The operator welcomed everyone to Avery Dennison's Earnings Conference Call for the Second Quarter ended on July 1, 2023 and provided instructions for accessing the replay. Mitch Butier, Chairman and Chief Executive Officer, Deon Stander, President and Chief Operating Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer were on the call. The company reported $1.92 of EPS in the second quarter, up from previous quarters, with volumes in their base business continuing to recover from slow market conditions. The Intelligent Labels platform is accelerating adoption in new categories, but the pace of the recovery is slower than anticipated.

Avery Dennison's results for the quarter were below expectation due to lower revenue and inventory builds, however the team was able to offset this with cost reduction actions. The company is confident that this period of challenging results will soon pass and that with the continued execution of their strategies, they will continue to deliver GDP+ growth and top-quartile returns. CEO Mitch Butier is stepping down at the end of August and handing the reins to Deon, who has been a close partner of Butier's over the years and is confident will lead the company to success in the next phase of their journey.

Mitch, the executive chairman of the company, is pleased to announce that Deon Stander will be the company's next CEO. Mitch thanked the team for their dedication, focus, and excellence and looks forward to continuing to serve the stakeholders and supporting Deon and the leadership team. Deon is honored to become the CEO and his focus will remain the same to ensure the long-term success of the company. The company delivered sequential improvement in the second quarter, but earnings were modestly below expectations due to inventory destocking in both Label and apparel channels. To minimize the impact on the bottom line, the company has accelerated temporary cost reduction actions, ramped up restructuring initiatives, and paid back capital investments in their base businesses while protecting investments in their high-growth platforms. The Materials Group delivered strong margins despite lower volume.

In the quarter, the volume decline versus the prior year was magnified by the level of inventory that was built last year compared to the inventory reductions taking place this year. Sequentially, volumes improved as inventory destocking began to moderate. Materials margin was strong, expanding to nearly 16% in the quarter. Solutions Group sales were down mid-single-digits in the quarter due to soft apparel volumes and retailer and brand inventory reductions. Enterprise-wide Intelligent Labels in non-apparel categories grew by 50% in the quarter, offset by a decline in apparel. It is expected that non-apparel growth will accelerate in the second half of the year, allowing for 20% growth for the platform overall in 2023.

The Intelligent Labels platform is expected to reach a $1 billion run rate in the coming quarters and to experience 20% plus growth in the coming years. The company has shifted its portfolio towards high-value categories, both organically and through M&A, and recently acquired Lion Brothers, a leading provider of external embellishments. They expect margins to improve sequentially through 2023 and for EPS to reach a $10 plus run rate a couple of quarters later than anticipated. The company is well-positioned with clear competitive advantages in scale and innovation.

Deon thanked the team for their hard work and then Greg Lovins reported that the company delivered $1.92 adjusted earnings per share in the second quarter, with sales down 10% compared to the prior year. Adjusted EBITDA margin was 14.7%, up 110 basis points compared to Q1, and the company generated $135 million in adjusted free cash flow. The balance sheet remains strong and the company has deployed $194 million for M&A and returned $216 million to shareholders. Good progress was made in the second quarter with strategic inventory builds and further progress is expected for the remainder of the year.

The Materials Group's sales were down 12% ex. currency and on an organic basis due to a mid-to-high-teens volume decline. Sequentially, Label materials volume increased low to mid-single-digits. North America and Europe were down 25-30%, while China was up low single digits and Latin America was up mid-single digits. Graphics and Reflective sales were up organically high-single digits. The Solutions Group's sales were down 4% ex. currency and 7% on an organic basis due to low-single-digit growth in high-value categories being offset by a high-teens decline in the base business. The GAAP operating margin was down due to an increased liability related to an ADASA legal matter.

The company is disputing a claim and is preparing to appeal, and has largely completed any migration to alternative encoding methods for RFID tags. Adjusted EBITDA margin was down 320 basis points compared to prior year, but is expected to improve sequentially. The company expects adjusted earnings per share to increase sequentially in the third and fourth quarters, driven by inventory destocking, ramping non-apparel Intelligent Labels volume, productivity actions, and normalizing apparel volumes.

