Avery Dennison Corporation

Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in the listen-only mode. Afterward, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. Welcome to Avery Dennison's earnings conference call for the fourth quarter and full year ended on December 30th, 2023. This call is being recorded and will be available for replay from 5 o'clock p.m. Eastern Time today through midnight Eastern Time February 6th. To access the replay, please dial 800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 2202-8081. I'd now like to turn the call over to Mr. John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Frank. 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 Sander, 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 fourth quarter, we again delivered sequential earnings growth, with earnings up significantly compared to prior year and in line with our expectations. We grew volume sequentially and compared to prior year in both segments, significantly expanded margins, generated strong free cash flow, and delivered significant growth in intelligent labels. Looking at the full year, while market conditions in 2023 turned out to be very different than we anticipated, and we did not deliver on our initial expectations for the full year, I am pleased with how we navigated the challenging environment. We protected margins as the industries we serve experienced significant destocking, improved service for our customers, deepened our insights on the drivers of demand and inventory throughout the value chain, continued to shift our portfolio towards high-value categories as we delivered on our growth opportunities, particularly in intelligent labels, and generated strong free cash flow, highlighting the strength and resilience of our overall franchise. During this period, we leveraged our core strengths of productivity, cost management and capital stewardship, and increased our potential in intelligent label solutions to minimize the impact of the low volume environment on our bottom line. More broadly, we see the reduction of excess inventory throughout the value chain as a good thing, as it positions our industries and business to return to a more normalized growth trajectory in 2024 and demonstrate the growth power of our intelligent labels platform in particular. Importantly, The macro uncertainty and volume impacts in 2023 have seen customers increasingly looking for help to solve some of the most complex industry challenges, such as labor efficiency and supply chain effectiveness, waste reduction, circularity and transparency, and helping better connect brands and their consumers. It is clear, physical items will need a digital identity to solve these challenges, and customers are increasingly turning to Avery Dennison as the leader to help them better connect the physical and digital worlds. Looking forward, a more cautious outlook is prudent, particularly in the near term, as economic indicators are still mixed and geopolitical risks remain elevated. That said, I'm confident that 2024 will be a year of strong earnings growth. Inventory destocking in our label business is largely complete. Apparel volumes will likely recover in the second half, and we expect significant growth in our high-value solutions, in particular our Intelligent Labels platform, as adoption accelerates across new categories and apparel rebounds. Now a brief summary of the year by segment. Materials Group delivered strong margins, and volume improved sequentially each quarter as inventory destocking continued to moderate throughout the year. As you can see on slide six, label volume in North America and Europe, where inventory destocking was most prevalent, continue to improve at a steady pace throughout the year. As I previously indicated, we believe inventory destocking is complete in Europe and now largely complete in North America. In the fourth quarter, volume was better than we had anticipated in Europe and slightly lower than we had anticipated in North America. End demand in these regions continues to be mixed on broad macro uncertainty and slow consumption of goods. As inventory destocking concludes, We expect volume will again improve sequentially in the first quarter, a trend we have seen thus far in January. Overall emerging market label volume was up low single digits for the year with increased momentum in the back half, particularly in India and China. Solution group sales were up low single digits for the year, up high single digits in the second half, a strong growth in high value solutions and the impact of acquisitions more than offset a decline in base solutions. volume and margin continued to improve throughout the year, particularly in the back half of the year as new programs in intelligent labels ramped and apparel destocking began to moderate. While apparel imports continued to be down significantly, both compared to prior year and 2019, the trend in North America started to show signs of improvement in Q4, which can be seen on slide six. Following a relatively mixed holiday season, retailers and brands continue to factor muted sentiment into their near-term sourcing plans. We anticipate this, combined with the Suez and Panama Canal shipping issues, we'll likely see apparel industry volumes normalize mid-2024. As you can see on slide seven, enterprise-wide intelligent labels grew low double digits in 2023. reaching roughly $850 million in revenue, including currency translation. Non-apparel categories, including logistics and food, continue to ramp significantly throughout the year, and we're up roughly 75% for the year. In logistics, the team successfully executed the largest RFID program single wave rollout in the industry's history, making greater shipping accuracy for our customer possible. Our execution in these key rollouts in new categories is delivering significant value for our customers and compelling proof points for broader segment adoption. This growth was partially offset by decline in apparel as retailers and brands reduced inventories throughout the year. As we continue to see adoption in categories like logistics, food, and general retail, as well as a rebound in apparel, we are targeting to deliver 20% or more growth in our intelligent labels platform in 2024. further advancing our leadership position at the intersection of the physical and digital. As I indicated, our ability to help address industry challenges such as labor efficiency, waste, transparency, and consumer connection in very large volume categories like logistics and food is increasingly resonating with customers. We continue to invest to capture the significant opportunity ahead as we grow the size of the overall industry. We continue to refine our strategies, raising the bar for ourselves in the process to ensure we continue to deliver superior value creation for all of our stakeholders. The ability of our teams to drive these strategies over the long haul while adapting to an ongoing dynamic environment has been exceptional. As you can see on slide 10, our focus over the long term is the success of all of our stakeholders. As such, we're making solid progress towards our long-term sustainability goals And Greg will shortly walk through our progress against our long-term financial objectives. Stepping back, the underlying fundamentals of our business are strong. We're exposed to diverse and growing markets with clear catalysts for long-term growth. We are industry leaders in our primary businesses with clear competitive advantages in scale and innovation. We have a clear set of strategies that have been key to our success over the long term across a wide range of business cycles and We are uniquely positioned to connect the physical and digital to help address some of the most complex problems in the industries we serve. We remain confident that our strategies, along with our team's ability to execute in any environment, will enable us to continue to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term, including delivering strong earnings growth in 2024 as we continue to unlock our significant growth opportunities and our core businesses rebound. I want to thank our entire team for their continued resilience, focus on excellence, and commitment to addressing the unique challenges at hand. And with that, I'll hand the call over to Greg. Thanks, Dion.

