Avery Dennison Corp. Q2 2026 Earnings Call

Ladies and gentlemen, welcome to Avery Dennison. S earnings conference call for the second quarter ended on June 30th, 2026. During the presentation, all participants will be in a listen only mode. Afterward, we will conduct a Q&A session. At that time, if you would like to ask a question, please press star one on your telephone keypad. To raise your hand and enter the queue. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website. I would now like to turn the call over to William Gilchrist Avery Dennison, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ellen, and welcome to Avery Dennison second quarter 2020 Earnings conference call. 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 A-4 to eight for the financial statements accompanying today's earnings release, 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.

Thanks, Jillian. Good morning everyone. We delivered strong second quarter results across the board on a year over year basis. Organic sales growth accelerated to 8%. Adjusted EBITDA margins expanded, adjusted EPS grew by 19% and adjusted free cash flow generation was strong at more than $360 million. While these results benefited from continued customer inventory, stocking materials group excluding this tailwind, we continue to drive a step change in the pace of our sales and earnings growth. Our performance this quarter once again demonstrated the strength and the resilience of our portfolio. Sales growth was balanced across both base and high value categories, with high value categories returning to mid-single digit growth. As as we expected. Combining this improved organic growth with our commercial and operational excellence. Allowed us to expand adjusted EBITDA margins across both segments, even against a volatile and inflationary cost backdrop. Our. Priorities are clear. We are continuing to drive both earnings growth and business resiliency by leaning into our proven playbook. First, we're investing in innovation, service led differentiation to drive share gains and expand new business opportunities. The strength of this focus was evident in our second quarter performance, where organic sales growth accelerated second.

Executing commercial and operational agility, including productivity and pricing actions to mitigate inflationary pressures And third, generating strong free cash flow and maintaining a healthy balance sheet. Our balance sheet strength and robust cash generation supported the increased pace of our share repurchases during the quarter, and another increase in our dividend. While continuing to invest in our long term growth priorities. Turning to our segment results. Materials group. Delivered. Organic sales growth of approximately 10%. Driven by high single digit volume mix growth, as well as low single digit pricing realization. As we began to pass on cost inflation. During the quarter. The business delivered solid performance across both base and high value. Categories. Encouragingly high value categories grew mid-single digits year over year, led by specialty and durable labels, as well as intelligent labels Base categories grew low double digits, driven by underlying market growth. Continued share gains, and the benefit of customer free buys. In label materials. Customer Pre-buying persisted longer into the quarter than we initially anticipated, driven by accelerating raw material inflation as well as customer concerns regarding surety of supply, particularly in Europe and parts of Asia. Looking forward, while it is difficult to predict the timing of when the unwind will happen due to continued geopolitical uncertainty.

We anticipate the majority of the unwind in the third quarter with a smaller carryover into Q4 from a. Profitability perspective Materials group adjusted EBITDA was strong, growing high teens with margins expanding compared to prior year. In the. Solutions group, organic sales grew 3%. The quarter was characterized by solid low single digit growth across both. Our high value categories and base solutions within our high value platforms. In. Delivered robust low double digit growth driven by core market expansion and strong World Cup demand Intelligent labels grew low single digits, while Vestcom was down slightly as we lapped a major customer rollout from 2025. In our base solutions, we were pleased to see sales return to low single digit growth from. A profitability perspective, execution in our productivity playbook more than offset higher employee related costs. This allowed us to deliver strong EBITDA margin expansion. Pivoting to our enterprise wide, intelligent Labels platform sales were up low single digits compared to prior year, in line with our growth expectations for the quarter. As an. Dissipated, this headline number reflects varying dynamics across our major end markets. In our largest category, apparel and general retail. We delivered another quarter of strong performance, with sales up approximately 10%.

This growth was driven by continued program expansions in apparel alongside a solid recovery in general retail Conversely, we experienced a headwind in logistics where sales were down double digits. This was driven by the difficult comparison of lapping outside share gains from 2025 and softer overall customer demand in the segment. Looking ahead, we continue to expect 2026 growth for our enterprise Intelligent Labels platform to outpace 2025 in apparel and general retail. We expect to deliver strong full year growth as adoption continues to deepen in food. We are positioning the platform for an acceleration in the back half of the year. Driven by the beginning of the rollout with the largest US grocery retailer and expanding activity across other customers Finally, logistics. We are managing through the normalization of outsized volume share gains from 2025, with the largest partner. While continuing to expand pilots with new logistics customers. As to our outlook, we are returning to providing full year guidance, reflecting our team's strong execution through a dynamic environment and the challenges of precisely timing. The second half. Customer inventory destocking in materials group. For the full year 2026, we anticipate $10 to $10.30 in adjusted earnings per share on organic sales growth of 3 to 4% in some.

