Avery Dennison - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was broadly in line: net sales $2.15B (-0.1% reported; +2.3% organic), adjusted EPS $2.30 (+0.4% YoY; ~+4% ex-FX), and margins stable; modest EPS underperformance versus consensus was offset by slight revenue outperformance. S&P Global consensus for Q1 was EPS $2.315*, revenue $2.146B*, EBITDA $353M*; actuals were EPS $2.30, revenue $2.148B, EBITDA $352M (near inline overall)* [GetEstimates].
• Materials Group delivered solid volumes and strong margins; Solutions Group posted 4.9% organic growth with apparel strength and logistics softness; enterprise Intelligent Labels grew mid-single digits with food and apparel up and logistics down as expected.
• Guidance pivot: management withdrew full-year guidance, moving to quarterly due to tariff/macro uncertainty; Q2 adjusted EPS guided to $2.30–$2.50, with sales roughly flat YoY and mid-single-digit decline expected in apparel; direct tariff cost impact is low single-digit and mitigated via surcharges/sourcing.
• Capital allocation remained active: $331M returned to shareholders, including $262M repurchases of 1.4M shares; dividend raised ~7% to $0.94/quarter (payable June 18, 2025).
• Stock narrative catalysts: tariff/China sourcing dynamics (risk to near-term apparel volumes), Intelligent Labels momentum in food and general retail, and quarterly guidance shift (signals caution, but execution consistent).

What Went Well and What Went Wrong

• What Went Well

  • Intelligent Labels momentum in food and apparel; management highlighted Kroger collaboration and broader pilots, with IL up MSD and “clear competitive advantages” in scale and innovation.
  • Materials Group margins held up: adjusted operating margin 15.6% and adjusted EBITDA margin 17.7% (up 70 bps sequentially), with productivity and volume offsets against pricing/raw materials.
  • Capital returns and balance sheet: $331M returned, net debt/EBITDA 2.3x; CFO reaffirmed disciplined buybacks when shares trade below intrinsic value.

• What Went Wrong

  • Q1 adjusted FCF was negative ($53.1M) on typical seasonality and higher incentive/rebate payments; working capital was heavier versus prior year.
  • Tariff-driven uncertainty: shift to quarterly guidance; apparel expected to decline mid-single digits in Q2; direct tariff impacts are small but indirect demand effects less certain.
  • IL logistics remained soft as expected; Embelex down mid-single digits; management flagged normalization and pilots likely converting in 2026, not 2025.

Transcript

Operator (participant)

Welcome to Avery Dennison's Earnings Conference Call for the first quarter ended on 29 March 2025. This call is being recorded and will be available for replay after 4:00 P.M. Eastern Time today and until midnight Eastern Time, April 30th, 2025. To access the replay, please dial 800-770-2030 or 609-800-9909. For international callers, the conference ID number is 585-5706. I'd now like to turn the call over to John Eble, Avery Dennison's VP of Finance and Investor Relations. Please go ahead, sir.

John Eble (VP of Finance and Investor Relations)

Thank you, Regina. 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 A4 to A8 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 made 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 (President and CEO)

Thanks John and hello everyone. We delivered a strong first quarter in a dynamic environment with earnings per share up 4% ex-currency and in line with expectations. We grew volume in both segments with strong growth in high value categories and expanded overall margins. Materials Group delivered solid volume growth and strong margins as we continue to drive productivity across our businesses. Our strategy to expand our position in high value categories, which makes up more than a third of Materials Group sales, is working. We delivered high single digit organic growth for these products in the first quarter with particular strength in Graphics and Reflective Solutions and Industrial Tapes. Our leadership position in our base business is strong as we continue to differentiate ourselves through quality and service, strong material science and process technology capabilities, and sustainable innovation over the long term.

In the first quarter, overall label volume in North America was up compared to prior year and improved significantly on sequential basis as customer working capital actions at year end normalized as expected. Volume in Europe was up sequentially and down slightly compared to prior year in part due to the strong first quarter last year that benefited from some customer order pull forward related to the Finnish port strike in 2024. Overall emerging market volume was solid with particular strength in the ASEAN region while volume in China was comparable to prior year. In the Solutions Group we delivered strong top line growth and margin expansion driven by strong growth in the base business and low single-digit growth in high value solutions. Overall apparel growth was strong, up mid-single digits within high value solutions.

Vestcom, our market leading suite of productivity and media solutions for the retail shelf edge, delivered strong growth driven by both existing customers and the rollout of our solutions at CVS Health. This new program is on track and underway. Embelex, our high growth platform driven by personalization and fan engagement in team sports and the performance athletic category, was down mid single digits in the quarter driven by softer sales for large U.S. performance brands and new program launches that benefited Q1 last year. We expect Embelex growth to strengthen later this year, partially driven by the performance apparel brands preparing for the 2026 World Cup.

Turning to enterprise wide Intelligent Labels, we grew mid single digits on an organic basis in the first quarter in line with expectations, driven by strong growth in apparel and food categories, partially offset by a decline in logistics as expected. In food, our strategic collaboration with Kroger focused on enabling more frequent and accurate inventory information to maximize freshness, reduce waste, and improve the consumer and associate experience is on track. We are actively working on other large scale grocery pilots in our pipeline. In logistics, our solutions continue to deliver strong returns for customers, helping drive increased routing accuracy and labor efficiency. We are actively engaged on key projects in the pipeline and do expect more industry adoption through the cycle. As previously discussed, we do not foresee another large scale rollout in 2025 in apparel and general retail.