Hello, everybody. I'll first provide some additional color on our fourth quarter results and our performance against our long-term targets, then walk you through our 2024 outlook. In the fourth quarter, we delivered adjusted earnings per share of $2.16, in line with our expectations, up sequentially and up 31% compared to prior year, driven by benefits from higher volume and productivity. Compared to prior year, sales were up 3% ex-currency and 1% on an organic basis, as higher volume was partially offset by deflation-related price reductions. Adjusted EBITDA margin was strong at 16% in the quarter, up three points compared to prior year, with adjusted EBITDA dollars up 29% compared to prior year and also up sequentially. We generated strong adjusted free cash flow of $218 million in the fourth quarter and nearly $600 million for the full year. With our working capital metrics on target to end the year, resulting in more than 100% adjusted free cash flow conversion. We invested $285 million in fixed capital and information technology in the year, paring back investments in our base given the lower volume environment, while continuing to invest in our high-value categories, particularly intelligent labels. Our balance sheet remains strong, with a net debt to adjusted EBITDA ratio at year-end of 2.4%. and we're continuing to execute our disciplined capital allocation strategy, including strategic acquisitions and continuing to return cash to shareholders. In 2023, we returned nearly $400 million to shareholders through a combination of our growing dividend and share repurchases, and we deployed roughly $225 million for M&A. Turning to segment results for the fourth quarter, Materials group sales were down 4% ex-currency and on an organic basis, driven by low single-digit volume growth, which was more than offset by deflation-related price reductions and product mix. Inventory destocking downstream from us continued to moderate. As you can see on slide six, label volume in North America and Europe combined continued to improve, particularly in Europe. Volume also continues to improve through the first four weeks of this year. Looking at label materials organic volume trends versus prior year in the quarter, North America was down slightly more than we anticipated, given destocking in the fourth quarter at our customers and with retailers and brands managing their year-end working capital. We believe inventory destocking in North America is now largely complete. Europe was up high single digits as it began to lap the destocking, which started midway through the fourth quarter in 2022. Asia Pacific was up low single digits, and Latin America was up low teens following a softer Q3 and up mid single digits for the second half. Also compared to prior year, graphics and reflective sales were up mid single digits organically, and performance tapes and medical were down low to mid single digits. Materials Group delivered a strong adjusted EBITDA margin of 16.2% in the fourth quarter, up 340 basis points compared to prior year, driven by benefits from productivity and the net impact of pricing and raw material input costs. GAAP operating margin was 12% in the quarter, which included an impact from the significant devaluation of the Argentine peso in the latter part of the year. This impact was adjusted out of our non-GAAP financials. Regarding raw material costs, we saw low single-digit deflation sequentially in the fourth quarter and expect just modest deflation sequentially in the first quarter. As I mentioned the last couple quarters, 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 up 19% ex-currency and 14% on an organic basis. with high-value solutions up more than 20% and base solutions up mid-single digits. Base apparel solutions were up sequentially and roughly comparable to prior year. Intelligent label sales grew more than 30% in the quarter. Non-apparel categories, particularly logistics and food, grew significantly, up roughly 110% as new programs continued to roll out with apparel categories comparable to prior year. Adjusted EBITDA margin of 18.2% was up 180 basis points sequentially and up 230 basis points compared