Avery Dennison Corporation — 2024 Q1

George, thanks for the question. As it relates to our IL guidance, we did see slightly lower volumes than we anticipated in logistics on lower parcel shipments. And -- but we did also continue to see some apparel IL growth ahead of our base business as well in apparel at the moment. And that's largely because some of the new programs that we've been rolling out, including Inditex, where we're driving loss prevention continues to be very strong as well. As we look forward, we still see the recovery of the apparel business in the second half to be a key driver of our IL growth as well.

Yes. George, to your second question on apparel or Solutions margins overall, we did expect some decrease sequentially, largely due to the seasonality with apparel and logistics now having a little more of a seasonality impact in Q1 versus Q4. So that was part of what we had expected. And we also see some employee cost increases as we look quarter-over-quarter. I think we've talked about these temporary cost savings last year that included items such as belt tightening, volume-related actions, things like that, but it also included incentive comp.

So Ghansham, on the apparel recovery, and I'll let Greg handle the Materials question. On the apparel recovery, we're seeing a couple of factors in play. I think we've been pretty clear all along that apparel imports continue to be significantly below 2019 levels. And what we saw in the last quarter is some slight improvement in our apparel import rates, particularly in North America, not yet in Europe, but particularly in North America. We also know having spoken to many of our customers that their -- inventory volumes that they're having now are at the place where they feel very comfortable generally across the board. That hadn't been the case up until we got into the first quarter.

Yes. And on your second question, Ghansham, when we look at Materials in the quarter. Overall, as we talked about, our volume was up low double digits in the quarter. And that was offset by -- partially offset by 2 factors. One of those was price, which was down mid- to high single digits in the quarter versus last year, then also mix down low single digits as well as some of that or more of that destocking took place in our base business, with generally less -- lower prices per unit.

Yes. Thanks, John. So I think you called out a lot of the buckets, really, the big driver of margin when you look year-over-year and even sequentially, is the volume increase. So year-over-year, obviously, it's very significant. And sequentially, we had an improvement as well as we still had some destocking back in Q4 that we talked about is behind us now. The other thing that the Materials business has been significantly doing is driving productivity. So we've got some large restructuring actions as well as just ongoing ELS type of productivity initiatives that the team is continuing to drive.

And John, let me just add from a market perspective, we were very clear that we thought destocking ended in Europe last year in the third quarter and the U.S. roughly in the end of the fourth quarter of the year. And we're seeing that play out in conversation with our customers where there had been more limited visibility to end CPG demand that has expanded. They're seeing more confidence there. And their own volumes of inventory are much more normalized now than they have historically been over the last sort of 1.5 years as it were.

It's actually Bryan Burgmeier sitting in for Anthony. Just on the rising paper costs in Europe, I know you cited a bit of a margin headwind next quarter. Can you just remind us how Avery has handled this type of inflation in the past? Or how long it typically takes you to get caught up on net price? And do you believe with the finished strikes now resolved, order patterns and paper costs can kind of normalize maybe in the second half of the year?

Yes. Thanks Bryan. So traditionally, we've talked about it taking about a quarter to implement pricing from the time we start to see some of that sequential inflation, and we expect to stick at least. And back in the '21, '22 time frame when we were seeing pretty significant sequential inflation each quarter, we had narrowed that gap a bit from that 3 months to a much smaller amount. I think we're just starting to see this sequential inflation over the back part of Q1. So we would expect it to take a couple of months to get that in place in some point in the mid- to late part of Q2.

And Bryan, all I'd add is that unlike in '22 and then into '23 when we saw that significant inflation period and then followed by deflation, this one over here, in particular in Europe is related to the Finnish port strike, which has now ended and concluded. That's the good thing. I think we're still going to see some of those ripple effects come through, as Greg has alluded to. But as the market leader, we tend to be very disciplined in our pricing approach. And so when we see inflation, we tend to respond both with productivity and price increases. And when we tend to see deflation, we tend to unwind those as well appropriately to make sure that the custodians of the industry, we're managing the health and the balance of the industry as well.

