acceleration of our Intelligent Labels platform. I am extremely pleased that he will be our next CEO, and I look forward to our future success under his leadership. Now, before handing the call over to Dion and Greg, let me conclude by thanking our team. This is a team sport. and I thank the entire organization for their dedication, focus, and excellence in delivering our continued and collective success. I look forward to continuing to serve our stakeholders and supporting Dion and the leadership team to achieve new heights in my role as executive chairman. Over to you, Dion.
spk21: Thanks, Mitch. I'm extremely honored to become the company's next CEO, and I'm looking forward to partnering with you in your continuing role as chairman. As CEO, my focus will remain the same, to ensure the long-term success of the company by delivering exceptional value for all of our stakeholders. As Mitch noted, in the second quarter, we again delivered sequential improvement, with adjusted EPS up 13% as volumes in our label businesses ramped, new programs and intelligent labels continued to accelerate, and additional productivity initiatives were implemented. That said, earnings were modestly below our expectations, as inventory destocking in both label and apparel channels is taking longer than anticipated in slower market conditions. In this environment, we've activated additional measures to minimize the impact on our bottom line. We've accelerated temporary cost reduction actions, ramped up our restructuring initiatives, and paid back capital investments in our base businesses while protecting investments in our high-growth platforms, particularly intelligent labels. Now, a quick update on the quarter by business. Materials Group delivered strong margins despite low volume. The volume decline versus prior year is magnified by the level of inventory that was built last year compared with the inventory reductions taking place this year. Sequentially, volumes improved as inventory destocking began to moderate in the quarter. The pace of improvement in North America and Europe can be seen on slide six. We expect volume will continue to improve at a similar pace in Q3 and indications are that inventory destocking is now nearly complete in Europe, with North America roughly a quarter behind. Looking at emerging markets, South Asia, particularly India, continues to grow, while in East Asia, particularly China, demand remains muted. Materials margin was strong, expanding sequentially to nearly 16% in the quarter as volumes improved and structural and temporary cost-saving actions were implemented. Solution group sales were down mid-single digits in the quarter, as apparel volumes continue to be soft across channels. Apparel imports are down significantly, not only compared to prior year, but versus 2019 as well, which can be seen on slide six, as retailers and brands target inventory reductions and factor muted consumer sentiment into their near-term sourcing plans. Enterprise-wide, intelligent labels in non-apparel categories, including logistics, food, and other category expansions, continues to ramp significantly, which can be seen on slide 7, and we're up roughly 50% in the quarter. This growth was offset by a decline in apparel, driven by destocking in existing programs. We expect non-apparel growth to further accelerate throughout the second half of the year. enabling us to achieve roughly 20% growth for the platform overall in 2023 despite softer apparel volumes. As adoption in categories like logistics, food, and general retail accelerate and apparel rebounds, we expect the Intelligent Labels platform to be at a billion-dollar run rate in the coming quarters and to deliver 20% plus growth in the coming years as we further advance our leadership position at the intersection of the physical and digital. As you all know, one of our key strategies is to drive outsized growth in high-value categories, and we continue to shift our portfolio towards these categories, both organically and through M&A. In solutions, we expect to benefit from a higher growth contribution in these categories as we move throughout the year, not only in intelligent labels, but external embellishments as well. In May, we closed the acquisition of Lion Brothers, a leading provider of external embellishments with roughly $65 million in annual revenue, expanding our position in this key growth platform. Solutions group margins were flat sequentially. We expect adjusted EBITDA margin will improve sequentially through 2023 as volume increases and additional productivity and cost reduction actions are implemented. Turning to the rest of the year, as volume in labels, materials, and intelligent labels ramps up, and additional structural cost-saving actions are implemented, we expect roughly 20% of sequential improvement in the third quarter. We expect further sequential improvement in the fourth quarter, and we now expect to achieve a $10-plus adjusted EPS run rate a couple of quarters later than previously anticipated. Stepping back, the underlying fundamentals of our business are strong. We're exposed to diverse and growing markets. We are industry leaders in our primary businesses with clear competitive advantages in scale and innovation. And we have a clear set of strategies that have been the keys to our success over the long term across a wide range of business cycles. We remain confident that the strategies we've formulated will continue to enable us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term. I want to thank our entire team. continuing to raise their game to address the unique challenges at hand and deliver value for all of our stakeholders. And with that, I'll hand the call over to Greg.