to prior year, driven primarily by higher volume. Now, shifting to our long-term performance, slide 9 of our supplemental presentation materials provides an update on our progress against the long-term financial targets that we communicated in 2021. And recall that this represents our fourth set of long-term goals after meeting or beating our previous three sets. The consistent execution of our key strategies enables us to continue delivering against our targets with an overriding focus on delivering GDP plus growth and top quartile return on capital over the long term. Through the first three years of the cycle, sales growth on a constant currency basis was 8% annually, above our target in GDP, driven by higher prices and volume. We expect strong volume growth in 2024, with some deflation-related price reductions, as previously noted. Compared to 2020, adjusted EBITDA dollars have grown roughly 7.5% annually, excluding currency translation. Adjusted EBITDA margin was 15.1% in 2023, with the second half of the year at 16%. Looking forward, our guidance for 2024 would indicate a roughly 9% EBITDA CAGR by the end of this year, excluding currency translation. Adjusted EPS grew roughly 5.5% annually over the past three years, excluding currency translation, short of our target of 10%, due primarily to the inventory destocking in 2023. With strong earnings growth expected this year, we anticipate making progress against this target in 2024. And as always, our focus will continue to be the optimal balance of growth, margins, and capital efficiency to drive incremental EVA over the long term. Our return on total capital was 12% in 2023, including higher costs in the year for restructuring charges, legal fees, and the impact of the Argentine peso devaluation. we expect ROTC will be back up in the mid to high teens in 2024. Given the diversity of our end markets, our strong competitive advantages, and resilience as an organization to adjust course when needed, we're confident in our ability to make strong progress against these targets in 2024. Now, shifting to our outlook for 2024, in the first quarter, we expect adjusted earnings per share to be roughly similar to the fourth quarter of 2023. with continued underlying sequential improvement, at least partially offset by the seasonality of solutions in both apparel and logistics, and the return of some of the temporary cost measures we took in 2023, with incentive compensation as an example. As 2024 progresses, we expect our earnings will improve sequentially, driven by the normalization of label volume early in the year, the normalization of apparel volume mid-year, significant growth in intelligent labels as apparel rebounds, a new programs rollout, and ongoing productivity actions. For 2024 overall, we anticipate adjusted earnings per share to be in the range of $9 to $9.50, up 17% at the midpoint. We've outlined the full year contributing factors on slide 18 of our supplemental presentation materials. To highlight key drivers of the midpoint of our guidance compared to prior year, we anticipate roughly 3.5% organic sales growth, with high single-digit volume growth partially offset by deflation-related price reductions. We estimate overall productivity, including restructuring savings, will offset higher employee costs, including wage and benefit increases, and higher incentive compensation following lower payouts for 2023. We expect to make selective strategic growth investments, particularly in high-value solutions, and we estimate net non-operational items, tax, interest, currency, and share count to be roughly neutral. In summary, we continue to improve our results as we advance our growth initiatives and our markets normalize. We expect a strong rebound in 2024 through a variety of environments and remain confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. We will now open up the call for your questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1-4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before 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 the first question. Our first question comes from Gasham Punjabi with Robert W. Baird. Please proceed.