Yes. Thanks, Jeff. So I think to your point, high-value categories in total that includes Intelligent Labels and Solutions on that chart shows it's around 60% of the segment. So when you look at that, it is a large portion or a significantly large portion of the overall growth in the quarter. And as we said, the base business is up kind of low single digits there on -- in addition to that. There are acquisitions in the high-value categories last year. We did 3 acquisitions in our External Embellishment space. which is part of that high-value segment category piece that's in our ex currency growth year-over-year as well.

And Jeff, to your second question, our Enterprise IL revenue in dollar terms was sequentially lower than Q4. Recall Q4 is a high watermark for logistics. And for the apparel business, Q1 sequentially is a lower quarter from an overall both apparel and logistics as it were.

Yes. So as you said, Josh, seasonality in the last few years has been pretty unique with a lot of the destocking in 2022 and 2021 and then the destocking we saw in 2023. But generally, we would expect some seasonality benefit moving from Q1 to Q2, just like we talked about in the first quarter, we had a seasonality impact from [ inland ] base apparel in our Asia business from Lunar New Year, we get a little benefit of that volume from Q1 to Q2. At the same point, as I talked about, we have a little bit of sequential inflation that takes us a little bit, as I mentioned a few minutes ago, to cover that.

Thanks, Chris, for the question. Yes, so I'll just remind, Chris, in the discussion that we had as well, is one of the reasons why we have such conviction around the growth potential of the business is just the scale of the opportunities in these adjacent categories. And I think I said before, food is in an order of magnitude, 4 or 5x larger than our apparel opportunity in total. And we're only there 40 or so penetrated. Logistics is 60 billion units relative to apparel of 40 billion. And all those segments are still at the nascency where we see an opportunity to help sort of connect the physical and digital by leveraging both our RFID capability and some of our other capabilities we have around data management and material science as well.

This is Nico Piccini on for Mike today. You kind of touched on it so far today, but just hoping we could delve in more. Recognizing that the timing of these IL deployments and pilot programs can change quarter-to-quarter. Could you maybe give us a tentative read on 2024, what the cadence for IL deployment looks like this year? I think there's a -- you call that a large logistics company that you're still working through, I believe, in the first half. But are there any other industries that might benefit this year?

Nico, the current forecast that we have, the way we're seeing the year unfold is basically all of the programs that are in rollout or an expansion. We have confidence that they will continue to do that. Now there always may be 1 or 2 quarters that things switched in terms of department changes and categories. Where we have pilots and trials, our effort is focused on trying to, particularly in food and logistics, move those to more adoption quicker than we are currently planned at the moment. And when we see that, that helps drive the broader industry adoption that we're anticipating.

Thanks, George. I'll take the first and then Greg can deal with the last one. As it relates to the Finnish strike, yes, the current resolution is as it is, it's resolved, but that doesn't preclude the fact that moving forward, that may change in time as well, George. I think the thing that we have lent on is 2 elements. One, we've specifically since the last experience we went through when we saw the significant supply chain constraints. We've deepened and broadened our supply chain fairly dramatically. Our sources of raw materials are no longer just single regional source, but they are more multiregional and multi-supplier source. And one of the reasons why we have seen no interruption during this period ourselves. In fact, our service excellence actually improved across the world because we have this resilience that we put into our supply chain as well.

Yes. Thanks, Deon. So on the internal indicator slide, George, to your point, Yes. I mean I think as we've talked about, our materials business is getting back to normal. We think the destocking is behind us as we've said. So part of why we didn't really need to provide those indicators as well, given that we are back to normal in that business or getting there at least. And in apparel, as I think Deon talked about a couple of minutes ago, we're also heading in the right direction there. We continue to feel confident that by midyear, we're kind of back to more normalized levels there. So just as you said, we're getting back to a more normalized state here as we move through the course of the year.

Thank you all for joining the call today. And while the environment does remain dynamic, we remain extremely confident in our position and our prospects and our ability to deliver GDP-plus growth and top quartile returns over the longer term. Thank you to you all. Good day.