Our strong second quarter performance delivering another quarter of accelerating sales and earnings growth, highlights the differentiation, strength of our enterprise. We remain focused on the key secular tailwinds shaping our long term strategy. While continuing to execute the operational actions required to navigate cyclical dynamics and inflationary shifts. With agility. The. Steps we are taking to accelerate innovation led differentiation. Serve our customers and ensure supply chain resilience. Further strengthens our competitive moat, our proven strategies. Market leading resilient businesses, agile teams, and disciplined capital allocation approach give us confidence in our ability to deliver sustainable growth in 2026 and beyond. I am proud of the global Avery Dennison team. Their agility and operational execution continue to drive strong results, giving us momentum as we execute across the balance of 2026 and beyond. Now over to you, Greg Thanks.

Deon and hello everybody. In. The second quarter, we delivered strong adjusted earnings per share of $2.89, up 19% compared to prior year. Earnings growth was driven by higher volume and productivity. Partially offset by higher employee related costs and targeted growth. Investments. As Diane mentioned, customer inventory pre buys were contributing factor during the quarter. Adding an estimated $0.25 to earnings. Second quarter reported sales were up 11% year over year, with organic sales growth of 8%, driven by strong volume mix and slightly favorable pricing. We estimate that roughly half of the organic growth was from customer pre-buy activity. Reported sales. Also benefited from approximately two points of growth from foreign currency translation and a point of growth from the Taylor Adhesives acquisition. Adjusted EBITDA margin was 17.1% in the quarter, up 50 basis points compared to prior year. And we generated strong adjusted free cash flow of $365 million in the quarter, primarily. Given by earnings growth in working capital improvements. Our balance sheet remains strong, with a quarter end net debt to adjusted EBITDA ratio of 2.3 times. Capital allocation during the second quarter remained consistent with our established framework. We. Returned over $210 million to shareholders through a balanced combination of $76 million in dividends and $138 million in share repurchases in accelerated pace relative to the first quarter.

This brings our year to date capital return to shareholders to roughly $350 million. These. Actions underscore our ongoing commitment to disciplined capital deployment. While preserving our financial flexibility. Turning to segment results for the quarter materials Group organic sales were very strong, coming in 10% higher than prior year. Driven by high single digit volume mix growth. Excluding our estimate of the year over year benefit from customer prebys Underlying organic sales growth remained strong at mid-single digits. Turning to label materials similar to the first quarter, we believe we successfully gained share and realized favorable year over year pricing as we acted to mitigate the impact of rising raw material costs. From a regional perspective, compared to prior year Volume mix in North America was up mid-single digits. Europe delivered strong mid-teens growth in an emerging markets. Both Asia and Latin America grew high single digits. Organic growth across our materials group, high value categories grew mid-single digits. LED by low double digit growth in specialty and durable labels in high. Single digit growth in intelligent labels. Industrial tapes grew low single digits in graphics and reflective sales were comparable to prior year. Materials group adjusted EBITDA was up 17% compared to prior year, with margins up 20 basis points.

This margin expansion reflects strong volume, ongoing productivity actions and the net benefits from pricing and raw material costs, inclusive of cost out reengineering. These factors more than offset an unfavorable product mix and higher employee related costs. Regarding. Raw material costs we experienced mid-single digit year over year raw material inflation in the second quarter, representing high single digit sequential inflation slightly above our expectations. Our teams continue to execute our proven playbook to navigate the current inflation environment through strategic sourcing actions, re-engineering, and the timely implementation of pricing actions. Looking ahead for the remainder of the year. While the situation remains uncertain, we're currently anticipating high single digit year over year inflation in the second half. Shifting to solutions group organic sales were up 3%, with both high value and base categories delivering low single digit growth. Within high value categories in. Delivered strong low double digit growth Intelligent labels grew low single digits with particular strength in apparel and general retail categories. While Vestcom was down low single digits as we lapped new program rollouts from the prior year. Solutions group adjusted EBITDA margin was 18.6%, expanding 150 basis points year over year and 220 basis points sequentially.