Hey, guys. Good day. I got you. Yeah, good day to you. You know, just going back to your comments on Europe being a little bit better, can you first of all, Dion, expand on that? And then, you know, second part of the question is really specific around intelligent labels. You know, you obviously had a very lumpy rollout during the back half of last year, you know, clearly very successful and so on and so forth. And I'm just curious, will there be similarly lumpy sort of customer rollouts in 2024 as well, or would it be more so a reflection of just a natural uptake of your business there.

Thanks, Gansham. Yeah, we did see slightly stronger volumes in Q4 in Europe, and we continue to see that trend in early January as well. And I think, as you recall, last time, Gansham, we said that we thought that e-stocking had largely ended at the end of Q3, and the growth in Q4, which we'd anticipated, has started to come through. I will also make the point, though, that European retail volumes are still muted. In fact, they declined in the third quarter. And I think it just underlines the broader macro uncertainty out there. But despite that, as we see the inventory stocking ending both in Europe and North America, we anticipate the recovery of that volume specifically in the normalization of our labels business. Turning to intelligent labels. We saw the growth really in business in the second half of the year for intelligent labels largely impacted by apparel and the destocking in apparel as well as some muted sentiment around apparel for the whole year. And then you clearly saw the growth we saw in our non-apparel categories up to 75% for the year and accelerating as we went through the back end of the year, particularly over 100% in the fourth quarter, largely on logistics and food. As we look into 2024, we're still targeting that 20% plus growth rate as we move through this year. And I think three things are going to have to happen in that regard, Gunsham. So one is we're going to continue to see those new programs that we launched during last year, both in apparel, food, logistics, and other categories, annualized as we go through this year. Those are in flight and will happen. There is a degree of seasonality that will come, particularly in logistics, which tends to have a higher fourth quarter than first quarter. And then we'll also continue to see, as Greg indicated, the normalization of our apparel volume during the second half of the year. That will also start to reignite some of the growth we've seen typically in apparel. And then the final piece is there will be new programs that we will continue to launch across all segments, not just apparel, both in logistics, food, and apparel. And I'll give an example of just one of those, Gunsham, just to help qualify. We're right now involved in food with a bakery trial with a very large U.S. retailer, a grocery retailer. And we've been able to clearly demonstrate that not only can you have an impact on food waste reduction for perishable items, but also significant labor efficiency improvement. And we're anticipating that those results will start to lead to broader adoption as we go through the 2024.

Our next question comes from John McNulty with BMO Capital Markets. Please proceed.

Yeah, good morning or good afternoon. Thanks for taking my question. So a question on the material space. So 4Q, you had a nice solid margin lift, even with destocking continuing to impact the business, at least in North America. I guess, how should we be thinking about the potential for margin step up from that level as we look out to 2024?

Yeah, thanks, John. You know, as we've talked about, when we set our targets, our long-term targets back in 2021, we were looking to get materials kind of at the level they were in 2020, which is around 17% EBITDA. I think we did a good job in the back half, getting above 16% and improving margins despite the destocking with a lot of the productivity actions the team was driving there. So, you know, our focus here in 24 is continuing to make progress towards that 17% EBITDA target. not necessarily suggesting we'll get that exactly in 2024, but we'll continue to make progress there and expect to be able to deliver on our long-term target in 2025.