Key new programs are on track. Retailers are adopting embedded technology to increase the return on their overall RFID program, unlocking additional value from loss detection and self checkout, and general retailers are driving supplier compliance in new categories. It is clear that physical items increasingly need a digital identity to help solve key industry challenges. Our competitive advantages here are clear. We provide labeling materials that both decorate and provide information on most of the world's items, and we are market leaders in the most ubiquitous, broadly applicable sensing technology in UHF RFID. This, combined with our innovation, leadership, and go to market strategy, uniquely positions us to lead and win in multiple industry segments with more than 350 billion units of opportunity at the nascent point of industry growth.

As such, we continue to invest to capture the significant opportunity ahead as we grow the overall industry through both the Solutions Group as well as our channel partners in the Materials Group. Shifting back to the total company level. While we delivered a strong first quarter and our underlying business is on track, macro uncertainty is elevated due to an evolving and dynamic trade policy environment and near term global GDP growth outlooks have continued to reduce. While it's not clear how things will play out, the recent change in tariffs will likely have both direct and indirect impacts to our business. We expect the direct impacts to our material purchases to be relatively low and largely mitigatable. Greg will provide some more details on this front momentarily. The indirect impact of trade policy on macro demand is more uncertain, in particular for discretionary categories.

Taken together, it is more difficult to predict and forecast full year results and as such we have moved to provide quarterly guidance as we have done in the past. We are prepared for a lower volume environment should it happen and have initiated our proven scenario planning playbook across the organization to maximize opportunities and protect earnings in various environments. We are initiating actions such as activating temporary belt tightening, identifying share gain opportunities and identifying trigger points for additional structural actions in the event of a broad economic slowdown. Stepping back, we have a proven track record of delivering strong results across cycles due to the strength of our overall franchise. We are industry leaders in more than 80% of our portfolio. In large, growing and diverse markets we are competitively advantaged including a global scale footprint, innovation and go to market strategy.

We have catalysts for strong growth over cycles in multiple high value categories that provide differentiated growth potential and in emerging markets. The durability of our portfolio, which is stronger than ever, and the agility of our global team provides us multiple levers to deliver in a broad range of scenarios. Materials Group has demonstrated strong resilience through and across cycles and has limited direct tariff exposure due to the regional nature of the business. Solutions Group is less cyclical than it was in previous downturns, with roughly a third of its end market exposure now outside of apparel. Lastly, we have a strong balance sheet with ample capacity and a disciplined approach to capital allocation that provides significant investment flexibility to drive earnings growth and expand EVA over cycles. Taken together, these elements enable us to continue delivering strong results over cycles.

I want to thank our entire team for their continued resilience, focus on excellence and commitment to addressing the unique challenges at hand. With that, before I hand the call over, I want to officially welcome Greg back. It's really great to have him back and healthy and also take a moment to thank Danny Allouche not only for stepping in as interim CFO while Greg recovered, but for doing an excellent job. Danny has now reverted back to focusing on strategy and M&A. With that, over to you Greg.

Greg Lovins (SVP and CFO)

Thanks Deon, and yes, a big thanks to Danny for stepping in while I was out, and I also want to thank everyone in the investment community who reached out while I was gone. It is definitely great to be back. In the first quarter, we delivered adjusted earnings per share of $2.30, up 4% excluding currency translation compared to prior year, as benefits from higher volume and productivity were partially offset by the net impact of pricing and raw material cost, as expected. Compared to prior year, sales were up 2% on an organic basis, as higher volume was partially offset by deflation related price reductions. Adjusted EBITDA margin was strong at 16.4% in the quarter, up 10 basis points compared to prior year, with strong margins in both segments.

Free cash flow was roughly -$50 million in the quarter and in line with our expectations. You may recall that free cash flow in the first quarter has historically been negative, driven primarily by the timing of customer rebates and employee incentive payments. Our balance sheet remains strong with the net debt to adjusted EBITDA ratio at quarter end of 2.3, which includes paying down EUR 500 million of debt which matured in March. We continue to execute our disciplined capital allocation strategy including returning cash to shareholders. In the first three months of the year, we returned $331 million through the combination of share repurchases and dividends and reduced our share count by 2.3 million shares compared to the same time last year.

Turning to segment results for the quarter, Materials Group sales were up 1% ex-currency and on an organic basis driven by low single-digit volume and mix growth, partially offset by deflation-related price reductions. Organically, high-value categories were up high single digits, including strong growth in our Intelligent Labels Inlay channel, and the base business was down low single digits in the first quarter. We reclassified roughly $10 million of Intelligent Labels sales from the Solutions Group to the Materials Group to better reflect our unique advantage in providing RFID materials to our strong converter network to further drive growth of Intelligent Labels in new categories. Overall, Label materials volume was in line with the expectations. Looking at regional volume growth versus prior year, in the quarter, North America was up low single digits.

Europe was down low single digits as we lapped a strong Q1 2024 which included the pull forward Deon noted earlier. Asia Pacific was up low single digits and Latin America was also up low single digits compared to prior year. Both Graphics and Reflectives and Performance Tapes in Medical delivered strong results and were up high single digits. Organically, Materials Group delivered a strong adjusted EBITDA margin of 17.7% in the quarter, up 70 basis points sequentially and down 60 basis points compared to prior year as benefits from productivity and higher volumes were more than offset by the net impact of pricing and raw material input costs due to the timing of deflation related price reductions through 2024. Regarding raw material costs globally, we saw modest deflation sequentially in the first quarter.

Our current outlook is for modest inflation sequentially in the second quarter with higher tariffs impacting us by mid-Q2. Where applicable, we're implementing surcharges to account for these higher costs. Shifting to Solutions Group, sales were up 5% on an organic basis with Base Solutions up high single digits and High Value Solutions up low single digits. Within High Value Solutions, Vestcom was up high single digits driven by strong growth with both existing customers and new program rollouts. Embelex was down in the quarter as Deon noted and we expect to return to strong growth in this platform as we move through the year.

