Avery Dennison Corp Q3 FY2024 earnings call

• Delivered strong Q3 with earnings per share of $2.33, above expectations and raised full-year guidance to $9.35-$9.50 per share, targeting ~20% earnings growth.
• Materials Group showed resilience with solid volume growth and strong margins in different regions.
• Solutions Group had strong sales growth and margins, driven by base solutions and high-value solutions.
• Intelligent Labels had strong top-line growth, with strategic collaboration with Kroger in food as a significant step.
• Focus on continuing to connect physical items with digital identities, seeing opportunity in apparel, food, logistics, etc.
• Strong fundamentals with diverse and growing markets, industry leadership, and disciplined capital allocation.

Materials Group

• Sales up 4% ex-currency and on an organic basis compared to prior year, driven by mid-single-digit volume growth, partially offset by deflation-related price reductions. Label Materials organic volume trends: North America up mid-to-high single-digits, Europe up mid-single digits, Asia-Pacific up low-single digits, Latin America up mid-to-high single-digits. High-value segment growth strong with graphics and reflective sales up mid-single-digits organically and Tapes up low-single digits organically. Adjusted EBITDA margin was 17% in the third quarter.

Solutions Group

• Sales up 6% on an organic basis and 7% ex-currency. Base solutions up mid-teens, high-value solutions up low-single digits. Intelligent Labels sales were up mid-teens year-to-date. Adjusted EBITDA margin was 17.9% in the third quarter, up 110 basis points sequentially and 150 basis points compared to prior year.

• Raised full-year adjusted EPS guidance to $9.35-$9.50, expecting ~20% earnings growth.
• Expect 4.5%-5% organic sales growth, targeting high-end of previous outlook.
• Anticipate high single-digit volume growth, partially offset by deflation.
• Incremental savings from restructuring actions over $55M, up $5M from previous outlook.
• Headwind from currency translation of roughly $5M in operating income for the year, slightly better than previous outlook.
• Target 100% adjusted free cash flow conversion.

• Uncertain macro environment with retail volumes soft in developed regions.
• Uneven growth in Intelligent Labels due to deployment pace and prior year comps.
• Drugstore channel softness affecting Vestcom.
• Impact of currency translation on operating income.

Q: On the Materials segment, is volume rebound plateauing? And on Intelligent Labels logistics volume weakness?

A: Gregory Lovins said materials volumes, especially in Europe, slowed sequentially from seasonality. Deon Stander said Intelligent Labels logistics volume weakness was due to prior year inventory builds and customer transition, now largely completed.

Q: On the Kroger opportunity, scale and QSR pilots?

A: Deon Stander said Kroger rollout starts in bakery, ramps over time, and there are QSR pilots focusing on food safety.

Q: On Intelligent Labels growth in 3Q and drugstore channel weakness permanence?

A: Deon Stander said 3Q Intelligent Labels growth moved to mid-teens YTD. Drugstore channel weakness is temporary with white space opportunity.

Q: On Solutions Group segment breakdown and Kroger tag volume estimate?

A: Gregory Lovins said high-value segments were up low-single digits ex-currency. Deon Stander said Kroger bakery rollout is a tipping point but specific program size not commented.

Q: On RFID food opportunity margins?

A: Gregory Lovins said Intelligent Labels platform has above-segment margins across categories.

Q: On food opportunity timeline and 2025 guidance?

A: Deon Stander said food is large addressable market, rollout starts in bakery. Gregory Lovins said 2025 expected to follow 10% EPS growth framework.

Q: On label volumes and Intelligent Labels market growth?

A: Deon Stander said label volumes in line with industry, Intelligent Labels growing in line with market.

Q: On pricing in 3Q and European materials market?

A: Gregory Lovins said low single-digit inflation sequentially, managed pricing actions, European materials environment relatively stable.