Our next question comes from Anthony Petaneri with Citigroup Global Markets. Please proceed.

Good afternoon. This is actually Brian Bergner sitting in for Anthony. Thanks for taking the questions. You know, I appreciate all the detail on the uh, guidance and organic revenue growth guidance. Um, you know, as prices kind of come down, which I think is embedded in your guide, consistent with raw material prices, do you expect labels can maintain a positive cost? So as price comes down, do you think that will kind of match input costs one for one, or do you think there's a little bit of opportunity for Avery to pick up some margin or, you know, do you kind of have to, uh, get back a little bit more price. Thanks.

Yeah, thanks. I think as we've been talking about over the last few quarters, given just the sheer magnitude of the inflation that we saw in 21 and 22, we've been largely passing through the deflation we've been seeing since, I guess, around the second quarter of 2023 through pricing. So our expectation is right now we're seeing a little bit of sequential deflation in Q1, not a lot. And we'd have a little bit of price down to go with that. But mostly the price year over year will be carryover of the impacts from the prior year will be our expectation. Now, that will depend on what happens with material costs as we move through the rest of the year. But overall, our view is given the amount of deflation and the amount of pricing we put through in 21 and 22, that we'll be passing most of that back as we see deflation through pricing.

And Brian, I'll just also add that our approach has always been that as we see ourselves as the industry stewards to make sure we maintain the health of the industry as well as part of our role But as we've lent into productivity, we tend to maintain and hold into our productivity benefits as we move sequentially through the years, given the investments in our core capability in our scale and innovation capability.

Our next question comes from George Stafos with BOVA Securities. Please proceed.

Thanks, everyone. Good afternoon. Good morning. Thanks for all the details. I just want to pick up on the margin discussion. So rough math, when we look at your guidance, look at the midpoint of earnings, look at the midpoint for revenue growth, we wind up roughly with about 130 basis points of margin expansion, 24 versus 23. Greg, would you agree that that's roughly in the right zip code? And if not, where would you have us land in And, you know, putting all of the commentary together on some of the other questions and things you said in the past, would it be fair to say that most of the margin lift in 24 will go to, will accrue to solutions versus materials, or would it be relatively split? Thank you.

Yeah, thanks, George, for the question. So on the latter point, I think it'll be a combination. I mean, we had, obviously, improving margins and solutions in the back half. We also have proven margins in materials in the back half of 2023. So, you know, based on our run rates in both of those businesses, both of them I would expect to be improving margins in 24 versus where we were last year. At an overall level, I think we put it on the side with the long-term targets. You know, our expectation for 2024 would be 15% plus margins. So, you know, if you do your math there on the EBITDA expectations, we'd be closer to 16% in 2024. So that's how we've thought about the plan and how we're thinking about margins increasing across the two segments as well as total company, of course.

Our next question comes from Mike Roxland with Truist Securities. Please proceed.

Thank you, Dion, Greg, and John, for taking my questions. And congrats on a good finish to a very tough year. Thank you. Just one question, Dan. You mentioned in your remarks about disruptions in terms of the Panama Canal, you obviously have that, and the Suez. Do you think the issues from shipping, whether it be the actual product itself or shipping costs, could that actually serve as a tailwind and maybe drive a buy or a restock, particularly if retailers get concerned that they're going to be out of pocket a lot of money to try to find alternative ways to get to get ships? Do you think that volume ultimately could actually be higher because of some of these transportation issues?

That's not what we're hearing at the moment, Mike. What we are hearing is that retailers and brands, initially largely in Europe, are rethinking about how they're trying to get their goods to their home markets quicker because they're having to route around the Cape of Good Hope. And what we've seen is some degree of pull forward of orders in maybe the first half of this first quarter, but we're anticipating that normalizing the second half of the first quarter, so being on aggregate the same. I think there's also a slightly broader challenge when it comes to the Panama Canal, given the water level over there. But equally there, we're seeing retailers and brands taking appropriate action to ensure that they have continuity of supply. And we don't anticipate additional volume bounce as a consequence of that.