spk09: Thanks, Dion, and hello, everybody. In the second quarter, we delivered adjusted earnings per share of $1.92, up 22 cents sequentially, driven by benefits from productivity and temporary cost-saving actions and higher volume. Sales were down compared to prior year, roughly 10%, both ex-currency and on an organic basis, driven by a low teens volume decline, partially offset by higher prices. Adjusted EBITDA margin was 14.7% in the quarter, up 110 basis points compared to Q1, with adjusted EBITDA dollars up 10% sequentially. We generated $135 million of adjusted free cash flow in the second quarter, which was roughly in line with our expectations. As you may recall, I noted last quarter that we had higher inventories in certain areas across the company, partially related to strategic inventory builds in areas such as RFID chips and also in components in which we experienced supply disruptions over the last couple years. For the latter, we are focused on driving improvements across the businesses We made good progress in the second quarter and expect to make further progress as the year unfolds. Our balance sheet remains strong. We continue to execute our disciplined capital allocation strategy, including strategic acquisitions such as Lion Brothers, which closed in the second quarter, and continuing to return cash to shareholders. In the first six months of the year, we returned $216 million to shareholders. through a combination of share repurchases and dividends, as well as deployed $194 million for M&A. Turning to the segment results, materials group sales were down 12% ex-currency and on an organic basis, driven by a mid- to high-teens volume decline as inventory was being built downstream from us last year and is being reduced this year. On a sequential basis, volumes increased in the second quarter, with label materials volume up overall low to mid-single digits sequentially. As Dion highlighted, on slide six, you can see that label volume in combined North America and Europe ramped as we moved through the second quarter and into July, and we've assumed that pace to continue for the remaining of the third quarter. Looking at label materials organic volume trends versus prior year in the quarter, North America and Europe were down roughly 25% to 30%. China was up significantly as we lapped the Shanghai area lockdowns from last year, and it was up low single digits sequentially. Latin America was up modestly and up mid single digits sequentially. Also, compared to prior year, graphics and reflective sales were up organically high single digits. Materials Group delivered a strong adjusted EBITDA margin of 15.7% in Q2, up 150 basis points from Q1, and down one point compared to prior year, as benefits from productivity and temporary cost-saving actions were more than offset by lower volume. We expect adjusted EBITDA margin to continue improving sequentially. Regarding raw material costs, we have moved into a modest deflationary environment. Following a period of significant inflation, these lower costs are largely being passed along in price reductions to our customers. Shifting now to Solutions Group, sales were down 4% ex-currency and 7% on an organic basis, as low single-digit growth in high-value categories was more than offset by a high teens decline in the base business. as retailer and brand sentiment remains muted. Gap operating margin was down in the quarter, largely due to an increased liability related to the recently disclosed jury verdict in the ADASA legal matter. The company continues to dispute this and is preparing to appeal. We've also largely completed any migration to alternative encoding methods for RFID tags. Adjusted EBITDA margin of 15.8% was down 320 basis points compared to prior year, driven by lower volume with continued strategic investments in intelligent labels and partially offset by productivity and temporary cost actions. We expect adjusted EBITDA margin to improve sequentially through the remainder of the year. Now, shifting to our guidance. In the third quarter, we expect adjusted earnings per share to be in the range of $2 to $2.20, up roughly 20 cents sequentially at the midpoint, similar to the level of improvement we delivered in Q2. In the third quarter, we expect label volume to continue to ramp at a similar pace as Q2, as inventory destocking further moderates. Intelligent label volumes in new categories will continue to accelerate, and further structural cost reduction actions are being implemented as we continue to focus on driving productivity across our businesses. Looking forward, we expect adjusted earnings per share will further increase sequentially in the fourth quarter. And, as Dion mentioned, we continue to anticipate achieving a $10-plus adjusted EPS run rate, albeit a couple quarters later than previously anticipated. We previously assumed the destocking period would end with a more accelerated ramp, like we have seen in these cycles in the past. In light of the broader macro uncertainty, we're currently seeing a more measured ramp. The anticipated sequential improvement across the next couple quarters and towards the $10 run rate is driven by the normalization of inventory destocking and label materials, the continued ramp and non-apparel intelligent labels volume, the impact of ongoing productivity actions, particularly structural cost reductions, and the normalization of apparel volumes. We've outlined additional full-year considerations on slide 13 of our supplemental presentation materials. We now estimate that incremental pre-tax savings from restructuring, net of transition cost, will contribute roughly $65 million, up $15 million from our April estimate. and we anticipate investing roughly $325 million on fixed capital and IT projects, down roughly $25 million from our previous outlook as we pare back capital investments in our base business. An anticipated impact from currency translation has increased slightly and now reflects a roughly $15 million headwind for the full year based on current rates. In summary, we're continuing to improve our results as we move through the year, And despite near-term challenges, we remain confident in our ability to continue delivering exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. And we're committed to delivering on our long-term financial targets through 2025. And now we'll open up the call for your questions.
