The operator begins the earnings conference call for Avery Dennison and introduces the speakers. The Vice President of Finance and Investor Relations discusses the use of non-GAAP financial measures and the safe harbor statement. The President and CEO of Avery Dennison highlights the company's strong start to the year, with earnings and volume growth, improved margins, strong free cash flow, and significant growth in the Intelligent Labels segment.

Materials Group showed resilience in the quarter with volume growth and margin expansion, particularly in Europe and North America. Emerging markets also saw strong volume growth. Solutions Group had strong top line growth and expanded margins, despite apparel imports remaining below demand. Intelligent Labels saw mid-to-high teens growth, with logistics volumes below expectations due to lower domestic parcel volume. The company's solutions are helping to address industry challenges and are resonating with customers, leading to significant value and proof points for broader segment adoption. The company continues to invest to capture the significant opportunity ahead and maintain its leadership position at the intersection of physical and digital.

In the first quarter, the company saw growth in their Intelligent Labels platform and a rebound in apparel, leading to a target of 20% growth in the platform by 2024. The company's strong fundamentals, exposure to diverse and growing markets, and clear competitive advantages make them well-positioned for long-term growth. They remain confident in their strategies and ability to execute, and reaffirm their full-year guidance for strong earnings growth. In the first quarter, the company delivered adjusted earnings per share of $2.29, up 6% sequentially and 35% compared to prior year, with strong adjusted EBITDA margin and free cash flow.

The company's balance sheet remains strong with a low debt ratio, and they continue to follow a disciplined capital allocation strategy. In the first quarter, they returned cash to shareholders and saw a 2% increase in sales in the Materials Group, driven by volume growth. The North American and European markets saw significant growth, while other regions also showed positive growth. However, sales in other categories were down compared to the previous year. The Materials Group also saw a strong adjusted EBITDA margin, but raw material costs began to increase towards the end of the quarter.

The company expects inflation in the second quarter and is taking steps to address it. The Solutions Group saw a 10% increase in sales and a 16.1% adjusted EBITDA margin, with growth in non-apparel categories. The company anticipates a sequential margin improvement in the second quarter. For the full year, the company expects adjusted earnings per share to be in the range of $9 to $9.50, with growth driven by the normalization of label and apparel volumes and significant growth in intelligent labels.

The company has outlined key factors contributing to their guidance, including a 4% organic sales growth and higher pricing. They also expect savings from restructuring and a headwind from currency translation. They anticipate a slight decrease in EPS in Q2 due to a customer pull-forward, but overall expect improvement in the underlying business. They remain confident in their ability to deliver value through growth initiatives and disciplined capital allocation. The call was then opened for questions. The first question was about intelligent label.

Deon Stander, the speaker, is responding to a question about the company's guidance for organic sales growth in the current quarter. He explains that there were slightly lower volumes in logistics due to lower parcel shipments, but they are still seeing growth in apparel due to new programs and partnerships. They are also expecting a recovery in the apparel business in the second half of the year. Stander emphasizes the potential for growth in other industries and the company's commitment to investing in order to achieve their 20% growth target.

The company expects the apparel market to return to normal by mid-2024 and is confident in this prediction. They also saw a significant impact on pricing in the first quarter, which is expected to continue into the second quarter and the rest of the year.

In the paragraph, Deon Stander and Gregory Lovins discuss the recovery of apparel imports and materials in the first quarter. They mention that apparel imports are slowly improving, particularly in North America, and that customers' inventory levels are becoming more comfortable. They believe that apparel volumes will return to normal by midyear. They also mention that materials volume was up in the quarter, but offset by lower prices and mix due to destocking in the base business. They expect the biggest pricing headwind to be in the first quarter due to deflation last year.

The company is taking pricing actions to deal with inflation in the second quarter. The Materials Group margin was at a record level due to increased volume and productivity initiatives. The company expects materials margins to reach 17% EBITDA by 2025.

The company has delivered on their long-term target and plans to continue doing so by balancing top line growth, margins, and capital efficiency. The Materials business has been a major driver of EVA growth and they will continue to focus on this. Market conditions have improved with the end of destocking in Europe and the US, but there is still some caution. Rising paper costs in Europe will be a margin headwind next quarter and the company has experience handling this type of inflation in the past.

The speaker is responding to a question about how long it typically takes for the company to adjust its pricing in response to inflation. They mention that in the past it has taken about a quarter, but in recent years it has been quicker due to significant inflation. They expect it to take a couple of months to adjust pricing in the current situation and do not anticipate much change in raw material prices after the second quarter. They also mention that the current inflation is related to a finished port strike, which has now ended, and that the company is disciplined in their pricing approach to maintain the health and balance of the industry.

The operator introduces a question from Jeff Zekauskas of JPMorgan about the organic growth in Solutions. Jeff points out that the percentages in Slide 11 suggest a higher organic growth rate than reported, and asks if this includes acquisitions. He also asks about the performance of Intelligent Labels. Gregory Lovins responds by clarifying that the high-value categories, including Intelligent Labels and Solutions, make up 60% of the segment's growth. Deon Stander adds that Enterprise IL revenue was lower sequentially in Q1. The operator then introduces a question from Josh Spector of UBS.

The question focuses on the company's strategy for addressing the growing demand for intelligent labels, particularly as RFID adoption expands beyond the apparel industry.

The company has been using value selling techniques to capture more value in various industries beyond just cost-plus pricing. This approach has shown potential for growth and could change the paradigm in terms of potential margins for the business. The company is confident in the growth potential of these adjacent categories, such as food and logistics, and believes their investments in these areas will pay off as these markets slowly adopt their solutions.

The company's approach to differentiating their solutions has been successful in bringing in larger opportunities and value for customers. They are currently focused on expanding their programs and have confidence that they will continue to do so throughout the year. There may be some changes in timing, but overall they are expecting a steady cadence of deployments and pilot programs in 2024.

The Finnish strikes have ended for now, but it is uncertain if they will resume again due to their political nature.

The speaker responds to a question about the company's preparedness for potential future strikes and discusses improvements made to their supply chain. They also mention potential effects of weather and the absence of a certain slide in their presentation.

The speaker discusses how their company has made efforts to understand the end consumption and inventory levels in the CPG, converter, and retail sectors. They also mention that parcel shipments are lower and will likely be affected by the state of US retail and GDP. They do not provide internal indicators as their materials business is getting back to normal and they anticipate a return to normal levels in their apparel business by midyear. The speaker concludes by expressing confidence in their company's position and ability to achieve GDP-plus growth and top quartile returns in the long term.

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