Avery Dennison Corp Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Overall Progress: Reported sales grew 5%, adjusted EBITDA margin expanded 130 basis points, and adjusted EPS grew 19% at the high end of guidance. Both Materials and Solutions Groups delivered strong results.
• Strategic Pillars: Focus on driving outsized growth in high value categories, growing profitably in base businesses, leading at the intersection of physical and digital, effective capital allocation, productivity focus, and environmental/social responsibility.
• Materials Group: Strong top-line growth in 2024, with high value categories growing. Innovations like RecyClass-certified label solution and linerless solutions were highlighted, along with productivity initiatives.
• Solutions Group: Base business growth, Embelex growth, and Vestcom with new partnership expecting strong growth in 2025. Intelligent Labels with growth in apparel and general retail but logistics challenges.
• Long-Term Vision: Aim for GDP-plus growth and top quartile returns, with a strong portfolio, competitive advantages, engaged global team, and strong balance sheet.

Segment Performance

• Materials Group: In 2024, delivered strong top-line growth as markets recovered from inventory destocking in 2023, with high value categories up high-single digits. Fourth quarter sales were up 4% ex. currency and organic, with high value categories up high-single digits. North America, Europe, Asia-Pacific, and Latin America had organic volume trends. Adjusted EBITDA margin was 17% in the fourth quarter, up 80 basis points.
• Solutions Group: Delivered strong top-line growth and margin expansion. Base business grew mid-teens, while high-value solutions were down mid-single digits. Embelex grew ~25% including acquisitions. Vestcom had softer sales in 2024 but expects strong growth in 2025. Fourth quarter sales were up 3% ex-currency and organic, with adjusted EBITDA margin at 17.8%, down 40 basis points.
• Intelligent Labels: Grew 9% organically in 2024, with apparel up ~20% and general retail up >40%, but logistics down. For 2025, guidance is 10%-15% growth, contributing 1-1.5 points to total company growth.

Guidance

• For 2025, adjusted EPS is expected to be in the range of $9.80 to $10.20, up ~10% excluding currency translation.
• Anticipate 3%-4% organic sales growth with mid-single digit volume growth.
• Estimate a roughly $30 million headwind to operating income from currency translation and ~$40 million restructuring savings net of transition costs.
• Target 100% adjusted free cash flow conversion and migrating to a calendar year adds ~2 extra working days in Q4 2025.

Risks

• Logistics Customer Impact: Volume declines from a logistics customer, with impact factored into IL growth plans, and volume performance/transition difficult to predict.
• Tariffs: Limited direct exposure, but indirect exposure possible if higher costs on apparel lead to lower demand.
• Mix in Solutions Group: Impact on margins due to mix changes in high value solutions and small incremental costs.

Question and Answer

Q: Can you talk specifically about what your assumptions are for growth in logistics within IL for 2025. And just given the headlines today, there’s news about a large customer of yours seeing a large pullback in volume from one of their customers. What effect, if any, is that having on your IL growth plans, both in 2025 and longer-term?

A: Our plan for logistics segment is a slight decline between 2024 and 2025. The impact of the large customer's volume pullback has been factored into our 10%-15% IL growth range, with partnership volumes aligned for 2024 and adoptions likely continuing in 2026.

Q: On the Materials segment, what are you embedding for core sales growth for 2025? And how does that breakdown between volume and price?

A: Assumptions are based on macro forecasts, with 3%-4% range assuming GDP growth in the base business, mid-single digit volume growth and slight price within that.

Q: Can you talk about raw material cost inflation or deflation for 2025?

A: Stable environment with slight deflation in Q4 and Q1, cycle over, modeling some lagged deflation impact into Q1 and Q2 2025, then stabilizing.

Q: On apparel and general retail, so general retail accelerated in 4Q all the way from 20% to 40%. Maybe you could talk about what drove that acceleration and how we should think about that progression in 2025? And similarly, apparel decelerated, it seems you have easy comps on apparel in the first half. So how should we think about apparel growth in the first half versus the second half?

A: General retail acceleration due to a large retailer driving compliance in IL adoption. Apparel expects low double-digit growth in 2025, with acceleration throughout the year as programs roll out.

Q: Can you help us to think about the cadence of how those volume declines may roll through as we look through 2025? Is it lumpy? Or is it relatively smooth? Have you seen any of that impact already, whether it was in the fourth quarter or in early 2025?

A: Difficult to predict, but partnership provides significant majority share in the account, with volumes aligned for 2024 and continuing to provide leverage.

Q: I just wanted to ask on Solutions margins. I know sequentially kind of messy, but sales were up a pretty decent amount, but the EBITDA increase was relatively small. So I don’t know how much you attribute that to mixed, cost or increased investments that you’re doing. So one will happen in the quarter. And then two, as you look over the next year with the rollouts that we’re talking about, what do you think the incremental margins look like in solutions?

A: Mix impact in the quarter with high value solutions down, small cost impact from Mexico plant, and margins expected to expand with rollouts in 2025.

Q: Can you maybe just speak more to the initial capital allocation plans this year? I think in the slides, you talked about ample capacity for M&A and buyback. So I guess, just how does the M&A pipeline currently look? And then do the debt coming due this year, do you intend to refinance all of that or pay some of that off with cash generation?

A: Continue strategic M&A, balance sheet strong, with €500 million debt due in March refinanced with senior notes at 3.75%.

Q: Just wondering if you can remind us, does Avery ship a meaningful amount of products from Canada and Mexico in or out of the United States? I know there’s an RFID facility that Avery built in Mexico. I’m not sure if those come into the United States or if they could face tariffs. Just general thoughts on how tariffs could impact Avery as we watch these play out?

A: Limited direct exposure, global network allows flex production, with scenario planning in place for policy changes and geopolitical risks.

Q: I wanted to go to Slide 7, and as kind of a two-part question on Vestcom before I turn back into queue. So you say that in total, high-value categories this year will be two to 3.5 points of volume. IL, assuming your forecasts are accurate, that’s one to 1.5 points as I take it, which would leave one to two points residual. If I then look at Materials, Materials are saying you’re looking for mid-single-digit growth out of your high-value categories and materials, which is about over 1/3 of the Materials segment and that in turn is whatever, 3/4 of the company. So that’s another point plus that doesn’t leave a whole lot of growth, I’ve done the math right for growth in Embelex or Vestcom even though it sounds like你’re positive on both and certainly Vestcom, you talked about a new pharmacy customer that you’re bringing in. So help me square that circle in terms of if there is growth in Embelex and Vestcom, while we’re not necessarily seeing maybe more growth in high value. Relatedly, can you talk about what the growth in Vestcom should be? You gave some color down early and then up later. What growth are you looking for Vestcom this year? And what’s the contribution to earnings there?

A: Embelex expected to grow double digits, Vestcom expects strong growth in 2025 with new partnership, with high single to low double-digit growth and contribution to earnings.