spk16: Thank you very much. And ladies and gentlemen, if you'd like to register your question, please press the 1 by the 4 on your telephone. You have three-tone prompt to acknowledge your request. If the question has been answered, if you'd like to withdraw your registration, you may press the 1 by the 3. If you're using a speakerphone, please lift your hands up for entering your request. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. One moment, please, for our first question. And we'll get to our first question on the line from John McNulty with BMO Capital Markets. Go right ahead.
spk13: Yeah, thanks very much for taking my question. And Mitch, let me be the first, but probably one of many to congratulate you on moving from the CEO role. And Dion, let me congratulate you for getting the CEO role. So thanks again to both of you for all the years of help, for sure. So I guess maybe just a question. Maybe there's two parts to it, though, if you'll forgive me. So it seems like, you know, you had raw materials that should have been down quarter over quarter, kind of low to mid single digits or so. Is that what you saw? And is that? what we should be thinking just given kind of what's going on in terms of deflation abroad? Is that something that we should be thinking about in 3Q? And then I guess tied into that, I know you normally, you know, you chase, I guess, to some degree, inflation on the way up. And then when deflation comes, you give it back. But with a lag, it doesn't seem like there was all that much of a lag this time around. So I guess, is that right? And is there any reason to think that that's you know, that something's changed in terms of how you give pricing back?
spk09: Yeah, thanks, John, for the question. Overall, to your point, our raw materials, when we look from the first quarter to the second quarter, of course, it differs a little bit by region and commodity. But generally, to your point, we had about somewhere in the low to low to mid single digit deflation sequentially from Q1 to Q2. And that's basically what we would expect as we look forward into the third quarter as well. To your point, as I mentioned earlier in my prepared remarks, we have continued to be disciplined in our pricing. As you know, over the last couple of years, we've implemented a pretty significant amount of pricing actions given all the inflation that we've taken over that time. So given the deflationary or slightly deflationary trend we've seen here, we have given back a little more price to go with that deflation as we've gone into the second quarter.
spk21: Yeah, and John, what I just add to that, typically when we've seen such a steep rise in pricing, we expect that pricing to unwind over the time period as deflation continues to ramp as well. And I think the one thing I would stress is we continue to maintain strong pricing discipline in the industry as the industry leader to protect the health of the industry in the long term. And we will respond as appropriately, making sure that first we address some of the surcharges that are out there, and secondly, then making sure we're continuing to manage our overall margins as well. And I'd also remind everybody that during these times, we've been really leaning into productivity, and those are typically things that we hold on to in the longer term, the productivity gains we make as well.
spk16: Thank you very much. And we'll proceed with our next question on the line. It's from the line of Gushan Punjabi from Baird. Please go right ahead.
spk23: Hey, guys. I just want to echo my congratulations to you, Mitch, and Dion, and your new roles. Best wishes for the future. And thanks for all the help over the years also.
spk20: Thanks, Gunchal. Thanks, Gunchal.
spk23: Thanks, Mitch. Thank you, Dion. I guess, you know, just on your comments that you anticipate the $10 plus EPS run rate will be delayed a couple quarters. Are you implicitly guiding for 2024 EPS to be north of 10? And then related to that, you know, you have easier comparisons 4Q onwards with destocking also sort of behind you, but now we're at a point where consumer spending globally is also weaker. How are we thinking about that headwind, you know, both for the back half of this year and also 2024?