Enterprise Wide Intelligent Label sales were up mid single digits in the first quarter and in line with our expectations with strong growth in our converter channel, mid single digit growth in apparel and strong growth in food partially offset by a decline in logistics. As expected, Solutions Group delivered strong adjusted EBITDA margin of 17.2%, up 110 basis points compared to prior year as benefits from productivity and higher volume were partially offset by growth investments. Now shifting to our outlook, we're working to mitigate the direct impacts of the recent tariff announcements while also activating our proven playbook to manage throughout various scenarios as it relates to the direct impact of tariffs. In both the current rate scenario as well as the scenario where the previously announced tariffs revert after the 90 day pause, a relatively small proportion of our material purchases are impacted, less than 10% globally.

It's also important to note that the vast majority of our imports and exports between the U.S., Canada and Mexico, including RFID inlays, are USMCA compliant. The overall direct cost impact will likely represent low single-digit inflation on our total raw material purchases. In order to mitigate the potential impact, we are implementing some sourcing adjustments and pricing surcharges. The indirect impact of trade policy on macro demand is more uncertain. The majority of our portfolio is anchored in consumer staples, but we also serve some more discretionary markets such as industrials, durables and apparel. In apparel, retailers and brands serving the U.S. market are assessing sourcing, supply chain and pricing strategies, especially for garments produced in China. We estimate our apparel label sales in China for garments to be exported to the U.S. are roughly $350 million annually, which represents just 4% of total company revenue.

Taking all of this into account, our visibility for Q2 is currently stronger than for the back half of the year. For the second quarter of 2025, we expect adjusted earnings per share to be up sequentially in the range of $2.30-$2.50, with sales growth in the majority of our businesses to be offset by a mid single digit decline in apparel, resulting in overall sales roughly comparable to prior year. We expect the sequential increase in earnings will be driven by our traditional seasonality as both the calendar and lunar New Year impacted our Q1, as well as ongoing business momentum in some of our high value categories such as Vestcom and a sequential currency benefit. Assuming current rates, this growth will be partially offset by our annual wage inflation cycle that started on April 1st and the impacts of tariffs on apparel revenue that we've discussed.

We've also outlined some contributing factors to our full year results on Slide 13 of our supplemental materials to highlight a few of the key drivers. We now anticipate a roughly $7 million headwind to operating income from currency translation, assuming recent rates, which is better than the roughly $30 million headwind we expected at the beginning of the year. We now expect restructuring savings net of transition cost of more than $45 million, which is up $5 million from our expectations a quarter ago. We continue to expect strong free cash flow across a wide range of scenarios. In summary, we delivered a strong quarter in line with our expectations through a dynamic environment. We are well prepared for a variety of macro scenarios and expect to grow earnings sequentially in the second quarter.

We are well positioned to continue to deliver exceptional value to all of our stakeholders through our disciplined strategies for long term profitable growth and disciplined capital allocation. With that, we will open up the call for your questions.

Operator (participant)

Ladies and gentlemen, if you would like to register a question, press star followed by the number one on your telephone keypad. You will hear a confirmation of your request. If your question has been answered and you would like to withdraw your registration, please press star one again. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. Our first question comes from the line of Ghansham Panjabi with Baird. Please go ahead.

Ghansham Panjabi (Senior Research Analyst)

Hey guys.

Good morning Greg. Welcome back. It's good to hear your voice again, I guess. First off, you know, as it relates.

To the first quarter, you know, maybe give us a frame of reference as it relates to how you think tariff, pre buying, etcetera might have impacted the first quarter.

You know, I think apparel was up mid-single digits and then you're calling out Q2 is down mid-single digits.

Just, you know, any more color on there would be great.

I know you're staying away.

From annual guidance, but you know, for RFID specifically, apart from just the tariff uncertainty, is there anything good or bad, you know, plus or minus versus your.

Outlook, you know, three months ago as.

It relates to 2025 in terms of new programs and so on and so forth? Thank you so much.

Deon Stander (President and CEO)

Hey Ghansham, let me address that. In the first quarter we actually didn't see on aggregate any really pull forward because of tariffs overall. If you recall the sequence of events that led through each announcement and somewhat of the retraction of the announcements, we were anticipating seeing some of our customer base adjust as they went through, but we didn't actually see any material impact at all in the first quarter. What we did see in the really last few weeks of March, if you recall, post the 20% announcement of tariffs to China, we did see some retail brands, apparel brands, look at their sourcing decisions, their pricing decisions in that last couple of weeks that we saw slightly more muted demand there.

If you then look in the second quarter, our anticipation as you said, is we're looking, we're expecting sort of mid-single digit declines for apparel. What we're seeing so far at the start of the quarter is roughly about high-single digit declines. That's based on the discussions we're seeing with brands and retailers really anchored around what are they trying to do to resolve the significantly high tariff rates they see currently in place with China. They're really focused on three actions. One is what sourcing decisions can they make to move goods. We're actively involved with them in that. That's actually one of our inherent strengths. Because of our global network, we see advantage for us in that regard.

The second is that they're thinking through how do they leverage supplier partnerships in the whole ecosystem to help offset some of those additional costs. The third element is really as they think through what are they going to do in terms of pricing strategy. This is an area where they're actually holding largely on some of their pricing decisions. If you think through the supply chain, a lot of what we provide them is price ticketing, for example, that has a particular price point, retail price point, some couple of months typically in advance of when it hits the market. They have to make decisions to determine what they're actually going to price these garments at. That's really why there's a bit of a slowdown.

