Avery Dennison Corporation

Ladies and gentlemen, thank you for sending by. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. Welcome to Avery Dennison's earnings conference call for the third quarter ended today. on September 30th, 2023. This call is being recorded and will be available for replay from 5 p.m. Eastern Time today through midnight Eastern Time October 31st. To access the replay, please dial 800-633-8284 or plus 1-402-977-9140 for international callers. The conference ID number is 22020693. I would now like to turn the conference over to John Ebley, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Carlos. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules 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 Dion Stander, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dion.

Thanks, John, and hello, everyone. In the third quarter, we delivered earnings in line with our expectations, grew volume and margins in both segments sequentially, generating strong free cash flow, and delivered significant intelligent labels growth in new categories such as logistics and food. While earnings were in line with our expectations for the quarter, volume was lower than anticipated on broader macro uncertainty and slower consumption, which the team was able to offset through productivity and cost reduction actions. As I mentioned last quarter, we have activated countermeasures to minimize the impact on our bottom line. We have implemented temporary cost reduction actions, ramped up our restructuring initiatives, and 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 and volume improved sequentially as inventory destocking continues to moderate. Volume was down compared to prior year as customers were still building inventory in the third quarter last year and have been reducing it this year. As you can see on slide six, volume in North America and Europe continue to improve at a steady pace in the third quarter. Latest indications suggest that our customers' inventory destocking is largely complete in Europe and will be largely complete in North America by year end. Demand in these regions has been softer than anticipated on broader macro uncertainty and slow consumption, particularly in Europe. As destocking continues to moderate, we expect volume will again improve sequentially in the fourth quarter, a trend we have seen through the first three weeks of October. Overall, emerging market label demand was solid in the quarter, up high single-digit sequentially with particular strength in Asia. Materials margin was strong, expanding year on year and sequentially as volumes improved and structural and temporary cost-saving actions were implemented. Solutions group sales were up mid-single digits in the quarter. Sequentially, volume in apparel solutions and intelligent labels improved, and adjusted EBITDA margin improved 60 basis points. We expect to drive further margin improvement in the fourth quarter as volume increases. Apparel imports continue to be down compared to prior year in 2019, which can be seen on slide six. Following a mixed back-to-school season, Retailers and brands continue to factor muted sentiment into their near-term sourcing plans. Intelligent labels in non-apparel categories, particularly logistics and food, continues to ramp significantly, and we're up roughly 75% in the quarter. Our execution of these key rollouts in new categories is delivering significant value for our customers and compelling proof points for broader segment adoptions. This growth was partially offset by a decline in apparel, resulting in roughly 10% growth for overall intelligent labels in the quarter. We expect non-apparel intelligent labels growth to further accelerate in the fourth quarter, along with sequential improvement in apparel, enabling us to achieve low to mid-teens growth for the platform overall in 2023, lower than previously anticipated due to the continued soft apparel market. As adoption in categories like logistics, food, and general retail accelerate, and apparel rebounds, we continue to expect the Intelligent Labels platform to deliver 20% plus growth in the coming years as we further advance our leadership position at the intersection of the physical and digital. Our ability to help address challenges such as labor efficiency and waste in very large volume categories like logistics and food is increasingly resonating with customers, and we continue to invest to capture the significant opportunity ahead of us. Intelligent Labels is a great example of one of our key strategies to drive outsized growth in high-value categories. We continue to shift our portfolio towards these categories, both organically and through M&A, and we expect to benefit from higher growth contributions from these categories over the long term. Another example of this is our external embellishments platform. Earlier this month, we announced an agreement to acquire Silver Crystal Group, an established play in sports apparel customization and application with roughly $30 million in annual revenue as we continue to expand our position in this key growth platform. Turning to the fourth quarter at a total company level, as volumes continue to improve, we expect further sequential earnings improvement. In both of our primary businesses, in past inventory destocking cycles, we've seen the pace of volume improvement accelerate as the industry nears the end of the cycle. In light of the broader macro uncertainty and softer consumption, we continue to anticipate a more measured recovery as we indicated last quarter. We remain confident that as volumes normalize and non-apparel intelligent labels adoption expands, we will steadily increase earnings to achieve a $10 plus EPS run rate. We anticipate achieving this at some point in 2024, but the timing of this is uncertain. 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. We have clear set of strategies, that have been the keys to our success over the long term across a wide range of business cycles. And we are uniquely positioned to connect the physical and the digital to help address some of the most complex problems in the industries we serve. We remain confident that the strategies we formulated will continue to enable us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term. I want to thank our entire team for their continued resilience and commitment to addressing the unique challenges at hand. With that, I'll hand the call over to Greg.