Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Significant long-term growth potential in the Intelligent Labels (IL) platform, particularly in logistics and food sectors, with over 20% volume growth expected this year. This is driven by ongoing customer rollouts, a strong pipeline, and increasing adoption in new categories.
- Improving margins in both the Materials and Solutions segments: The Materials segment has been delivering EBITDA margins around 17% or better, exceeding targets due to operational leverage and productivity initiatives. The Solutions segment's margins improved by 70 basis points sequentially in Q2, with expectations to return to 18%+ margins as apparel volumes normalize.
- Earlier-than-expected normalization of apparel volumes, as inventory levels at retailers have stabilized after a year of destocking. This has led to an uptick in import volumes and contributed to stronger-than-anticipated performance in the Solutions Group.
- Avery Dennison expects revenue growth in the fourth quarter to be lower than previously anticipated, due to delays in customer rollouts in the Intelligent Labels segment, affecting volume changes related to timing. ,
- Macro uncertainty and weak consumer sentiment are impacting the apparel segment, with the environment remaining dynamic and consumer sentiment not robust, potentially affecting future performance. ,
- Increased competition in the Intelligent Labels (IL) market and declines in average selling prices (ASPs) may pressure margins and require greater pricing actions. ,
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Intelligent Labels Revenue Timing
Q: Are delays in customer rollouts impacting Intelligent Labels revenue?
A: Yes, revenue growth in Intelligent Labels (IL) is expected to be lower in Q4 due to customer rollout timing changes. These delays are typical in new category adoptions, but the long-term growth opportunity remains significant. -
Solutions Margins Returning to 18%+
Q: Will Solutions margins return to 18%+ levels?
A: Yes, as the apparel segment normalizes, margins have improved by about 70 basis points in Q2 vs. Q1. Management expects to return to 18%+ EBITDA margins in Solutions over the next 12 months. -
Apparel Destocking and Recovery
Q: Is the apparel business improving after destocking?
A: Yes, apparel inventory levels have normalized after a year of destocking. There's an uptick in import volumes, and Q2 performance was slightly ahead of expectations, indicating recovery in North America and Europe. -
Q2 Outperformance Drivers
Q: What drove the upside in Q2 results?
A: The better performance was due to stronger volumes in Materials Europe and sooner-than-expected normalization in the apparel business. -
Competitive Dynamics in Intelligent Labels
Q: Are competitive pressures affecting pricing in IL/RFID?
A: Competitive dynamics exist in the IL market, but the focus is on maintaining leadership through innovation at process, product, and solution levels. Historical pricing declines in the mid-single digits have helped accelerate adoption and unlock new opportunities. -
Long-term Growth in IL and New Segments
Q: Is IL growth expected to exceed 20% in 2025?
A: The long-term growth potential is substantial, with IL penetrating only about 40% of the 45 billion unit apparel market. Initial adoption in the 200 billion unit food market is underway, and more details will be provided at the Investor Day in September. -
Materials Margins and Targets
Q: How did Materials margins perform, and what are future expectations?
A: Materials margins were 50 to 100 basis points higher than expected in Q2, aided by stronger top-line growth in Europe, cost reductions, and productivity. The company targets around 17% EBITDA for the Materials segment and expects to deliver at or above this level going forward. -
Vestcom and Digital Shelf Labels
Q: How is Vestcom performing amid digital shelf trends?
A: Vestcom continues to perform well, contributing high-value business with above-average margins. While there's some softness related to drugstore challenges, Vestcom is well-positioned for the shift toward digital shelf labels due to its strong data composition engine, supporting both analog and electronic labels. -
SG&A Expense Increase
Q: Why did SG&A expenses increase by $55 million or 17% year-over-year?
A: The increase is mainly due to higher incentive compensation accruals in 2024, as the company raises its outlook above initial expectations. In 2023, incentive accruals were low, down to zero for corporate. -
$50 Million Cost Savings Allocation
Q: How are the $50 million in cost savings allocated?
A: The savings are roughly evenly split between cost of goods sold and SG&A, with a slightly higher weighting towards cost of sales. Actions include productivity improvements in both Materials and Solutions segments.