spk09: Yeah, Gancham, this is Greg again. So I think overall, as you said, you know, we're looking at last quarter we talked about expecting the back half to be at the $10 or $10 plus run rate. pushing a couple of quarters essentially means that moves in more into the first half of next year. So overall, yes, that would mean next year, we're looking at more than a $10, uh, EPS run rate for the year. You know, when we look forward from where we are here in the second quarter to get into that $10 run rate, I would say there's four primary drivers of that, um, trajectory change. One is really about less D stocking in the labels business. So even though the, um, there's some signs of consumer demand and packaging categories is a little bit lower. We still saw a fair amount of destocking in Q2, and more normalization of that destocking will give us an increase, even if the markets are a little bit slower. We also continue to see the non-apparel intelligent labels growth, as Dion talked about, and you can see in the chart we included in our slides. And we're continuing to do productivity actions. We raised our productivity or our restructuring expectations for the year by about $15 million from where we were a quarter ago. So I would expect we're ending the year with about 15 cents more restructuring benefit than where we were in the second quarter as well. And then again, you know, Dion and I talked a little bit about the base apparel business being softer, and you can see that in some of the charts on our slides as well. So as that normalizes a little bit, we would expect some benefits there also. So those are really the four big drivers I see in getting us towards that $10 run rate over the next not-too-distant period.
spk21: Ganchal, maybe let me just add a little context around where we see the markets at the moment. I think, as you recall, in times when we've seen significant volume declines, for example, in a recessionary period, they tended to be steep, but they tended to be a relatively steep recovery as well. And that's what we had been anticipating as we came through the second quarter. And we didn't see that in June. And I think that's largely down to the pace of inventory destocking, moderating. But as well, we've seen more uncertainty in the markets in the near term. I think there are a number of indicators at the macro level that are are contrary to each other, and I think that's driving further uncertainty. In our labels business specifically, we're going to continue to see that measured recovery you see on slide six. And for apparel, I think there is more muted sentiment now than there has been for a while, and a lot of How apparel goes over the next couple of quarters is going to relate to the results from back to school and then the implications for holidays as we move forward. As such, we're going to be continuing to focus on service execution for our customers, addressing our costs, as Greg has said, and making sure that we're continuing to drive on our share gains as we move forward into the market as well.
spk16: Thank you very much. We'll get to our next question on the line. It's from Anthony. Petinari from Citigroup, please go right ahead.
spk11: Good afternoon, and congratulations to Mitch and Dion in the new roles. Thank you. Just following up on Gansham's question, Can you discuss kind of the decision to pull the full year guide? You know, you've guided to 3Q and you discussed, you know, reaching $10 plus in 2024. So I'm just wondering about sort of the decision to give a number for 23 versus not giving a number. And I think you said that you expected 4Q to be above 3Q. Just wondering if you can talk about sort of the sources of potential uncertainty around 4Q or just that decision.
spk21: Anthony, let me address that first, and then Greg can follow up as needed as well. I think I made the point that we typically have seen a steeper decline and a more steeper recovery in periods when there's been recessionary environments. It's not a recessionary environment now, but the similar analogy that we would use as we move forward, we'd anticipate that there'd been a sharper recovery, particularly in June and July. And we've not necessarily seen that. We've seen volume sequentially improved. That combined with a more near-term market uncertainty and outlook, given some of the contrary indicators we're seeing over there, has led us to focus where we are in Q3 and continue to see the projection of our volume recovery in labels business. and assuming at the moment that our apparel business will not recover during Q3 at this stage. And then when we factor on top that, our accelerated aisle non-apparel adoption roller, we feel good about where we are as we look towards that $0.20 earnings growth in the third quarter.
spk16: Thank you very much. We'll proceed with our next question on the line. This is from Josh Spector with UBS. Go right ahead.