We anticipate that as they make these decisions in the very, very short term that we'll continue to see orders rise. Still anticipating, given the visibility, to have that apparel be sort of mid single digits decline for the quarter. On our material side, for what it's worth, we haven't seen really any impact of tariffs so far. We've not seen really any pull forward of orders either in the first quarter and order patterns for the first three weeks so far, as expected. Perhaps a little bit of elevated volume in North America. That's probably because we are discussing potential price surcharges. We don't expect that to be material. Anyway, turning to your second quarter on RFID, I will say that absent the tariffs and the macro uncertainty, the underlying business is on track with what we thought it was going to be.

You recall that 10%-15% range that we gave? Again, one of the reasons why we're actually only focused on the second quarter is because even in that 10%-15% range, apparel still makes up roughly 60%-65% of our overall sales. Given the uncertainty over there, we thought it better that we focus on the second quarter and what we know now. If I look across the rest of the segments, Ghansham, I don't see any change in the growth programs that we have planned, which as you recall we said would scale during the year. They were all on track in the way that we'd anticipated and remain very confident in those overall.

Operator (participant)

Our next question will come from the line of John McNulty with BMO Capital Markets. Please go ahead.

John McNulty (Managing Director and Chemicals Analyst)

Yeah, good morning. Thanks for taking my question. A question on the working capital front. It had a relatively decent jump and I know normally that happens in the first quarter, but it seems bigger than usual. Is that a little bit of repositioning your own products and building up inventory kind of ahead of tariffs? If not, can you help us to understand maybe why we saw that ramp up the way that it did? Just another somewhat related issue on the low-single digit impact from tariffs. How do you anticipate dealing with that? Is it again, some of it maybe moving working capital around ahead of it? Do you expect to be able to get it all through in pricing?

I know you mentioned a little bit of price, a little bit of efficiency improvements, but I guess how quickly can you get that pricing through to help offset some of the tariff headwinds?

Greg Lovins (SVP and CFO)

Yeah, thanks for the questions, John. On working capital, I would not say there is anything really specific to call out. I think when we look at, you know, DSOs and TURNS and DPOs, each of them had slight increases or decreases from a DPO perspective versus prior year, but nothing really significant across the businesses. I would say that we had some purchases in the fourth quarter of inventory that got us future rebates that had some impact on our inventories as we exited last year and the payables went out in the first quarter here this year.

There's a little bit of an impact for that, but nothing really major that I would look at there. You know, as I talked about in the prepared remarks, you know, we had incentive compensation payments this year obviously significantly higher that went out in Q1 of this year than it was in Q1 of 2024 given the destocking and things we had in 2023 and the impact that had on incentive comp for that year. That was a big piece of it. As well as just higher customer rebate payments that went out in the first quarter of this year given the improvement in 2024 versus 2023 as well. Both of those things higher order of magnitude this year than they were a year ago in Q1.

I think when we talk about the tariffs, as you said, you know, our expectation is if everything as of right now and if they go back to the higher rates in a few months, both of those scenarios result in basically low single digit impact on us from a tariff perspective. We're looking at pricing surcharges as we talked about, as well as looking at wherever we can shift sourcing to mitigate some of the tariff impacts. It will be a combination of those things that we're looking at, not 100% pricing, but certainly in the U.S. looking at pricing surcharges that we would expect to go out relatively soon. Now we do have some inventory in the second quarter, so we do not really start to see a big impact from that until we get kind of midway through the second quarter here.

Operator (participant)

Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Jeff Zekauskas (Analyst)

Thanks very much. I just want to see if I can describe what you said about the change in apparel demand from positive mid single digits to negative mid single digits in the second quarter. Is this mostly a China event or does it have to do with other Asian countries? That is, do you see it more as a tariff event rather than an economic event? For Greg, you know, the company bought back a lot of stock in the first quarter. You spent $260 million, which is more than you spent for the entire 2023 and 2024. At the same time, what you did is you stopped providing earnings guidance for 2025 and can only see a quarter ahead. Why did you buy so much stock even though the outlook seems to be cloudier.

Deon Stander (President and CEO)

Thanks, Jeff. Yes, the change in from mid-single digit to sort of negative mid-single digits overall is based on what we can see at the moment. I talked roughly about what we saw initial order demand looks like as we're working with our customers to determine how best we can help them make sourcing changes. Think through the entirety of how can I help them offset some of these costs, but also thinking through where we can help them do pricing changes for garments, whether it's in country or actually through the supply chain, even back into the United States. Largely this is really a China tariff issue at the moment. That's the way I characterize it. I think Greg made the point of saying we have about $350 million.

Roughly 4% of the company's revenue is on apparel tags and labels that get attached to garments that get exported to the United States. What we're seeing with customers over there is trying to determine how much they can move to other sourcing locations. We've done that historically for them for a very long time with their prime partner in that we actually see advantage for us in that. The second piece is how do they then also make decisions on what they're going to price point these into the markets ultimately when they arrive stateside? I don't see it very easy to distinguish between if it's a tariff issue or if it's an economic issue because ultimately any high tariffs of that order of magnitude will have likely consumer volume impact at some point.

Again, it's on a very small part of our business overall and that's the way I characterize it. I think it also highlights, at least for me, Jeff, just the broad strength of the franchise that we have. You know, this is a smaller part in this. We have a significant opportunity in some of our high value category growth areas. Our base businesses across the world outside of apparel index China continue to do well. Competitive advantage over there. We have a strong balance sheet that we're going to leverage and move as we move forward through the cycle as well.

