Yahoo Finance Avery Dennison Corporation (NYSE:AVY) Q1 2024 Earnings Call Transcript
Avery Dennison Corporation (NYSE:AVY) Q1 2024 Earnings Call Transcript April 24, 2024
Avery Dennison Corporation beats earnings expectations. Reported EPS is $2.29, expectations were $2.15. AVY isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. During this presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. Welcome to Avery Dennison's Earnings Conference Call for the First Quarter Ended on March 30, 2024. This call is being recorded and will be available for replay after 4:00 p.m. Eastern Time today and until midnight, Eastern Time, May 1st. To access the replay, please dial 1-800-770-2030 or 1-609-800-9909 for international callers. The conference ID number is 3299441. I'd now like to turn the call over to John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.
John Eble: Thank you, Mandeep. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled from GAAP on schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are subject to the safe harbor statement included in today's earnings release. On the call today are Deon Stander, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Deon.
Deon Stander: Thanks, John, and hello, everyone. We're off to a strong start to the year. In the first quarter, we again delivered sequential earnings growth, with earnings up significantly compared to prior year and slightly above our expectations. We grew volume in both segments, significantly expanded margins generated strong free cash flow and delivered significant growth in Intelligent Labels. Materials Group once again demonstrated its resilience, delivering significant volume growth and margin expansion both above expectations as downstream inventory destocking subsided and volumes continue to normalize. Label volume in Europe was particularly strong, as our teams managed through the now concluded finished port strike, which resulted in slight customer order pull forward in the quarter.
Volume in North America was up compared to prior year and improved significantly on a sequential basis, as inventory destocking moderated in the quarter as expected. Overall, emerging market volume was strong with particular strength in India and the ASEAN region and China was up mid-single digits in the quarter. Solutions Group delivered strong top line growth, driven by high-value categories and expanded margins despite apparel imports continuing to be below demand. While the apparel import trend has started to show slight signs of improvement in North America, retailers and brands remain cautious in their near-term sourcing plans, and we continue to expect apparel industry volumes to normalize midyear. Enterprise-wide Intelligent Labels grew mid-to-high teens in the quarter, with particular strength in non-apparel categories, while apparel began to recover.
In the quarter, logistics volumes, while strong were below expectations due to lower domestic parcel volume. Overall, the ability of our solutions to help address industry challenges, such as labor efficiency, waste, transparency and consumer connection in very large volume categories like logistics and food is increasingly resonating with customers. Key pilots and rollout are delivering significant value for our customers and compelling proof points for broader segment adoption. We continue to invest to capture the significant opportunity ahead as we grow the size of the overall industry, further advancing our leadership position at the intersection of the physical and digital. As we continue to see adoption in new categories and a rebound in apparel, we are targeting to deliver roughly 20% growth in our Intelligent Labels platform in 2024.
Stepping back, the underlying fundamentals of our business are strong. We're exposed to diverse and growing markets with clear catalysts for long-term growth. We are the industry leaders in our primary businesses with clear competitive advantages in scale and innovation. We have a clear set of strategies that have been key to our success over the long-term and across a wide range of business cycles, and we are uniquely positioned to connect the physical and digital to help address some of the most complex problems in the industries we serve. We remain confident that our strategies, along with our team's ability to execute in dynamic environments will enable us to continue to generate superior value creation through a balance of GDP-plus growth and top quartile returns over the long term.
In summary, we delivered a strong quarter in a still uncertain environment and reaffirm our full-year guidance to deliver strong earnings growth in 2024. I want to thank our entire team for their continued resilience, focus on excellence and commitment to addressing the unique challenges at hand. And with that, I'll hand the call over to Greg.
Gregory Lovins: Thanks, Deon. Hello, everybody. In the first quarter, we delivered adjusted earnings per share of $2.29, up 6% sequentially and up 35% compared to prior year, driven by benefits from higher volume and productivity. Compared to prior year, sales were up 4% ex currency and 3% on an organic basis as higher volume was partially offset by deflation related price reductions. Adjusted EBITDA margin was strong at 16.3% in the quarter, up 270 basis points compared to prior year. with adjusted EBITDA dollars up 25% compared to prior year and up 4% sequentially. We generated strong free cash flow of $58 million in the first quarter, up $129 million compared to prior year. And our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 2.3%.