spk17: Yeah, thanks for taking my question and just echo my congrats to Mitch and Dion. Thank you. So just on the RFID non-apparel categories, obviously you're still forecasting quite strong growth there. Has anything changed in terms of timing and rollout? And then kind of related with that, you know, that chart you show on slide seven is pretty helpful about the bridge through the year. Looking at fourth quarter and that exit rate, is that the right way to think about kind of the stack when we get into 2024 as well? Thanks.
spk21: Josh, thanks for the question. Nothing has changed in terms of the timing of the current rollout on non-apparel. The biggest change has been on apparel softness. But let me go back to the non-apparel piece. Those programs are in-flight existing rollouts that we've seen in logistics and food, and they are tracking to plan. Our team continues to execute excellently in that regard and making sure we're delivering on those promises. As you look at the Q4 run rate, that That will indicate a degree of the exit run rate into next year, but also, remember, in logistics, it's the principal season when most packages and volume is shipped as well. So we tend to see a slightly lower entry point into Q3. That said, there continues to be new and other programs in logistics and food that will increase adoption as we go through 24 as well. And in addition... As apparel volume recovers, we also continue to see new apparel rollouts that we already have secured and will start to launch during the second half of this year.
spk16: Thank you very much. We'll get our next question on the line. It's from the line of Mike Roxland with Truist Securities. Go right ahead.
spk14: Thank you, Mitch. Dion, Greg, John, I appreciate you taking my questions, and I'll just like to follow everybody's comments. Mitch and Dion, congrats on your new roles. Thank you. Just one quick question. I'm interested in talking about the cadence of the stocking in labor materials and 2Q, especially since you repeatedly called out June. So, you know, what happened in June, say, relative to April and May? Was there a deceleration in June? If so, what in markets? Obviously, Powell is one that you've called out repeatedly. Have there been other markets that were impacted? And can you comment on what you've seen thus far in July? Thank you.
spk21: Yeah, Mike. The difference in June that we saw, we'd anticipated a steeper ramp, as I think both myself and Mitch had said previously. And volumes did continue to ramp, but not at the pace that we'd expected. If you look at slide six, what you can see is the combination of April, May, and June continues to ramp. And in July, we're seeing a similar consistent ramp in our revenue through July month to date.
spk09: I think, Mike, part of it is really about, as Dion said a couple times here, it's really about when historically we've seen more of a sharper recovery in cycles like this. And this is part that goes back to the question on Q4 guidance as well. What we have seen throughout the quarter is a pretty steady ramp up across the quarter and continuing into July. And that's what we show on the chart on slide six that you can see there. And that's how we built our outlook into Q3. Part of the challenge here has been really calling the pace of the recovery, which is why we're confident that we'll get to the $10, and the question is the timing of that, and how does that pace go, and do we see a ramp up, a steeper ramp up near the end of the destocking period, or does it stay in a more steady flow? So that's how we've been thinking about things, and what we've been seeing is a more steady increase over the last few months.
spk16: Thank you very much. We'll get to our next question on the line. So Jeff Zucalkis from JPMorgan Securities. Go right ahead.
spk10: Thanks very much. On slide seven, the way I understand it is that intelligent labels in the quarter were about flat. And in the first quarter, I think they were up a little bit. So in order to grow 20% this year, do you have to grow 40% in the second half, roughly? And secondly, I think, you know, the UPS and the workers are, maybe they have a tentative agreement. But if it turns out that there's an extended UPS strike, does that put your projections in some jeopardy?
spk21: So Jeff, yes, our performance year to date, if you look across the two quarters, is roughly flat for apparel. And that's largely been driven by the apparel softness that has been more pronounced than we'd anticipated. As I said, our IL non-apparel ramp-up is on track and on pace with what we'd anticipated and is continuing to ramp through the second half of the year. So that does imply, yes, a greater than 40% growth rate as we go through the second half of the year, and we feel good about that. As it relates to UPS specifically, we don't comment on specific customers, but logistics is a big part of our ramp as we move forward through this. And as we always do for every significant program rollout that we do, Jeff, We do a lot of scenario planning to make sure that we're ready for all eventualities. We've done that in this case. If there was to be any strike in the logistics sector of any period, then we would anticipate some impact, but we have made sure all our efforts are focused on continuing for service excellence to continue to validate the strength of the business case that, in this instance, the logistics industry really feels strongly about.