Greg Lovins (SVP and CFO)

All right, thanks,. Jeff, on your question on share buyback, nothing's really changed from our approach to capital allocation. I think you've heard us talk about that many times and how we think about capital allocation specific to share buybacks. Our focus there over the years has been on, and you know, focused on generating a return on our share buybacks. I think when you look at, we started to increase purchases in late fourth quarter as well as Q1 coincident with the share price decline that we saw at that point in time with continued confidence ourselves in the intrinsic value of the company and the stock. From that perspective, we increase the pace of our buybacks accordingly as we think we can then generate a strong return. That's been our focus and how we think about buybacks.

Of course we use a grid based approach and we're disciplined in that. You know, when we think the share price is in a period where it's declining and well below our intrinsic value, then we'll look to accelerate our purchases. That's what we've done here in the last few months. I think the uncertainty that we're talking about with 2025 and full year guidance really came about in the last two or three weeks with the increased pace of tariffs and the changes that have happened there. That's a little bit different than I think our approach. You know, we'll continue our approach on buyback. I should say we'll continue with our capital allocation strategies we always had.

I wouldn't say that we're necessarily going to buy $250 million of shares every quarter, but of course we're going to continue executing our strategy the way we.

Have in the past.

Operator (participant)

Our next question comes from the line of George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director)

Thanks everyone. Good morning. Great to hear you back, Greg. And also congrats to Danny. My question's on again. Solutions and apparel tags. If we think about the amount of volume or revenue that is looking to move from China to elsewhere, recognize there's going to be some inertia. Would you be able to satisfy that from your existing locations in other countries right now or would there be some leakage that is either because you don't have the capacity in place or for some other reason and if so, would there be a way to quantify that? Related question, we totally understand that the uncertainty might lead to delays in some of the pilots. I just want to make sure that I'm understanding it correctly.

You know, coming into the year, the outlook for IL growth was 10-15% with the lower end of that range, Deon, seemingly being relatively baked in based on what you knew right now. Can you help us understand how that may have changed or what the outlook should be as we sit here today, given again so much volatility in the last few weeks?

Thank you.

Deon Stander (President and CEO)

Sure. On your first question, George, what we've historically seen in time is, and this probably means the last decade, is we've helped customers move their sourcing for apparel into other countries. Bangladesh, Vietnam, Cambodia, Thailand, Latin America, Eastern Europe. We've actually over that time built up a fairly robust network. It's one of the things I keep reiterating. It's one of the advantages we have and some of the reasons partners work with us in that regard. I will also say that there is still a substantial amount of garments still being sourced in China. Its vertical supply chain that it has in that country combined with highly efficient manufacturing still makes it an attractive destination to source apparel in, even relative to some other lower cost environments.

Particularly because in some of those other countries there's not still yet the full value chain established domestically. There's not every piece of componentry that you will need to make garments. You are still having to export in those countries as well. Typically when we see movements, we have more than ample capacity to be able to deal with that. We do that both through a typical approach in terms of productivity, improving our own processes, but also just in terms of shift management and as we continue to invest in assets where we see higher returns as well in the scale of the magnitude. If the existing tariffs stay at the same rate, we anticipate, you know, roughly 10% or so of what remains now in China to still be probably exported back out to some other regions.

This is largely as it relates to U.S. volume and we know within our network we can manage it across our network. Again, I'll point to whether the industry has enough garment manufacturing and vertical capacity to absorb that approach. There's probably a question mark there. It will also take time to stand up factories for garment manufacturing to stand up those supply chains. I think there's an advantage for us there and we're involved in conversations with all of those customers. Just turning to IL, I was very clear when we talked through this last time. I saw that 10% is really strong certainty around that, largely because it was based on existing market for existing customers where they were either growing or they had new programs that were already in rollouts. We were just fulfilling those programs.

The additional 5% we talked about was for new program rollouts, not speculative, but planned for a specific time. The variability could come if those timing changed in that 10%. Clearly we still have a very large portion of apparel, George, that's anchored at roughly 60-65% is still apparel. Any volatility or uncertainty as it relates to apparel, particularly the applicability of tariffs, now makes it more difficult to understand. That is why I made the point. Absent the tariff implications, our IL business, the underlying IL business, is on track. The programs that we plan to roll out are rolling out, the programs that we are destined to roll out, yet from a timing perspective, still look to be on that case.

We're seeing significant increased interest from our food channel on the strength of what they've seen at the Kroger rollout, which so far we're in 25% of their stores on track for the rollout over there. We continue to see really strong interest from the pilots that we have in Food about you expanded even further in logistics, we continue to see further interest as well, although I will still say that's more likely to be a 2026 application rather than the 2025 application. In general retail, we've seen higher levels of retailers wanting to drive compliance. It's one of the reasons we've stood up our Materials Group channel program because we access all of those channel partners and we've made it a clear focus for ourselves to enable them to be a mechanism for activating industry adoption from which we will benefit significantly as well.

Operator (participant)

Our next question will come from the line of Mike Roxland with Truist Securities. Please go ahead.

Mike Roxland (Managing Director of Equity Research)

Yeah, thank you, Deon, Greg and John for taking my questions. Greg, nice to have you back and wishing you continued good health.

Greg Lovins (SVP and CFO)

Thank you.

Mike Roxland (Managing Director of Equity Research)

Just two quick ones for me. Just in terms of Intelligent Labels supply globally, it seems to be increasing competitive dynamic obviously has negatively impacted the logistics vertical with the potential for further negative impacts. Just like a sense like. Yeah, like what are you doing to try to. To mitigate any further share erosion in logistics?

And then.

Yeah, just also following up on a comment you just made in response to George's question about deployments for 2026. It sounds like there is something in the pike with respect to 2026 with logistics. Any additional color you could give us around deployments that could potentially happen next year? Thanks.

