Avery Dennison Corporation (AVY) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Quarter and Raised Guidance: Avery Dennison delivered a strong Q2 with EPS of $2.42, above expectations, and raised full-year guidance to $9.30 to $9.50 per share, targeting roughly 20% earnings growth.
• Materials Group Resilience: Demonstrated significant volume and margin expansion, with label volumes in Europe and Asia above expectations.
• Solutions Group Growth: Delivered strong top-line growth driven by both base and high-value categories, with retail apparel channel stronger than expected.
• Intelligent Labels Growth: Year-to-date, intelligent labels grew mid to high teens, with the company now targeting over 20% volume growth and mid-teens sales growth in this platform.
• Investment in Future Growth: Continued investment to capture significant opportunities ahead, further advancing leadership at the intersection of physical and digital.

Pessimistic Highlights

• Retail Volumes Soft: Retail volumes remain soft relative to long-term trends due to high inflation, not anticipating change in the second half of the year.
• Fourth Quarter Revenue Growth Lower Than Anticipated: Expected growth in Q4 to be lower than previously anticipated primarily due to the timing of customer rollouts.
• Uncertain Environment: Despite increasing outlook for the year, the environment remains uncertain, warranting caution moving through the second half.

Company Outlook

• Raised Full-Year Guidance: Now expects earnings of $9.30 to $9.50 per share for the year, targeting roughly 20% earnings growth compared to the prior year.
• Continued Investment in Growth: Focused on accelerating adoption in key verticals such as food and logistics, investing to capture significant opportunities ahead.
• Confidence in Long-Term Strategy: Confident that strategies and execution in dynamic environments will enable continued generation of superior value creation.

Q & A Highlights

• Q: On the solutions business and intelligent label side, is the revenue contribution pull down for this year tied to just the timing of rollout? (John McNulty, BMO Capital Markets)

  A: The lower anticipated revenue growth in Q4 is largely on volume changes due to customer rollout timing, with some impact from mix and deflation-related pricing impacts. Rollouts in new categories can be uneven, but conviction in the adoption technology remains high. (Deon Stander)

• Q: On the second quarter variances that drove the upside relative to previous guidance, was it as simple as just Europe and maybe apparel being a little bit better? (Ghansham Panjabi, Baird)

  A: Yes, the two big drivers of the beat in Q2 were better performance in materials Europe and the apparel segment. (Gregory Lovins)

• Q: Regarding the delay in customer deployment in 4Q, does it involve any other vertical besides logistics, and how are you addressing deflation? (Michael Roxland, Truist Securities)

  A: The delay is mostly in logistics and general retail, with some volume impacts from existing customer rollouts. Addressing deflation through relentless productivity and leveraging scale and innovation. (Deon Stander)

• Q: Has anything changed on the competitive dynamics within RFID to require greater pricing actions? (Josh Spector, UBS)

  A: Competitive dynamics are seen, but focus remains on maintaining and expanding leadership share through innovation and activating industries like logistics and food. (Deon Stander)

• Q: Given the timing issue in 2024 for RFID, could you envision growth of more than 20% in 2025? (Matt Roberts, Raymond James)

  A: Conviction in the long-term growth potential of the platform is strong, with significant runway in apparel, logistics, and food. More details on long-term volume outlooks to be provided at the Investor Day in September. (Deon Stander)

• Q: Can you describe what's going on in SG&A expense and how raw materials changed year-over-year in the second quarter? (Jeff Zekauskas, JPMorgan)

  A: SG&A expense up due to higher incentive compensation accruals. Raw material costs saw high single-digit deflation year-over-year, with paper prices driving a portion of the increase. (Gregory Lovins, Deon Stander)

• Q: How has the Vestcom business been performing this year, and how is it set up potentially in a move towards a bigger digital shelf environment? (Anthony Pettinari, Citi)

  A: Vestcom continues to perform well, contributing significantly and engaging in significant U.S. retailer deals. Positioned well for a digital shelf environment through its data composition engine. (Deon Stander)

• Q: How did margins fare in Materials relative to your initial expectations for the quarter? (George Staphos, Bank of America)

  A: Margins were driven by a combination of better performance in Europe, ongoing productivity, and restructuring savings, in line with the target of around 17% EBITDA for the Materials segment. (Gregory Lovins)

• Q: For the $50 million in cost savings, how would you allocate it to cost of goods sold and SG&A? (Jeff Zekauskas, JPMorgan)

  A: The savings are probably a relatively even split, with a bit more heavily weighted in the quarter on the cost of sales side. (Gregory Lovins)