The company has estimated that pre-tax savings from restructuring will be $65 million, capital investments will be $325 million, and currency translation will be a $15 million headwind. Despite near-term challenges, the company is confident in its ability to deliver long-term value and remain committed to its financial targets through 2025. John McNulty asked about the raw material costs, which should be low to mid-single-digits lower than the previous quarter.

GregLovins and Deon Stander both addressed the question of how pricing is affected by deflation. They noted that in the second quarter of the year, there was low to mid-single-digit deflation in raw materials, and that the company had given back more price to go with the deflation. They also stressed the importance of maintaining strong pricing discipline in the industry to protect the health of the industry in the long term.

Greg Lovins explains that the $10+ EPS run rate that was expected to be achieved in the back half of the year has been pushed out a couple of quarters, meaning it will now be achieved in the first half of 2024. He outlines four primary drivers that will help to achieve this goal, including less destocking in the Labels business.

In Q2, there was a fair amount of destocking, and the company is expecting to get $15 million more in restructuring benefits than they did in the second quarter. Additionally, the base apparel business has been softer, and the company is expecting to reach a $10 run rate in the near future. Deon Stander added that in June, there was a slower pace of inventory destocking and more uncertainty in the markets due to conflicting macro level indicators.

MitchButier and Greg discussed the decision to not give a full year guidance for 2021, citing the muted sentiment in the apparel industry. They noted that volumes have sequentially improved, but not as sharply as they had anticipated. They plan to focus on service execution for customers, addressing costs, and driving share gains as they move forward.

Deon Stander explains that the RFID non-apparel rollout is still on track and nothing has changed in terms of timing. He then goes on to explain that the fourth quarter run rate will indicate the exit run rate into the next year, but it is also the principal season for shipping packages and volume, so it will start off low in the third quarter.

In June, Label materials destocking did not ramp up as quickly as expected, but the revenue has continued to ramp up steadily from April-July. MitchButier and Deon Stander both comment on the slower-than-expected recovery, which is why the Q4 guidance is more conservative.

Deon Stander discussed Intelligent Labels, which were flat in the quarter, but will need to grow 40% in the second half of the year in order to reach the 20% growth expectation. He also noted that logistics, such as UPS, is a big part of their ramp, but did not comment on the potential impact of a UPS strike.

Greg Lovins answers a question from George Staphos about the uncertainty in the logistics industry, and how Avery has done scenario planning to be prepared for all eventualities. He then goes on to explain that for Avery to reach their projected earnings of $10 for the first quarter of 2024, they need to have a certain volume run rate and margin productivity.

The speaker discusses the potential for RFID adoption beyond apparel and how it could be used in other areas. They also note that the use cases for RFID and predictive analytics that were discussed at the beginning of 2021 are still intact and evolving.

Deon Stander explains that the apparel industry has adopted inventory productivity and visibility, and that this same concept is applicable to other industries and verticals, such as logistics and food. He states that the solutions provided by technology such as RFID can help reduce waste, increase sustainability, and provide brands with a direct connection to their consumers. Finally, he highlights the importance of shining a light on provenance down the supply chain in food, in order to reduce waste, which can be as high as 30-50%.

MitchButier discussed the use of technology in logistics to avoid missed shipments and loads, and how the same use cases apply across different industries. He mentioned that they are leaning forward to activate markets, and that the Intelligent Labels revenue was flat or up a bit in the Solutions business from 1Q to 2Q. In response to a follow-up question, Butier mentioned that there are large-scale projects in the works that could be completed in the next 12 months.

Deon Stander discussed the solutions from Q1 to Q2, which included a significant decline in the base apparel business and an unfavorable mix. He then discussed the large-scale programs they are looking forward to, which include transparency and freshness applications in fast casual chains and grocery stores, as well as logistics and apparel accounts. George Staphos asked two follow-up questions to wrap up the discussion.

The apparel industry is seeing variation in brands and retailers' ability to destock their inventory, with some having higher levels than usual. Deon Stander anticipates that organic volume growth should improve in the fourth quarter of 2021 and continue into the beginning of 2024 as the destocking process continues. Greg Lovins adds that they expect to see volume growth versus the fourth quarter of 2020.

Mitch Butier thanked everyone for joining the call and expressed confidence in their ability to deliver growth and returns in the long run. The conference call then concluded with the operator thanking everyone for their participation and asking them to disconnect their lines.

This summary was generated with AI and may contain some inaccuracies.