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.