Deon Stander (President and CEO)

Sure. Mike, yeah, I think I've spoken previously about where we see the overall competitive landscape to be for RFID. I'll just remind everybody that, you know, it's not just in a singular node, it's a series of nodes. The chip manufacturing, that's not us, there has been taking that chip and putting it onto an inlay specifically designed and attenuated for its applicability. Whether it's food, logistics, apparel, whatever the case may be. We are world leaders in that with much of our intellectual property centered there. You are going to have to manage data on that device. Again, we're world leaders in that. You have to have some form of hardware or software, that hardware that reads it, and we play partner in that area.

On the software side, there is a whole stack of software options that enable you to make sense of what that data means, whether it is applications for reading, whether it is ERP systems. We selectively play, have bought and have stood up applications, including our atma.io . I would say across that ecosystem, Mike, we remain the go-to person to enable large-scale rollout and adoption. It is also typically when that rolls out that we tend to be the only or largely predominant supplier. In time, as sourcing decisions change within brands, retailers and customers, they may bring on a secondary or third supplier, but we tend to remain the majority supplier. That is what we have seen in every instance in apparel. We have seen this in logistics and I know, I suspect in time as the other segments are all be similar.

Our aim is to make sure we're maintaining our majority share because we will disproportionately benefit then as these new segments roll out. We're doing that really in three things. We're continuing to really lean into our innovation capability. During this year we will see new innovation, proprietary innovation that we bring to market that is going to help unlock some of these new segments even further. We will benefit from that. We lean into our process engineering role to roll manufacturing capability, producing billions of items to maintain our low cost leadership in the world in this area. That also provides us with competitive advantage. I think the final thing is that we've learned over time as the team that most people call for the first time out, how to position the value creation that this technology will provide.

We back that up with support throughout the network, whether you're at source, whether you're in garments of sourcing, food sourcing, whether you're in the supply chain or even in retail where we help retailers do cultural adoption. We continue to see that as a predominant and key focus for us is maintaining our advantage in that area. I think on the color as it relates to 26 and logistics. All I will say, and I'm not going to comment on individual programs, Mike, is that in the extended pilot that we currently have going outside of UPS, which is our largest customer, every one of those pilots is actually extended slightly, some of them fairly largely, and they're still in the pilot phase where they're testing the returns that they will see largely anchored on labor efficiency or routing accuracy.

They're all directionally there and there is not one of the large logistics providers that we're not engaged with now. If things continue to progress in the way they are, I don't see why we've not seen another progress moving forward as we go through the next year or so. Again, that will be subject to how that particular customer sees it as a priority within all of their other strategic priorities.

Operator (participant)

Our next question comes from the line of Mike Leithead with Barclays. Please go ahead.

Mike Leithead (Director of Equity Research)

Great, thanks. Good morning team. Wanted to follow up on the raw material side. I think you talked about inflation going into 2Q. You obviously flagged some of the tariff impact, but we've also seen chemical prices like propylene come down quite a bit of late. Can you just walk through the broader raw material basket and what you're seeing in the key areas and how that's sort of all netting out to inflationary and 2Q.

Thanks.

Greg Lovins (SVP and CFO)

Sure. Yeah, I think when we look at our pure raw material basket, we've got kind of sequentially looking forward, relatively stable, maybe we had low single-digit inflation in the first quarter from Q4 to Q1, mostly paper, a little bit on our films and chemicals, deflationary as well. I think when we look forward to Q2 we see relatively stable outlook, a little bit of, maybe a little bit of deflation from our raw material basket potentially offset by some of the tariffs, you know, that I talked about earlier, that price start impacting us here in the middle of the quarter. I think from that perspective overall it's probably relatively stable is how we're thinking about it right now.

Most of our dynamics over the last few quarters have really been on the paper side, more so than on the chemicals or film side for us.

Operator (participant)

Our next question comes from the line of Matt Roberts with Raymond James. Please go ahead.

Matt Roberts (Research Analyst)

Hey, good morning Greg. Welcome back. Glad to hear all is well. Deon, you sound confident in the new program rollout and I don't want to belabor questions already brought up too much. Thinking about the RFID supply chain more broadly, what type of cost impacts or tariff exposures are your suppliers or partners in the RFID value chain facing that could drive costs higher for the end retailer, whether that be wafers for circuits made in China and whether those are exempt or not or anything on the reader or printer side. Do any cost increases there add uncertainty into your partners' own planning and the timing of those rollouts or have those investments really already been made from retailers? That makes the timing somewhat immune to ongoing uncertainty. Thanks for taking the question.

Deon Stander (President and CEO)

Let me see if I can best address that. To the best of our knowledge, we're not anticipating substantial tariff impacts on the predominant pieces that make up the RFID supply chain. I'm deliberately excluding semiconductors out of China at the moment, those chips because most of what happens from a semiconductor perspective that we use and that industry use at the moment doesn't come out of China. There are some local for local China pieces and they get dressed over there. There may be very small elements where they are using chemicals or other substrates to make those that may be subject to some of the limited tariffs, but they're very opaque to us and I suspect very low impact overall. In terms of hardware, there are certainly hardware players that have got manufacturing based in Asia and there may be some incremental costs associated with that.

I suspect like we are doing, all other companies are trying to make sure they're mitigating those largely through sourcing changes. Overall, I would suspect that the increased tariff costs to retailers or customers will be very, very limited. In that regard, I'd also say that typically if you have such a small order of increase, it's not a deterrent. The way we've seen the return on investment for these RFID programs, it typically pays back within a year. The returns are so strong that they would typically offset any of those. Now, in discussion that we've had with their existing plan rollout, currently this has come up a couple of times, but there's been no indication from any customers that suggest they will pull back. I put that in the context of some of even our apparel customers who are wanting to roll out.