Our next question comes from Jeffrey Zakowskis with JP Morgan Securities. Please proceed.

Thanks very much. I have a couple of questions around intelligent labels. In the logistics and food category, you're up 110%. Is there a cliff that we have to worry about as maybe new business is fully loaded, or can we continue to grow from that level? And do you think that Intelligent Labels will grow 20% plus in the first quarter, no, 24%? And then from a housekeeping standpoint, in your slides, you talk about intelligent labels as being 32% of the solutions group, which is 817. And last year, it was 29%, which is 738. So are those the right numbers? Because sometimes in your slides you talk about intelligent solutions earlier in the year being an $800 million business, but maybe you were rounding up or there's some currency or something like that. Can you clarify what the levels really are?

Sure, Devin. Thanks for the question. I'll address the first and I'll let Greg deal with the third one then. On your first question as it relates to logistics being up 110%, That relates to the program that we said we've been rolling out during 2023. Recall I said the largest single-wave program in the industry's history. And that ramped through the year. I think we talked about this each quarter as well, Jeff, culminating in the fourth quarter as that particular customer was getting ready for their busiest holiday period as well. Now, as we look forward into 2024, two things are going to be at play over here. So one is, as we've seen and we've consistently said, When we have a new segment leader start to adopt the technology and realize the benefits, in this instance, of shipping accuracy, it tends to be something that then drives greater adoption across that particular segment. This is what we saw in apparel, and we're going to see this again in logistics. And so we're underway in discussion already with other logistics providers around the world to understand how best we can enable and support them in their supply chain efficiency aims as well. Some of those will come to bear either in pilot trial stage as we go through 2024 and then onwards from 2025 as well. I think the second thing you're going to see in specifically logistics is that because you have this peak typically in the second half of the year, the first half and largely the first quarter tends to be lower just from a volume perspective for logistics overall. And that's what we're anticipating as well in our overall first quarter. We will see some continued apparel growth slightly, and then we'll see other segments that will also contribute in terms of some of the new programs we've launched as well for the first quarter. The first half of the year will certainly be up relative to the first half of last year, simply because of the annualization of some of those large programs, Jeff.

Yeah, Jeff, on your second question, I think Dion indicated in his prepared remarks that Intelligent Labels revenue for the year in 2023 was around $850 million. That does include some revenue that's in the material segment. So if you just look at the solution segment, it's a bit lower than that because some of that sold through our converter channel through materials. Now, as we talked about as well, last year we said we had a roughly $800 million business. There is some currency translation there, of course, that impacts that number. But overall, we grew, as we said, kind of low double digits for the year in 2023, and that number is around $850 million across the enterprise.

Our next question comes from Josh Spector with UBS Securities. Please proceed.

Yeah, hi. Thanks for taking my question. I just wanted to ask a couple quickly on retail and really your confidence in the second half and where your volumes are today. So my multi-year stacks are getting kind of messed up, I guess, as we get further and further from 2019. I guess my data would say you're down about low single digit in fourth quarter versus that level. I imagine that's wrong. So where would you say you are versus 2019? And then when you talk about a normalization, I guess what's the magnitude of the improvement you see in the second half as possible as worked into your guidance assumptions? And what's your visibility to that today? Thanks.

