Q4 2023 Summary
Published Jan 10, 2025, 5:10 PM UTC- Management expects to achieve a $10 EPS run rate in the second half of 2024, reflecting strong earnings growth confidence.
- Intelligent Labels business is projected to grow by 20% in 2024, driven by logistics and food sectors (contributing about half of the growth) and an apparel rebound in the second half.
- Margin expansion is anticipated in both the Solutions and Materials segments in 2024, due to improving volumes and operational efficiencies.
- Uncertainty in Apparel Volume Recovery: The company's guidance relies heavily on the normalization of apparel volumes in the second half of 2024, but there is uncertainty due to persistent macroeconomic and geopolitical risks, with retail volumes still down in Europe and North America , and the timing of the rebound remains uncertain.
- Margin Expansion Challenges: While the company expects to improve margins, achieving its long-term EBITDA margin target of 17% in the Materials segment may not occur until 2025, indicating slower-than-expected margin expansion. Additionally, margins in the Solutions segment are impacted by ongoing investments and temporary cost measures returning in 2024.
- Dependence on Large Customers and Potential Growth Slowdown: The significant growth in Intelligent Labels, particularly a 110% increase in logistics and food categories, may not be sustainable at the same pace. There's a risk of a "cliff" after initial large customer rollouts, and future growth depends on successful adoption by other customers, which may take time.
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Intelligent Labels Growth
Q: Will Intelligent Labels achieve 20%+ growth in 2024, and is this growth sustainable?
A: Management expects 20%+ growth in Intelligent Labels for 2024, driven by annualization of new programs, normalization of apparel volumes, and new customer rollouts across all segments, including logistics and food. They anticipate sustained growth without a "cliff," as adoption by segment leaders often leads to broader industry uptake. New trials, such as a bakery program with a large U.S. grocery retailer, are expected to contribute to growth. -
Margin Outlook and Targets
Q: How should we think about margin expansion in 2024 across segments?
A: Management aims to progress towards a 17% EBITDA target for the Materials segment by 2025, with margins improving in both Materials and Solutions in 2024. They expect overall margins to reach 15%+ in 2024, approaching 16%, driven by productivity actions and volume recovery. -
Apparel Volume Normalization
Q: When do you expect apparel volumes to normalize, and what's the impact?
A: Apparel volumes are anticipated to normalize in the second half of 2024, contributing to Intelligent Labels growth and the potential achievement of a $10 EPS run rate in the second half. This recovery is expected to reignite growth in apparel-related Intelligent Labels. -
Impact of Destocking Ending
Q: How is the end of destocking affecting volumes and outlook?
A: Destocking largely ended at the end of Q3 2023, with signs of volume recovery in Q4 and early January, particularly in Europe. This normalization is expected to benefit the labels business as inventory levels stabilize. -
Pricing Dynamics and Deflation
Q: As material prices come down, will price reductions match input costs?
A: The company expects to pass through most deflation in material costs to customers through pricing, maintaining healthy industry dynamics. While slight sequential deflation is seen in Q1, pricing adjustments will largely be carryover effects from prior year, with an emphasis on holding onto productivity gains. -
Sustainability of Logistics Growth in IL
Q: Is there a risk of a decline in logistics-related Intelligent Labels growth?
A: Management does not foresee a significant decline ("cliff") in logistics-related Intelligent Labels growth. The 110% growth in logistics and food in Q4 2023 is expected to continue, as adoption by leading logistics providers leads to broader industry uptake. Seasonal factors may affect quarterly volumes, but overall growth is anticipated. -
Vestcom Performance and Outlook
Q: How did Vestcom perform relative to expectations, and what's ahead for 2024?
A: Vestcom met or slightly exceeded growth and margin expectations in 2023. In 2024, continued growth is expected, with pilots underway with a large national U.S. retailer to demonstrate productivity benefits, potentially driving further adoption of their shelf-edge labeling technology. -
Supply Chain Disruptions Impact
Q: Will Panama Canal disruptions drive higher volumes due to restocking?
A: Management does not anticipate additional volume increases as a result of Panama Canal disruptions. While retailers are adjusting logistics to ensure continuity of supply, any pull-forward of orders is expected to normalize within Q1 2024, resulting in no significant net change in volumes. -
Materials Segment Margin Protection
Q: How are you protecting margins in the Materials segment amidst deflation?
A: Margin protection efforts focus on offsetting volume impacts from destocking through productivity actions and cost management, rather than relying on price dynamics. They've maintained or grown market share across regions by emphasizing service excellence and competitiveness. -
Solutions Segment Margin Expansion
Q: Can margins in the Solutions segment improve despite increased revenues?
A: The Solutions segment is expected to see margin expansion in 2024 due to higher volumes, operational efficiencies, and a favorable mix of high-value segments. Temporary cost actions taken during periods of lower volume will be reversed as volumes recover.