spk16: Thank you very much. Thank you for that. We'll proceed with our next question on the line. It's from George Stafos with the Bank of America. Please go right ahead.
spk06: Thanks very much. Hi, everybody. Good morning. I'll echo what everybody has said. Mitch and Dion, congratulations. Mitch, in particular, congratulations on all the positives and the value creation you brought to Avery over your tenure. With that being said, in the matter at hand, You know, given the uncertainty that you're seeing, right, things are steadily getting better, but, you know, you're uncertain enough such that it's difficult for you to project for the full year, hence the lifting of the guide for the year, as Anthony was pointing out. You gave us several points as to why you feel you get to $10 of earnings power, but what exit rate on volume do we need to be seeing? What other specific quantification would you give us in terms of margin productivity and so on, such that you feel you are at that, let's call it 250 of earnings by the first quarter. So again, particularly what kind of volume run rate do we need to see into the first quarter of 24 for you to feel comfortable about that guide to a $10 of earnings power for the first half of 24?
spk09: Yeah, thanks for the question, George. Overall, when we look at, you know, even where we were in Q2 with the amount of destocking we had in the second quarter, and we would estimate that's probably more than a couple weeks in North America and Europe. And if we were to normalize for that amount of destocking and also normalize for apparel, our base apparel business was down, I think, more than 20% in the quarter. And you can see the charts on apparel imports as well. As both of those would normalize, we would be closer to 250 run rates already at this point from the normalization of those things. So that's how we would think about it as we get through the destocking, even in the lower volume, somewhat lower volume environment that we're in, or demand environment, I should say. So we get through the destocking and see eventually here's some normalization of the apparel demand and starting to normalize the apparel demand. That's how we feel like we get back to that $10.00.
spk16: Thank you very much. We'll get to our next question on the line. It's from Christopher Couch with Loop Capital Markets. Go right ahead.
spk15: Yeah, hi. So I had sort of a bigger picture question about the broader RFID adoption, less about the cadence of growth over the next couple quarters. I guess it was early 21 you guys did a pretty comprehensive update and talked about the commercial momentum. You had an I.L., and different categories beyond apparel that you were targeting and, and the base, the, you know, the business case, the adoption case for those, for those target markets. And so I'm just wondering as, as if you, as you, you know, continue to get momentum and traction beyond item level apparel, I'm just curious if the use case that you anticipated back then is still intact. Are those involved evolving at all? Are there any, new sort of adoption cases for RFID that are emerging, like predictive analytics, anything like that. I'm just wondering if everything's sort of evolving and developing as you kind of expected strategically, you know, a couple few years ago.
spk21: Yeah, Chris, thank you. In apparel, what we saw the industry really drive adoption around was effectively inventory productivity and visibility. And that case actually holds true for many industries and verticals if you look further along, Chris. If you remember, we said that apparel's addressable mark was about 40 billion units, logistics was about 60 or 65, and food was north of 200 billion. So a significant order of magnitude if we were able to prove the value of the solutions that we provide. And we've now come to realize that those are really in four categories. One is helping reduce waste, whether that's food waste, the promise of reducing food waste, the promise of waste in the supply chain. Again, reemphasizing how labor efficiency and supply chain effectiveness becomes more pronounced when you use technology like RFID. The third one is really an emerging piece, which is around being able to provide the sustainability, circularity, and transparency of items and the mechanism for measuring that. And the final one is we're starting to see also a better way for brands to directly more connect with their consumers. And so when we look into each one of these verticals, and particularly the ones that are in flight now, logistics and food, we see use cases that are reinforcing the need to address those problems in food, really trying to understand how you shine a light on provenance down the supply chain, and then use that to drive food freshness in store and less waste. The waste, as you know, could be 30% to 50% of everything produced in the United States gets wasted typically. We produced a report that showed that, I think, last year. In logistics, using the technology to really understand how do you avoid mis-shipments and mis-sorts is one example, but then also traceability as well, and that is to come. We're engaged with a number of alternative places, the ones we already have both in food and logistics, proving out the economics of those business cases. What we've come to realize is that as in apparel, The typical use cases apply across all the industry players when it's once been established. And it's the reason why, because we've been leaning so far forward in not just dealing with customer problems, but trying to activate markets. Because in that activation of markets, we can see the benefits spreading across all of them.