So, Josh, let me just start at the high level. We're anticipating that we'll see apparel normalization in the second half of the year, largely because we're seeing full uncertainty at retail and brand level, and they're factoring that into their sourcing near-term requirements as well, and compounded by, I think, some of the more macro, some more of the geopolitical escalations that we've seen more recently. I think at a retail confidence level, you know, we continue to see retail volumes be down both in Europe and North America at an absolute retail volume level in late 2023, and they're roughly forecast to be flat or similar in 2024. Final point I'd make is if you looked at I think our slide six, we highlighted that we've had more than four quarters of continuous significant import declines relative to normalized patterns in 2019. And at some point, that does turn. We're starting to see that now in North America for part of Q4, and I don't doubt that we'll also see that when the information comes through from Europe as well. That trend is part of our confidence around why we buy around mid-2024. We anticipate volumes for apparel normalizing at that point.

Yeah, Josh, I think you can see on that slide, apparel imports in North America were down, you know, from 10% to low teens. As you look at the different quarters, it cost 23. Europe was a little worse, down in the low 20s. So, you know, looking on a net basis, it's somewhere in the mid-plus teens from that perspective in 2023. We'd expect to still see that kind of a trend in the first half and start to improve then in the back half, as Dion talked about.

Our next question comes from Matt Roberts. with Raymond James. Please proceed.

Hey, good afternoon, everyone. Thanks for the time here. I might try to dig just a little bit more. So if a pair of volumes are expected to normalize in second half, does that imply you could hit the $10 run rate in EPS as soon as 3Q, or is that still uncertain? And in regard to the 20% growth rate in intelligent labels, Can you quantify how many points of that is dependent on the apparel rebounds?

So, Matt, I think we were clear the last time that we have confidence in the $10 run rate being achieved at some point in 2024, and that still remains a confidence. In fact, it's included in our guidance. I think the only variable that we continue to see is related to the uncertainty and the impact on timing. And so at this point, we will see a likely $10 run rate in the second half of the year. As it relates to your 20% IL growth, that basically is going to account for, we think about sort of two points of the company growth as we look for 2024. And it's based on making sure that we continue to accelerate our existing programs, roll out the new programs that we have, and apparel volume rebounding as well.

Yeah, I would just add to Dion's comments there. I think when you look at that 20%, it's probably half or just shy of half of that from the logistics and food growth that we've talked about, and then a quarter or so of that from the apparel rebound, which, again, we've baked into the second half, and then the rest of that from general retail and some of the other programs that I think Dion's already touched on as well.

Our next question comes from Christopher Capps with Loop Capital Markets. Please proceed.

Yeah, hi. So, two questions sort of focused on margin. In your formal remarks, you've mentioned in the material segment about protecting margin in the context of, I guess, you know, some deflation. I'm just wondering if you could elaborate on that comment. And is it, are you referring more to just sort of, you know, giving back some of the price in the context of some raw material costs coming in? Or was there a broader comment there about just the competitive dynamic as we've evolved through this destocking period? Maybe you could just comment on that.

Yeah, I think the comment, Chris, on protecting margins is really about given the volume challenges that we saw with the amount of destock. So it was really about the actions we were taking to help offset the volume impact on the bottom line, whether that be through productivity actions, some of the temporary actions the team's taking to offset that, belt tightening, all those type of things, That's really what that's more referring to overall rather than the price inflation dynamics.

And, Chris, let me just add from a competitive dynamic perspective, we know that we've not only maintained but slightly grown share in 2023 in our label business, both in North America and Europe, and we've grown share in our Asia-Pacific business as well as we've continued to really focus down on service excellence and delivering for our customers. Our apparel share as well, if you're switching segments, is also – We've held share in apparel and, in fact, are gaining in some of our new high-growth segments such as external embellishments as well. And overall, our IL share has grown as a consequence of some of the large-volume programs we've rolled out as well.

We have a follow-up from John McNulty with BMO Capital Markets. Please proceed.

Yeah, thanks for taking my question. So on the solutions business, and in particular the margins, you had a nice marginal uplift from 3Q to 4Q with the big logistics player coming in. At the same time, when I look at it, the margins relative to, say, your revenue, revenue is kind of at an all-time high. Margin is not necessarily there. Did you have a lot of extra, say, feet on the street or however you want to put it to kind of ensure that that platform was went off flawlessly as it ramped to kind of full levels. And if that was the case, how much does that kind of get dialed back as we look to 2024?

