Avery Dennison(AVY) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted earnings per share for Q1 2024 was $2.29, up 6% sequentially and up 35% compared to the prior year, driven by higher volume and productivity [13] - Sales increased by 4% excluding currency effects and 3% on an organic basis compared to the prior year, with adjusted EBITDA margin at 16.3%, up 270 basis points year-over-year [13] - Free cash flow was strong at $58 million, an increase of $129 million compared to the prior year, with a net debt to adjusted EBITDA ratio of 2.3% [14] Business Line Data and Key Metrics Changes - Materials Group sales were up 2% excluding currency and on an organic basis, driven by low-double digit volume growth, while Solutions Group sales increased by 10% excluding currency and 6% on an organic basis [15][17] - Intelligent Labels grew mid-to-high teens in Q1, with strong growth in non-apparel categories, while apparel began to recover [10][17] - The Materials Group achieved an adjusted EBITDA margin of 18.3%, up 4 points year-over-year, while Solutions Group's adjusted EBITDA margin was 16.1%, up 40 basis points compared to the prior year [16][17] Market Data and Key Metrics Changes - North America volume was up mid-single digits year-over-year, with Europe showing significant growth of more than 30% as destocking cycles ended [15] - Emerging markets, particularly India and ASEAN, showed strong volume growth, with China up mid-single digits [7][15] - Apparel imports in North America showed slight improvement, although retailers remain cautious in their near-term sourcing plans [8][30] Company Strategy and Development Direction - The company aims for approximately 20% growth in its Intelligent Labels platform in 2024, focusing on expanding its leadership position at the intersection of physical and digital [10][11] - The company is committed to investing in organic growth and acquisitions while returning cash to shareholders, with $81 million returned in Q1 through share repurchases and dividends [14] - The company maintains a disciplined capital allocation strategy and is focused on balancing top-line growth with margin sustainability [36] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the underlying fundamentals of the business, citing diverse and growing markets with clear catalysts for long-term growth [11] - The company reaffirmed its full-year guidance for strong earnings growth in 2024, despite uncertainties in the operating environment [12][18] - Management noted that while apparel industry volumes are expected to normalize mid-year, there remains caution in the market [30][66] Other Important Information - The company anticipates modest inflation in raw material costs in Q2, particularly in paper, and is addressing these through product reengineering and pricing actions [16][42] - The company has deepened and broadened its supply chain to mitigate risks from potential future strikes and supply chain disruptions [64] Q&A Session Summary Question: Insights on Intelligent Labels guidance and margin expectations - Management noted lower-than-expected volumes in logistics due to slower parcel shipments but remains confident in the growth potential of Intelligent Labels, particularly in apparel [22][23] - Solutions margins were expected to decrease sequentially due to seasonality and higher employee costs, but management anticipates improvement in Q2 [25][26] Question: Apparel market normalization and pricing impact - Management highlighted slight improvements in apparel imports and inventory levels, supporting confidence in normalization by mid-2024 [29][30] - Pricing impact in Q1 was down mid-to-high single digits year-over-year, with expectations for sequential pricing increases in Q2 [31][32] Question: Sustainability of Materials Group margins - Management indicated that volume increases and productivity initiatives are driving margin expansion, with a focus on balancing growth and capital efficiency [35][36] Question: Handling rising paper costs and inflation - Management expects it to take about a quarter to implement pricing adjustments in response to inflation, with visibility on materials markets remaining limited [41][42] Question: Internal indicators and market normalization - Management confirmed that the materials business is returning to normal, with destocking behind them, and apparel is also heading in the right direction [67][68]