This margin expansion was driven by continued execution of our productivity initiatives. The reversal of prior year tariff related network inefficiencies, and a positive net price cost impact inclusive of tariff related costs. Together, these benefits more than offset higher employee related costs and are targeted investments and growth. Turning now to our full year 2026 outlook. We anticipate reported sales growth of 5 to 6%. This includes organic growth of 3 to 4%, with approximately 1.5% from currency translation, 1% from the tailor Adhesives acquisition and a nearly half point headwind from the fiscal calendar change. We expect full year adjusted earnings per share in the range of $10 to $10.30. Representing 7% growth year over year at the midpoint. This full year earnings growth is driven by benefits of organic growth, which is primarily volume mix driven. A large. Largely neutral impact from customer inventory management for the full year. Productivity actions, including restructuring benefits of more than $60 million. Offsetting. Winds from wage inflation in the normalization of 2025. Temporary savings, which are largely. Incentive compensation related. And a net benefit of approximately $0.30 from combined currency. Share count, interest and tax. Additionally, we remain committed to strong free cash flow targeting roughly 100% conversion for the year.

With fixed in IT capital spending of approximately $260 million. From a quarterly earnings cadence perspective, we're assuming the third quarter will see a larger than normal sequential earnings decline driven by our customer destocking timing assumption, which will represent an approximate 50 cent sequential headwind versus the benefit we saw in the second quarter. While we expect a sequential headwind in the second half, as these customer prebys unwind underlying earnings momentum remains strong across the balance of the year. In summary, we delivered a strong second quarter, achieving 8% organic sales growth in 19%. Adjusted earnings growth. We generated very strong free cash flow, increased our dividend and accelerated share repurchases while maintaining a strong balance sheet. With leverage coming down to 2.3 times. Our updated 2026 outlook anticipates 3 to 4% organic sales growth and roughly 7% EPS growth, demonstrating positive momentum toward our long term targets. Overall. Our resilient portfolio agile execution, and disciplined capital allocation give us high confidence in our ability to deliver strong, long term value to all stakeholders. With that, we'll. Now open up the call for your questions.

Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please raise your hand now using star one on your telephone keypad. 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, please stand by as we compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi with Baird. Your line is open. Please proceed with your question.

Thank you. Operator. Good morning everybody., can you just give us a bit more granularity as it relates to the growth outlook for intelligent labels for 2026, relative to the low single digits you generated in to queue and in particular, how's, how's your view on the major end market verticals such as apparel, general retail, you know, food and logistics change, if at all. Relative to the last time you reported three months ago. Thank you.

Thanks, Ghansham. Yeah. Our anticipation has always been that we would continue to see our growth ramp in the second half of the year., and then when I look at the individual segments in apparel and general retail, we're continue to expect solid growth as we go through the second half of the year, largely on the new program rollouts, we're doing as well as the continued strengthening and some of the general retail execution as well in logistics specifically,, you know, we're expecting a continued.. Share and volume challenge relative to 2025. When we grew outsized share and volume in that period. And we expect that to persist for the remainder of the year while we continue to also expand pilots with our existing customers that we have and some new customers in, in the logistics pipeline and in food, we're expecting a much more meaningful contribution from the food programs as we go through the second half of the year. Largely on the significant retailer rollout that we've talked about for a while, as well as,, a lot more activity in new customer programs overall that we're seeing in the food sector. Ghansham.

Your next question comes from the line of George Staphos with Bank of America. Please proceed with your question.

Hi. Thanks for. Thanks for taking my question., and congratulations on the progress. I want to dig into the Pre-buy effect in materials. And there are a couple components to it. I think you said that the effect of Pre-buy was more or less five points, mid-single digits in the second quarter. And a the figure being one point in the first quarter. And I think it was one and a half points at the materials level. Did I relate those correctly? And does that mean, in essence, there's 6 or 6.5% that ultimately has to be destocked over the rest of the year. How should we interpret that? And why is there so much going on, especially it sounded like in Europe. Thank you guys.