spk16: Thank you very much. And we'll get to our next question on the line. It's another follow-up question from the line of John McNulty with the BMO Capital Markets. Go right ahead.
spk13: Yeah, good morning. Maybe I can kind of sneak two in here since we've round-tripped it once already. So I guess the first one would just be in the solutions business, going from 1Q to 2Q, you saw revenues up, and presumably the mix got better because it looks like Intelligent Labels was at least flat, if not up at least a little bit. So why wasn't there any improvement in the OI? And then I guess the second thing that I just wanted to flush out a little bit is I think you're always busy with new projects, new pilots in the RFID or intelligent labels area, but obviously there are some chunky ones like we've seen the big home goods one that you've had with a customer. We've seen a new big logistics one. I guess as you look out over the next 12 months or so, are there other large-scale projects, that maybe haven't been announced yet, but that you see in the pipe that they could make it to the finish line in the next 12 months that we should be at least considering. Thanks.
spk09: Thanks, John. So, on your first question, you know, looking at solutions from Q1 to Q2, well, as you said, we saw the sequential improvement in the non-apparel portions of IL. Really, the base apparel business is where we saw a pretty significant decline. And we actually had within that even an unfavorable mix. So from Q1 to Q2, despite that portion of intelligent labels, the rest of the segment had an unfavorable mix sequentially. And that's really what we had to benefit from the volume growth sequentially Q1 to Q2. Some of the productivity actions we had an unfavorable mix sequentially as well.
spk21: And John, just to your question on any large-scale programs that we look forward, the short answer is yes, there are a number that are in flight at the moment. I was actually just with an executive of a fast casual chain during this last week, rediscussing some of the extended applications that we're going to work with them on both transparency and freshness as well. And we see similar things in grocery around freshness. And in addition, in logistics, we're engaged with a number of other industry players as well. And so in time, those will become more pronounced and we'll start the rollout and adoption of those. I'll also say, as I reiterated, I think earlier on, in apparel, we've recently just also closed out four new apparel accounts, and they will be starting to roll out from the third and fourth quarter into next year.
spk16: Thank you very much. We'll get to our next question on the line. And another follow-up from the line of George Staffos with Bank of America. Go right ahead.
spk06: Thank you. Hi, guys. Two quickies to wrap up for me. So when we talk about destocking and apparel, some of the discussion in the past has been your customers ultimately will mark down to move inventory. And so destocking is not an issue. And that was the expectation in terms of why destocking should have been done by now a year after those retail headlines started coming out. So where is this inventory that needs to continue to be destocked? What have your customers told in terms of why they're still in this position, recognizing it is what it is? And then secondly, back to organic volume, when should we expect positive volumes for Avery across its key segments and product lines? recognizing IL is going to be growing. But in total, is that a fourth quarter phenomenon or is that a first quarter phenomenon? Thank you.
spk21: George, let me address the first question. Yes, the news that I think I mentioned this last time, the news that a number of retailers and brands have started to make progress on their imagery reductions is true, but it's not uniform, George. Across the whole apparel industry, there is variation in both brands and retailers and their ability to get at that. And we continue to see variation where some retailers and brands have high inventory levels and they've historically carried. And then with a more muted sentiment that they're factoring in, we're not seeing necessarily that inventory come out at the rate that we would have hoped and I suspect that they would have hoped as well.
spk09: Yeah, and George, on your second question, from an organic volume growth perspective, we would expect – We're anticipating, at least as we're into the fourth quarter, to see volume growth versus Q4 of last year as we start to obviously comp some of that destocking. But we would see that continue to improve as we moved into the beginning of 2024 as well.
spk16: Thank you very much. Mr. Booth, there are no further questions at this time. I will now turn the call back to you for any closing remarks.
spk02: All right. Well, thank you, everybody, for joining the call today. Clearly having a challenging period right now, but we remain extremely confident in our position and prospects and our ability to continue to deliver GDP plus growth and top quartile returns over the long run. Thank you all very much.
spk16: Thank you. Thank you, everyone. And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. I ask you to disconnect your lines. Have a good day, everyone.
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