The operator introduces the Avery Dennison Earnings Conference Call for the third quarter of 2023 and provides information on accessing the replay. John Eble, the Vice President of Finance and Investor Relations, reminds listeners about the use of non-GAAP financial measures and the Safe Harbor statement. Deon Stander, President and CEO, discusses the company's performance, including meeting earnings expectations, growing volume and margins, and delivering significant growth in Intelligent Labels. However, volume was lower than expected due to macro uncertainty and slow consumption, but the team was able to offset this through productivity and cost reduction measures.

The company has taken measures to minimize the impact on their bottom line, including cost reduction actions and restructuring initiatives. The Materials Group saw improved margins and volume, though it was still lower compared to the previous year due to customers reducing their inventory. Demand in North America and Europe has been softer than expected, but emerging markets saw solid label demand. The Solutions Group saw an increase in sales and improved margins, with expectations for further improvement in the fourth quarter. Apparel imports continue to be down compared to the previous year.

The Intelligent Labels platform saw a 75% increase in non-apparel categories, but this growth was offset by a decline in apparel. The company expects non-apparel growth to continue to accelerate and for apparel to rebound in the fourth quarter. They anticipate low to mid-teens growth for the platform overall in 2023, with a focus on categories like logistics and food. The company is investing to capture opportunities in these high-value categories and shifting their portfolio towards them. Another example of this strategy is their external embellishments platform.

The company has announced an agreement to acquire Silver Crystal Group and expects further sequential earnings improvement as volumes continue to improve. They anticipate a more measured recovery due to macro uncertainty and softer consumption. They are confident in their business fundamentals, diverse and growing markets, and strategies that have led to their success. They believe they are uniquely positioned to address complex problems in the industries they serve. The company's team has shown resilience and commitment during these challenging times.

In the third quarter, the company saw an increase in adjusted earnings per share and adjusted EBITDA margin, driven by higher volume and productivity actions. Sales were down compared to the previous year, but showed improvement from the previous quarter. The company also generated strong free cash flow and continued to reduce inventory levels. The balance sheet remains strong and the company is executing a disciplined capital allocation strategy. In the Materials Group segment, sales were down due to a decrease in volume, but showed improvement from the previous quarter in Label Materials.

In the third quarter, label volume in combined North America and Europe continued to improve at a similar pace as in the second quarter. Volume also continued to improve in the first few weeks of October. In terms of organic volume trends, North America was down mid-teens and up low single digits sequentially, Europe was down roughly 30% and up mid-single digits sequentially, Asia Pacific was up low double digits and up high single digits sequentially, and Latin America was down mid-single digits and up mid- to high single digits sequentially. Compared to the previous year, graphics and reflective sales were down low single digits organically, while Performance Tapes and Medical were up low single digits. The Materials Group delivered a strong adjusted EBITDA margin of 16.4%, which was up 90 basis points from the previous year and 70 basis points sequentially, due to productivity and cost-saving actions. Raw material costs saw a modest deflation, which was passed along to customers through price reductions. In the Solutions Group, sales were up 5% ex currency and 1% organically, with high-value categories seeing high single-digit growth and the base business experiencing a mid- to high single-digit decline. The adjusted EBITDA margin of 16.4% was up 60 basis points sequentially, but down 250 basis points from the previous year due to lower organic volume, higher employee-related costs, and strategic investments. However, the company expects the adjusted EBITDA margin to improve in the fourth quarter.

In the fourth quarter, the company expects significant growth in adjusted earnings per share compared to the previous year, despite a softer consumption environment. This will be driven by improvements in Label Materials and Intelligent Labels volume, cost reduction actions, and a seasonal headwind. The company remains confident in steadily increasing earnings to achieve a $10-plus adjusted earnings per share run rate. They anticipate incremental savings from restructuring and plan to invest in fixed capital and IT projects. The expected impact from currency translation has increased and the adjusted tax rate is expected to be in the mid-20% range. Overall, the company is continuing to improve its results.

