Avery Dennison (AVY) Q2 2025 Earnings Call July 22, 2025 11:00 AM ET Company ParticipantsJohn Eble - VP - Finance & IRDeon Stander - President & CEOGreg Lovins - SVP & CFOGeorge Staphos - Managing DirectorMichael Roxland - MD - Equity ResearchJohn Dunigan - VP - Equity ResearchJosh Spector - Executive Director - Chemicals Equity ResearchWilliam Gilchrist - VP - IRConference Call ParticipantsJohn McNulty - MD - Chemicals AnalystGhansham Panjabi - Senior Research AnalystMatt Roberts - Research AnalystJeffrey ...

Financial Data and Key Metrics Changes - The company reported adjusted earnings per share of $2.42, up 5% sequentially and comparable to the prior year, with strong free cash flow of nearly $190 million in the quarter [15][16] - Adjusted EBITDA margin was strong at 16.6%, up 20 basis points compared to the prior year [16] - Sales were down 1% on an organic basis compared to the prior year, primarily due to deflation-related price reductions [15][16] Business Line Data and Key Metrics Changes - Materials Group sales were down 1% on an organic basis, with high-value categories up low single digits and base business down low single digits [18][19] - Solutions Group sales were down 1% organically, with high-value categories up low single digits and base solutions down mid single digits [21] - The Solutions Group achieved an adjusted EBITDA margin of 17.1%, up 30 basis points compared to the prior year [22] Market Data and Key Metrics Changes - North America saw low to mid single-digit growth in organic volume mix, while Europe was down low to mid single digits [19] - Apparel sales were down 6% in the quarter, with overall apparel and general retail categories experiencing reduced orders and inventory levels [6][10] - Food and logistics categories showed strong growth, with food sales up mid-teens collectively [10][21] Company Strategy and Development Direction - The company is focused on leveraging its global scale, innovation, and go-to-market strategy to maintain competitive advantages in large growing markets [12][13] - There is an emphasis on expanding high-value categories and pursuing new projects in food and logistics [10][12] - The company plans to continue disciplined capital allocation, including share repurchases and dividends, while exploring M&A opportunities to enhance high-value category contributions [52][54] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism for the third quarter, expecting earnings per share to be comparable to the prior year amid trade policy uncertainties [12][15] - The company anticipates a normalization of growth in apparel and general retail categories over time, despite current softness [10][11] - Management remains confident in the long-term growth trajectory, particularly in high-value categories and emerging markets [13][72] Other Important Information - The company announced a 7% increase in its quarterly dividend to $0.94 per share, continuing a decade-long trend of annual dividend growth [17] - The company is actively managing its global network to reduce inefficiencies and associated costs due to shifts in trade policies [11] Q&A Session Summary Question: Can you speak to whether you see pent-up demand and potential quicker turnarounds in the second half? - Management noted continued retail sales volume softness in Europe and muted customer sentiment, with expectations of low single-digit demand in apparel and general retail overall [29][30] Question: What are your expectations for volumes in the back half of the year? - Management anticipates growth in Intelligent Labels in the third quarter and expects new programs to gain traction in the fourth quarter [38][42] Question: What impact do you expect from the closure of Kroger stores on your deployments? - Management stated that the rollout with Kroger continues as planned, with no significant impact from store closures on their deployments [78] Question: What are the expectations for growth in the Embellix business? - Management expects growth in the Embellix business to begin in the fourth quarter, driven by performance brands and upcoming sporting events [86][100] Question: How is the company managing tariff cost impacts? - Management indicated that they largely offset tariff-related costs in Q2 through strategic pricing and sourcing shifts, with expectations to continue this in Q3 [91][92]

Financial Data and Key Metrics Changes - The company reported adjusted earnings per share of $2.30, up 4% excluding currency translation compared to the prior year [24] - Sales increased by 2% on an organic basis, driven by higher volume but partially offset by deflation-related price reductions [25] - Adjusted EBITDA margin was strong at 16.4%, up 10 basis points compared to the prior year [25] - Free cash flow was approximately negative $50 million, consistent with historical trends for Q1 [26] - The net debt to adjusted EBITDA ratio at quarter-end was 2.3%, following the repayment of €500 million of debt [26] Business Line Data and Key Metrics Changes - Materials Group sales were up 1% on an organic basis, driven by low single-digit volume and mix growth, while high-value categories saw high single-digit growth [28] - Solutions Group sales increased by 5% on an organic basis, with base solutions up high single digits and high-value solutions up low single digits [33][35] - Overall label materials volume was in line with expectations, with North America showing low single-digit growth and Europe down low single digits [30] Market Data and Key Metrics Changes - North America volume was up low single digits, while Europe experienced a slight decline due to a strong prior year [30] - Asia Pacific and Latin America both saw low single-digit growth compared to the prior year [30] - Apparel growth was strong, up mid-single digits, but expected to decline mid-single digits in Q2 due to tariff impacts [9][41] Company Strategy and Development Direction - The company is focused on expanding its position in high-value categories, which now make up more than a third of Materials Group sales [6] - There is a strategic collaboration with Kroger to enhance inventory management in the food sector, with ongoing large-scale grocery pilots [12] - The company continues to invest in capturing significant opportunities in intelligent labels and RFID technology, positioning itself as a market leader [15][22] Management's Comments on Operating Environment and Future Outlook - Management noted elevated macro uncertainty due to changing trade policies and a reduced global GDP growth outlook [16] - The company is prepared for a lower volume environment and has initiated scenario planning to maximize opportunities [19] - For Q2 2025, adjusted earnings per share are expected to be in the range of $2.30 to $2.50, with overall sales growth anticipated to be roughly comparable to the prior year [40] Other Important Information - The company returned $331 million to shareholders through share repurchases and dividends in the first quarter, reducing share count by 2.3% [27] - The company has a strong balance sheet with ample capacity for capital allocation, providing flexibility for future investments [22] Q&A Session Summary Question: Impact of tariff prebuying on Q1 results - Management indicated that there was no significant pull forward due to tariffs in Q1, but some muted demand was observed in late March [50][51] Question: Working capital increase in Q1 - The increase in working capital was attributed to higher incentive compensation payments and customer rebate payments, rather than specific repositioning for tariffs [66] Question: Apparel demand change from positive to negative - The shift in apparel demand is primarily related to tariff issues, particularly concerning sourcing from China [73] Question: Share buyback strategy amid uncertainty - The company increased share buybacks due to confidence in intrinsic value, despite the recent tariff uncertainties impacting the outlook [78] Question: Logistics and supply chain capacity - The company has a robust network to support customers moving sourcing from China to other countries, with ample capacity to manage increased demand [87] Question: Raw material cost impacts - Management expects limited tariff impacts on raw materials, with a stable outlook for the raw material basket despite some inflationary pressures [115][125]