They're clearly looking at their sourcing strategy, but they see still the value of doing this overall. That may change as the environment changes over the next 60 to 90 days. We'll see and once we know more, we'll come back and let all of you know.

Operator (participant)

Our next question comes from the line of Josh Spector with UBS. Please go ahead.

Chris Perrella (Director of Equity Research)

Hi, it's Chris Perrella on for Josh. I want to follow up on the capital spend as you follow or work with your customers to relocate them. Is there, you know, how much flexibility do you have in the capital outlays or how much more of a step up is required to shift production or serve customers in a new region? I have a follow up question on U.S. demand. Given it's 30% of the revenue, what are your U.S. based customers see.

Deon Stander (President and CEO)

On the capital spend? I think I may have touched on this. Sorry Chris, we don't anticipate really a significant step up in capital because we actually have available capacity, we have available shift mechanism, we continue to work on productivity. I think the things I outlined overall, and we will and we always do continue to invest in capability and capacity in all of these regions, but always returns based. We look at that from an EVA perspective. I can't remember your specific second question. Maybe John, you can help in that.

John Eble (VP of Finance and Investor Relations)

Just color on U.S. demand right now.

Deon Stander (President and CEO)

U.S. demand for overall U.S. demand. Okay. Overall U.S. demand we are seeing at least on the Materials business, no change to overall U.S. demand I think for retailers and brands and apparel certainly. I think I've indicated there is a current slowdown in orders specifically for China as they think through their pricing strategies and their procurement strategies, but largely for the rest of where they source from. Those volumes continue to be steady as we expect.

Operator (participant)

Our next question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Anthony Pettinari (Research Analyst)

Good morning. On the last earnings call you talked about expecting negative net price in 1Q and then I think, you know, a little bit in 2Q and then stabilizing. I'm just wondering is that kind of broad cadence still applicable or does it get pushed out a quarter as you implement surcharges or is the visibility just kind of out the window? I'm just curious how you kind of think about, you know, the progression of net price given the kind of cost environment that you talked about in 2Q.

Greg Lovins (SVP and CFO)

Yeah, I think when we look at, as you said, versus last year we had price down in the quarter and Materials business to go with the year over year deflation. As we work through that kind of final part, I guess of that cycle of inflation deflation we had for the last few years.

Some price down in Q1 versus prior year, we'd have a little bit more in Q2 versus prior year. When we look sequentially, we had price down in the first quarter to go with that low single-digit deflation that we had sequentially in the first quarter. I'll put the tariff impacts aside for a second, but otherwise we would expect a relatively stable environment from a pricing and raw material perspective from Q1 to Q2 sequentially. Now with the tariffs, as we talked about, you know, we'll look to implement some surcharges to manage part of that. You would expect some benefit as we move through the second quarter from a price perspective, depending on what happens with the tariffs overall and everything, of course, but you would expect some increase in price as we move through the second quarter to manage that tariff surcharge.

Operator (participant)

Our next question comes from the line of John Dunigan with Jefferies. Please go ahead.

John Dunigan (VP of Equity Research)

Thanks for taking the question and I'll echo others in welcoming back. Greg, glad to hear you're healthy and back in the seat. I just wanted to start off with slide 15. You gave a nice detailed sales breakout by end markets there, but it doesn't seem like you guys are considering Avery's logistics exposure as maybe a bit more cyclical in the current environment, if that's accurate. Can you provide some details around why that end market should be a bit more stable and maybe how you can. You can touch on some of the logistics businesses and how much of that would be more for international transportation that could be impacted by tariffs, trade wars and ongoing uncertainties.

Deon Stander (President and CEO)

John, the way we think about the logistics piece, which is largely a function within our Intelligent Labels platform, but we also have some base business as well. On the material side, where we've got a lot of VI labels that go into box shipments. Let me break that into two pieces. On our Intelligent Labels side, we actually see less variability, even though there may be some economic impact to overall logistics. If there is a lower volume environment, and largely because we have aligned with that significant customer, what our absolute volume will be for this year, whether that is affected by volume changes or not. It's largely, I'd say, largely secure in terms of where we are. Hence why we see less variability.

I think as it relates to if there is more volatility in the volume, broader volume environment that impacts logistics shipments domestically in the United States, for example, or internationally, some of our VI label growth that we typically see, which goes on, this will be slightly impacted. Again, it's a smaller part of the overall business for us and we see it as largely mitigatable within our control.

Greg Lovins (SVP and CFO)

Yeah, just to add to Deon's points on, you know, much of that logistics stuff. Slice of that pie, outside of the Intelligent Labels portion that goes to logistics, is really the majority of that is within our Materials businesses. I think if you look over past recessionary periods, our Materials business has been pretty stable. Certainly it's not immune to the impacts of a downturn, but has been pretty stable throughout recessions. We've been able to hold or even grow margins in recessionary periods in that Materials business. You know, we feel good about overall within Materials, our ability to withstand a downturn is pretty strong and we've demonstrated that, I think, over the last number of downturns that we've seen globally.

Operator (participant)

Our next question is a follow up from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Jeff Zekauskas (Analyst)

Thanks very much. In the quarter in Intelligent Labels, how did the general retail category do and given that you expect a change in apparel dynamics in the second quarter, what do you expect for Intelligent Label growth in the second quarter?