The speaker discusses the challenges faced in the third quarter, particularly in the Intelligent Labels sector, due to lower-than-expected growth in apparel. This was driven by consumer sentiment and inventory to sales ratios. However, they remain confident in their ability to deliver value in the long-term and expect some recovery in apparel in the fourth quarter. They have also seen growth in their non-apparel business, particularly in logistics and food. The call is then opened up for questions.

The company has several new apparel programs that will contribute to their growth in the fourth quarter. The guidance for the fourth quarter may seem conservative, but it takes into account seasonality and the current macro uncertainty, including declining retail volumes and cautiousness from retailers and brands. However, the company is still expecting significant growth in Intelligent Labels and an overall improvement in label business volumes.

The company is taking into account the cost sensitivity of their end users as they enter the end of the year and are factoring it into their guidance. They are seeing some cost sensitivity in the consumer packaged goods market and apparel market due to higher interest rates. This is causing caution and slower consumption among consumers. They are starting to see some sequential improvement from inventory destocking in certain categories.

The speaker discusses the uncertainty surrounding when the company will reach a $10 run rate, but is confident in the fundamentals of the business. The next question asks about the increase in volume and the company's plans for paying down debt. The speaker clarifies that the volume increase is not directly comparable due to stocking up last year and that volumes in the third quarter were down.

In the third quarter, the company experienced its highest stock build of the year, but is still reducing inventory in North America and Europe. The company's debt repayment plans may be impacted by potential M&A opportunities in the next year or two. In the Solutions segment, sales were up but EBIT was down due to higher investments and costs. The majority of organic growth in the segment was driven by Intelligent Labels, with base apparel and the base business seeing a decline.

The company has seen a decrease in organic sales this year, mainly due to the slow unwinding of inventory from the previous year. They have maintained or even expanded their market share in Materials and base apparel, and overall share in Intelligent Labels has grown. They expect further improvement in margins in the Solutions segment and anticipate getting back to previous margin rates next year.

The company's focus on delivering excellent service and quality to customers has helped them address challenges and remain confident in the European market. Despite uncertainty, the company has a strong position in growing and diverse markets, with a successful team and strategies in place. They have seen steady improvement in demand over the past few months, rather than a sudden rebound, which reflects their strong performance and market leadership.

The company has seen an improvement in inventory levels and a slowdown in consumer demand, which has led to a steady increase in recovery rather than a rapid ramp up. The demand in the Materials segment has improved sequentially in October, with the destocking moderating in Europe. In the Intelligent Labels segment, there is confidence in the sustainability of the 20% growth CAGR, as there is evidence of expanding TAM due to the use of Intelligent Labels beyond apparel in conventional retailers.

The company is confident in their 20% growth rate for their Intelligent Labels platform due to the accelerating adoption in non-apparel categories such as logistics and food. They also anticipate a bounce back in the apparel market and continued adoption of new use cases in that segment. Additionally, the potential for growth in the larger non-apparel categories is significant.

The speaker explains that the company has been investing to maintain and expand their market leadership position. They are confident in their future growth rate and have seen the impact of their investments on customers. When asked about the cash conversion cycle for Intelligent Labels, the speaker states that it is similar to the rest of the system. They have been building up inventory in chips due to inventory challenges but expect no difference in the normal ongoing process. Their focus is on consistent and flawless execution for large-scale rollouts.

The speaker discusses the importance of delivering a business case and proof of economics to ensure reliance and investment in capacity for providing everything needed. They mention that the payback period for newer markets is typically less than a year, with apparel starting at this rate. In logistics, the payback period is expected to be even shorter due to a more compressed supply chain. The speaker also addresses a follow-up question about the expected volume of Label Materials in the fourth quarter.

The company is in the early stages of its food work and expects the payback cycle to be similar to apparel within a year. Sequential label volume is expected to improve in the fourth quarter due to moderating inventory destocking and slight demand improvement. Year-over-year, label volumes are also expected to increase. The company remains confident in its position and ability to generate growth and returns in the long term.

The writer thanks the reader for participating and requests that they disconnect their phone lines.

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