Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Avery Dennison Corp (AVY, Financial) delivered a strong quarter with EPS of $2.42, exceeding expectations.
- The company raised its full-year guidance, now expecting earnings of $9.30 to $9.50 per share.
- Materials Group demonstrated resilience with significant volume and margin expansion.
- Solutions Group saw strong top-line growth and expanded margins, particularly in the retail apparel channel.
- Intelligent Labels platform experienced mid to high teens growth, with strong performance in general retail, logistics, and apparel.
Negative Points
- Retail volumes remained soft relative to long-term trends due to high inflation, with no expected improvement in the second half of the year.
- Label volumes in North America were slightly below expectations.
- Fourth-quarter growth is expected to be lower than previously anticipated due to the timing of customer rollouts.
- Materials Group margins are expected to moderate in the third quarter due to raw material cost inflation, particularly in paper prices.
- SG&A expenses increased by $55 million year-over-year, driven by higher incentive compensation accruals and the return of temporary costs.
Q & A Highlights
Q: Can you provide more details on the timing of Intelligent Labels rollouts and the impact on revenue?
A: (Deon Stander, CEO) Our original outlook called for lower revenue growth relative to volume growth. We now target 20% volume growth with mid-teens revenue growth. The timing of customer rollouts, particularly in new categories, has shifted, impacting Q4 revenue. However, customer conviction in the technology remains high, and we see strong pipeline growth.
Q: What are the expectations for Solutions Group margins, especially post-destocking in the apparel market?
A: (Gregory Lovins, CFO) We expect margins to improve as apparel volumes normalize. We saw a 70 basis point improvement in Q2 versus Q1 and anticipate further improvement in the second half. We aim to return to the 18%-plus EBITDA margin range seen before the destocking.
Q: What drove the upside in Q2 results, particularly in Europe and apparel?
A: (Deon Stander, CEO) The upside was mainly due to better-than-expected performance in our labels business in Europe and quicker-than-expected normalization in apparel volumes. Retailers have now met their inventory targets, leading to an uptick in import volumes.
Q: How is Vestcom performing, and what is its role in the shift towards digital shelf labels?
A: (Deon Stander, CEO) Vestcom continues to perform well, contributing high-value segment business with above-average margins. It provides significant access to food customers, aiding our Intelligent Labels initiatives. While there was some softness in the drug store segment, we re-signed a major US retailer and expect to add another large retailer by year-end. Vestcom's data composition engine is crucial for both analog and digital shelf labels.
Q: Can you elaborate on the competitive dynamics in the RFID market and the impact on pricing?
A: (Deon Stander, CEO) The RFID market is competitive, but we maintain and expand our leadership through innovation in process, product, and solutions. Our scale and global reach position us well, especially for new customer adoptions. We expect pricing to moderate as the technology curve matures, but the focus remains on value creation for customers.
Q: How did SG&A expenses and raw material costs impact the quarter?
A: (Gregory Lovins, CFO) SG&A expenses increased due to higher incentive compensation accruals, reflecting our improved performance. Raw material costs saw low single-digit inflation sequentially but high single-digit deflation year-over-year, driven by paper, chemical, and film costs.
Q: What are the expectations for cost savings and their allocation between cost of goods sold and SG&A?
A: (Gregory Lovins, CFO) Cost savings are roughly evenly split between cost of goods sold and SG&A. We achieved savings through restructuring actions and ongoing productivity improvements, particularly in our materials business.
Q: What is the outlook for RFID growth in 2025, considering the timing issues in 2024?
A: (Deon Stander, CEO) We have high conviction in the long-term growth potential of RFID, driven by significant opportunities in logistics and food segments. We will provide more details on our strategic plans and outlook at our Investor Day in September.
Q: How did materials segment margins perform relative to expectations, and what were the key drivers?
A: (Gregory Lovins, CFO) Margins were higher than expected due to stronger top-line performance in Europe, restructuring savings, and ongoing productivity improvements. We aim to maintain or exceed our 17% EBITDA margin target for the materials segment.
Q: How is the company addressing deflation in Intelligent Labels and improving productivity?
A: (Deon Stander, CEO) We leverage our expertise in roll-to-roll process manufacturing and material science innovation to drive productivity and cost efficiency in Intelligent Labels. This approach helps us maintain a competitive edge and create value for customers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
