Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- AVY expects roughly 20% growth in Intelligent Labels (IL) in 2024, fueled by recovery in apparel and adoption in new categories like logistics and food, demonstrating strong demand and significant growth opportunities in this segment ,.
- The Materials Group delivered a record adjusted EBITDA margin of 18.3% in Q1, driven by volume increases and productivity initiatives; management intends to sustain strong margins through ongoing productivity actions and balancing growth and capital efficiency.
- The company anticipates that apparel industry volumes will normalize by mid-2024, which will enhance their Solutions segment performance and contribute to stronger earnings in the second half of 2024 ,.
- The company's Intelligent Labels (IL) revenue declined sequentially from Q4, with lower-than-expected volumes in logistics due to reduced domestic parcel shipments. Additionally, IL growth is reliant on a mid-year recovery in the apparel market, which remains uncertain.
- Rising paper costs in Europe are expected to lead to margin headwinds in the Materials Group in the second quarter, with potential delays in passing these costs to customers due to implementation lags in pricing adjustments.
- Second quarter earnings per share (EPS) are anticipated to be slightly down from the first quarter, contrary to typical seasonal patterns, due to factors such as customer order pull-forward, modest sequential inflation, and annual wage increases.
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Materials Group Margin Sustainability
Q: Can you help us think about the sustainability of Materials Group margins going forward?
A: The Materials Group achieved record margins driven by significant volume increases and productivity initiatives, including large restructuring actions and ongoing ELS programs. These efforts are largely offsetting wage inflation and incentive compensation headwinds. Management expects to maintain margins around the 17% EBITDA level, aligning with long-term targets set for 2025. The focus remains on balancing top-line growth, margins, and capital efficiency to drive EVA growth over time. -
Apparel Market Recovery Outlook
Q: What supports your confidence in apparel market normalization by mid-2024?
A: Apparel imports remain significantly below 2019 levels, but we saw slight improvements in North America during the last quarter. Customers are now more comfortable with their inventory levels, which were previously elevated. While uncertainty persists, the combination of recovering apparel imports and normalized inventories underpins our belief that apparel volumes will normalize by midyear. -
Intelligent Labels Growth and Guidance Adjustment
Q: Is there anything behind the modest adjustment in Intelligent Labels (IL) growth guidance?
A: We observed slightly lower volumes than anticipated in logistics due to reduced parcel shipments. However, apparel IL growth remains strong, driven by new programs like Inditex's loss prevention initiative. We anticipate the recovery of the apparel business in the second half to be a key driver for IL growth, and we remain committed to delivering 20% growth. -
Impact of Rising Paper Costs and Finnish Strikes
Q: How does rising paper costs in Europe affect margins, and how do you handle such inflation?
A: Traditionally, it takes about a quarter to implement pricing to offset sequential inflation. We're starting to see sequential inflation in Q2 due to the Finnish port strike, which has now ended. We expect to adjust prices within a couple of months, mitigating the impact by mid to late Q2. As the market leader, we respond to inflation with productivity measures and price increases, managing the health and balance of the industry. -
Intelligent Labels Margins and Value Selling
Q: How is value selling progressing in new Intelligent Labels applications, and could this improve margins?
A: We're confident in the growth potential of Intelligent Labels given the scale of opportunities in adjacent categories like food and logistics. Our approach focuses on providing differentiated total solutions, including hardware, software, and material science, which allows us to capture more value. As we expand into new segments, this value-based selling could enhance margins over time. -
Sequential Earnings Cadence and Factors
Q: What factors affect the lower sequential earnings into Q2 despite normal seasonality?
A: While we expect some seasonal benefit from Q1 to Q2, we face sequential inflation and annual wage increases effective April 1. These are sequential headwinds from a cost perspective. Additionally, a $0.05 pull forward from Q2 into Q1 affects the comparison. Excluding the pull forward, our underlying business would be up sequentially. -
Supply Chain Resilience
Q: How have you improved your supply chain to handle potential Finnish strikes resuming?
A: Since the last significant supply chain constraints, we've deepened and broadened our supply chain, moving from single regional sources to multi-regional and multi-supplier sources. This resilience has prevented interruptions during recent events, and our service excellence has improved globally. We've also enhanced our processes and data to better understand end consumption and manage inventories across the value chain. -
Intelligent Labels Deployment Cadence
Q: What's the expected cadence for Intelligent Labels deployment in 2024?
A: Programs currently in rollout or expansion are expected to continue as planned. We're focusing on accelerating pilots and trials, particularly in food and logistics, to drive broader industry adoption. Benefits in these new segments are compelling, and with proven technology, we're working to bring more customers to full rollout in time. -
Lower Parcel Shipments Impact on IL Volumes
Q: How have lower parcel shipments affected Intelligent Labels volumes?
A: We experienced slightly lower volumes in logistics due to reduced parcel shipments in Q1. Parcel shipments are influenced by U.S. retail activity and GDP, which remain slightly uncertain. However, apparel IL growth continues ahead of the base business, offsetting some of the impact.