Deon Stander (President and CEO)

Okay, Jeff. Yeah, our general retail in the first quarter was up very low single digits as we saw compliance continue to be driven by some of these particularly large general retailers who are focused on additional categories they brought in. Overall, our outlook for apparel IL in the second quarter had originally been high single digits. Sorry, our outlook for overall IL had originally been high-single digits for the quarter. Our expectations when we started the year, and we know now that with the apparel impact that we're seeing, which we're saying is mid-single digits decline for the whole business, we anticipate the range of our IL growth to be probably in the mid-single digits. Growth is again highly variable, could move quite a lot. That is currently where we see it at the moment.

I will say that if, again, if you extract the apparel piece out of this, where there is the uncertainty, all the other programs that we have and our expectations for them during the second quarter are on track.

Operator (participant)

We have time for one more question. Our final question is a follow up from the line of George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director)

Thanks very much. I'll ask a couple questions in sequence here. You talk about the trigger points for additional structural actions. Deon, Greg, can you talk a little bit about what you mean by that direction? We know, but if you could put some detail around that or timing or what the trigger points might be which would then drive the actions. Second question, back to the earlier comment on sourcing in China and I think I heard you, Deon, say that based on current tariffs that roughly 10% of what you were seeing of your volume would look to be move to other countries from China. Correct me if I was incorrect in sort of your interpretation of your answer there.

What happens, you know, if we go back to the prior tariffs? Is there a way to sort of scale what that movement might look like and whether you would still have the capacity to take on that volume if it moves in a new tariff regime? Thanks very much and good luck in the quarter.

Deon Stander (President and CEO)

Thank you, George. In terms of the way we think about, let me address the sourcing piece first and then we'll get to the trigger points after between. Greg and I will handle that. When I laid out what I thought is around 10% movement from the existing piece that's left in China, it's probably at the upper end of what we would see, possibly from a supply chain capacity perspective. I'm talking broader supply chain, not ourselves. What we know in previous tariffs, when they went up, I think during the first administration, prior to the Biden administration, was that we saw tariffs increase and we saw more of a steady but slow migration over time. They weren't substantial enough to drive diverted action straight away. We were able to respond as we were if there's more of a substantive requirement.

Let's say over the next nine to 12 months, people want to move by season, substantial portions, then the gating factor is first going to be can they get the capacity at apparel, garment or shoe manufacturing in those countries. Does the supply chain stand up to support all of that? They typically turn to us and say, can you help make that possible? Generally, even in the extreme situation like that, I think we will have the capacity to be able to address that.

Greg Lovins (SVP and CFO)

Yeah. George, to your other question about trigger points, I think, you know, when we look at various trigger points, of course the landscape on what happens with tariffs as we move across this quarter clearly will be one thing we're keeping an eye on in terms of how that evolves. You know, hopefully we end up with some negotiations that when we get to a few months from now, that they don't go back up or even the China ones hopefully come down as we start to hear some evening about last night. Hopefully we see some improvement there. That's something we'll keep an eye on and how that evolves. Then from that perspective, where that puts projections for GDP in the macro environment for this year.

We know that, you know, projections over the last couple weeks have come down a little bit from a number of sources. We will continue to monitor that and see how that evolves. Of course, we will continue talking to our customers, particularly in apparel, given the China dynamics there and understanding how they are looking at things, whether they are shifting manufacturing to other regions like we just talked about, et cetera. There are a number of different trigger points we will keep an eye on as we move through the quarter. You know, we will follow the similar playbook to how we have done in recent downturns. We look at 2020 or even in 2023 when we had the destocking and we will look at temporary savings buckets, whether that be volume driven actions or belt tightening and discretionary spend reductions, things like that.

We will look at are there other structural actions that will accelerate or not. We already increased our restructuring savings expectation for the year here in our numbers we provided you this morning as well.

Deon Stander (President and CEO)

The only thing I'd add to what Greg said is as you know, we will actually tend to probably be seeing any changes in the macro environment prior to many other companies because of the role that we play in the system supply chain. Whether it's in our Solutions business or Materials business, we're probably likely to see demand soften ahead of many other people as well. Part of that advantage then allows us to pull into play the playbook that Greg was talking about. I think for me it just constantly underlines the fact that the strength of the franchise we have is really resilient.

We've gone through down cycles and when they've happened in the past, we've actually been able to not only maintain margins, our Materials business, slight decrement in our Solutions business, but actually come about overall stronger, both from a share perspective and a market perspective overall. I don't see that changing as we move forward this time around. I think we also have other levers that we are able to pull, not least our high value categories, some of which are somewhat immune to even cyclicality. I'll call out Vestcom as an example. This is a business for us where we're seeing significant growth because of some of the new customers we brought on board. Typically in downturns, when either pricing changes or there is less volume, you need more promotional activity.

Actually, somewhat counterintuitively, our Vescom business will actually thrive more in a downturn economic cycle. Again, highlighting the resilience of our Solutions Group is actually different to what it was even in 2020 when we saw the last real significant change overall. I think overall I think we're well positioned should growth continue. We have all of the innovation we bring to the market, we have the strength of our base business. These great high value categories differentiate, including IL, and should things change, we have a really robust playbook that allows us to take action, protect earnings, and take advantage of market dislocations where we see opportunities as well.

Operator (participant)

That concludes our question and answer session. Mr. Eble, I will now turn the call back to you for any closing remarks.

John Eble (VP of Finance and Investor Relations)

Thanks, Regina. To recap, we delivered a strong first quarter in a dynamic environment. We are well prepared for a variety of macro scenarios. We expect to grow earnings sequentially in the second quarter. Most importantly, we are well positioned to continue delivering superior value through this cycle for all of our stakeholders. Thank you for joining today. This now concludes our call.

Operator (participant)

Ladies and gentlemen.