We continue to execute our disciplined capital allocation strategy, including investing in organic growth and acquisitions, while continuing to return cash to shareholders. In the first quarter, we returned $81 million to shareholders through the combination of share repurchases and dividends. Turning to the segment results for the first quarter. Materials Group sales were up 2% ex currency and on an organic basis compared to prior year, driven by low-double digit volume growth, partially offset by deflation related price reductions and mix. Looking at Label Materials organic volume trends versus prior year in the quarter. North America was up mid-single digits and up mid-teens sequentially and as downstream customer inventory destocking subsided in the quarter as expected.
Europe was up significantly, more than 30%, as Q1 2023 was the low point in the destocking cycle. Volume was also strong sequentially, up low double digits. Emerging regions delivered strong volume growth as well with Asia up mid-single digits with particular strength in India and ASEAN and Latin America up mid-teens. Compared to prior year, sales in both Graphics and Reflective and performance tapes and medical categories were down mid-single digits. Materials Group delivered a strong adjusted EBITDA margin of 18.3% in the first quarter, up 4 points compared to prior year, driven by benefits from productivity, higher volume and the impact on margin percentage from deflation-related price reductions, partially offset by higher employee-related costs.
Regarding raw material costs, globally, we saw modest deflation sequentially in the first quarter as expected. Towards the latter part of the quarter, we began to see raw material cost increase in certain categories. Paper in Europe, in particular. As such, we anticipate modest inflation sequentially in the second quarter and are addressing the cost increases through a combination of product reengineering and pricing actions. Given the timing of these pricing actions and our annual employee wage increases, we expect Materials Group margins will moderate slightly in Q2. Shifting now to Solutions Group. Sales were up 10% ex currency and 6% on an organic basis, with high-value solutions up low-double digits and base solutions up low-single digits.
In the quarter, enterprise-wide Intelligent Labels sales were up mid-to-high teens, with strong growth in non-apparel categories, particularly logistics and general retail, and with apparel categories up both sequentially and compared to prior year. Solutions Group adjusted EBITDA margin of 16.1% was up 40 basis points compared to prior year driven by benefits from productivity and higher volume, partially offset by higher employee-related costs and investments. Margins were down sequentially, driven by apparel and logistics seasonality and higher employee costs, including higher incentive compensation accruals following lower payouts for 2023. We anticipate sequential margin improvement in the second quarter, driven by higher volume and additional productivity initiatives.
Now shifting to our outlook for 2024. For the year, we continue to anticipate adjusted earnings per share to be in the range of $9 to $9.50, up 17% at the midpoint, reflecting a more than $0.05 increase from our operational performance, offset by a similar size headwind from currency translation. And as you will recall, our outlook includes four key drivers of earnings growth in 2024, which are all on track: the normalization of label volumes early in the year, the normalization of apparel volumes mid-year, significant growth in intelligent labels as apparel rebounds and new programs continue to roll out and ongoing productivity actions. We've outlined additional key contributing factors to our guidance on Slide 12 of our supplemental presentation materials.
In particular, and focusing on the changes from our assumptions in January, we estimate roughly 4% organic sales growth, 50 basis points higher than our previous outlook due largely to the slightly higher pricing than previously anticipated. We continue to expect high-single digit volume growth, partially offset by deflation related price reductions for the year. We expect incremental savings from restructuring actions of more than $45 million. and we now anticipate a headwind from currency translation of roughly $5 million in operating income for the year, up from our previous outlook of modestly favorable. We estimate the Q1 customer pull-forward benefit that Deon mentioned earlier, was roughly $0.05 of EPS and will come out of Q2. Overall, in Q2, we continue to expect improvement in the underlying business.
And we anticipate EPS will be down slightly from Q1 due to the customer pull forward. We continue to expect earnings in the second half of the year will be stronger than the first half with apparel industry volumes normalizing midyear. In summary, we continue to strengthen our results as we advance our growth initiatives and our markets normalize. We continue to expect a strong rebound in 2024 throughout a variety of environments, and we remain confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. We will now open up the call for your questions.
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