So, John, I think there are two elements to this. One is we continue to, as we said consistently, forward invest, ensuring that we have industries adopt. And so part of when we had lower volume overall, you tended to see the impact on margins overall. I think the second piece in this is that, you know, we're, we will continue to see the return of some of those temporary cost actions that we've taken as volumes pick up during 2024 as well. But the benefit of the additional volume and the way our teams are operating and the mix that we have from high-value segments and base on our solutions business will see our margins expand during 2024.

We have a follow-up from George Stafos with BOV Securities. Please proceed.

Thanks very much for taking my follow-ons. So my questions are on solutions. Deanne, can you talk just a little bit about how Vestcom did relative to the KPIs you would have had for the business in 23 and what the expectation is for 24? And then relatedly within solutions, you've covered this already to some degree, but IL for apparel, you know, it looks up a little bit looking at slide seven. versus 23, still down versus 22, if we're reading it correctly. Help us understand what is going on in terms of IL adoption and usage in apparel and why you're comfortable in the outlook there going forward. Thank you and good luck in the quarter.

Thanks, George. On your first question related to Vescom, we continue to be really pleased with the progress that business is making as part of the Avery Dennison family overall. In 23, we grew at the pace and delivered the margins that we expected. and in some instances, slightly ahead. And in 24, we're expecting continued growth and actually a little bit of expansion as we are in the process of piloting with a very large national retailer in the United States, demonstrating the benefit of our productivity benefits that our shelf-edge labeling technology and data composition engine are able to drive there. In terms of IL, Overall, you're right on that slide. What we're anticipating is that IOL will slowly recover in the first half and then actually accelerate as the apparel industry recovers in the second half. And so we've got two things factored into that, George. One is some of the newer programs that we're seeing in apparel that started in 23 are rolling out a little bit in 24, more likely in the back half of 24. And then second is the recovery in the apparel base volumes, which also has an impact on the base IOL volumes from apparel. I'll give you an example of just one of those. We're seeing a couple of pieces, both in apparel where we're extending beyond the base case of just inventory accuracy, that historically being there. I talked previously, George, about, for example, Inditex continuing to see the benefit of loss prevention from the technology. They will be continuing to roll it up, not just in that one single brand, but in other brands as we move forward. We're also seeing the extension of the technology from inventory accuracy to in a large European performance brand, and they're looking to leverage that for supply chain efficiency, specifically around case verification. That's in flight at the moment. And there's the third anecdote as well that might shed some light on this. It's not just that the supply chain or case efficiency or an inventory accuracy benefit we're seeing. We're also helping connect consumers and customers in a better way. We have worked with a number of professional sports franchises around the world, as you know, under our Embellix or external embellishment platform. And one of those, for example, the 49ers, we're working with them to embed digital triggers and sensors, whether it's UHF, NHF, or otherwise, in their garments so that they can better engage with their consumers and drive more fan equity and franchise engagement. And we recently had an example with them where we did an exercise that allowed consumers to connect on the patch that we provided be taken to a website where they had personalized managers from Joe Montana, as an example, linking together heroes, the actual franchise, and consumers in a better way. So addressing all of these problems that we think are out there, ranging from efficiency through waste in, for example, grocery retail, through circularity and sustainability, and then finally onto consumer connection. I think we have multiple pieces in flight that will enable us to enable us to have great confidence in our ability to grow this particular platform substantially over the years to come.

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

Thank you, Frank. And thank you all for joining the call today. While the environment remains dynamic, we are confident in our position and prospects and our ability to to deliver GDP plus growth and top quartile returns over the long term. I'm also pleased to announce that we're planning to host an investor day on September the 18th in New York City to provide a strategy update. I hope to see you all there. Thank you very much, everyone.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.