Yeah. Thanks, George. So in one queue we talked about a relatively around a point of growth from customer inventory building., I think I mentioned earlier about half of our organic growth in Q2. We would estimate is related to inventory build. So in total, closer to five points of growth in the first half or added net first half, about 2.5% growth for the whole half of the year. And we would expect to see that come out in the second half, as we said. So I think you would you would see that change from first half to second half. At the same time from an organic growth perspective. That will largely be offset in the second half by the fact that we'll have more pricing activity action versus prior year, where we still had deflation in the first quarter., carry over from last year. We'll have more pricing impact year over year in the second half. I think,, to your point, we're seeing that more in Europe and Asia, and that's where we're seeing more of the inflationary pressures as well., as well as just more customer concern. I think about,, surety of supply. And as we move through the second quarter, we continue to see that inflation increase in the middle part of the quarter.

And obviously, it's been quite up and down since then., so customers are still seeing a pretty uncertain environment., and. I think that's what led to a lot of the,, stock build that continued throughout the second quarter.

Your next question comes from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

Yeah. Good morning. Thanks for taking my question. So I guess maybe a couple of related points on on the margin side. I guess, can you help us to think about price cost in the second half? And if you'll catch up with, with pricing, just given your, your expectations for, for cost to be kind of up in the high single digits. And then I guess somewhat related on the margin front, in solutions, you're kind of hitting a high water mark., anything special about that in terms of why you're kind of at these levels? Or is this kind of the new, the new baseline now that you're starting to see volumes stabilize and IL starting to starting to grow again?

Yeah. Thanks, John, for the question. So when we look at the second quarter from a price cost perspective, and I'll talk sequentially. We saw high single digit inflation, inflation from Q1 to Q2. And we had mid-single digit price increase from Q1, to Q1 to Q2 to help mitigate that. In addition to obviously, material engineering and our procurement teams continuing to work to mitigate that as well. So I think we largely mitigated the majority of that in in the second quarter from a sequential perspective. When we look Q2 to Q3, we would expect low single digit sequential inflation. Largely carry over from what we saw as we moved through the second quarter. But I will say continues to be a pretty uncertain environment. There., so we've seen oil, like I said a minute ago, move up and down quite a bit over the last few weeks. But right now our expectation is low single digit sequential inflation and low single digit sequential price as well. Q2 to Q3., if I shift to your second question on solutions margins, I think overall there's a couple drivers there that teams continue to drive pretty significant productivity year over year.

Certainly that's having a benefit on our margins there. At the same time is a nice volume rebound. Our apparel business is growing, mid to high single digits in the quarter as we lacked some of the tariff implications from Q2 last year, with some strong growth in our platform. Our high value category there that we talked about earlier as well. So overall it's both strong volume growth in apparel as well as productivity across the business. And we did have a couple small,, one time type benefits in the quarter, but still strong underlying results. You may see a little bit of moderation in that margin in Q3, but we still expect the second half to be above prior year.

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question..

Thanks very much., two part question., it's sounds like you're gaining more traction with your customers and intelligent labels in the general food category. Is, is it baked goods or frozen foods or are there themes that are allowing you to,, expand? Your reach., and, and ,, for Greg,, you know, you've talked about inflation and employee costs., is this one time or what's the rate or how large are your employee costs as a percentage of your cost base? Can you help frame the employee cost issue?

Thanks, Jeff. Let me deal with the first. And Greg can take the second. Thank you. You know, we continue to have very strong. We continue to have very strong conviction in the growth in the food segment as we move forward over the years to come. Because we see the return on investment at the retail level to be so strong in all the pilots that we've done and some of the rollouts that have been underway for a while., I think the way I'd characterize it, Jeff, is the initial focus has been really around bakery. It's the more simple one to implement. But we are, as you know, working through protein, which has been more technically difficult to do. But that's where we've brought our innovation to bear, where I think we continue to sustain advantage. And then beyond., protein within, the next category is really at the periphery of the store will be in perishable items. The further perishable items. And I think those will follow in suit ., I certainly think that two things are also playing in thematically. So one is I think retail at an aggregate level is recognizing that the greater the urgency with which they digitize their stores.

Overall to drive more of a digital platform for their stores. The more they're likely to succeed in driving the efficiencies and consumer connections. They really desire. And clearly, you know, technologies like I'll play a very significant role in enabling that driving return on investment, both from a labor productivity, a gross margin expansion and sales uplift. We've seen that consistently, particularly in perishable foods ., and so I think the only other thing I'd say from, from our perspective is, you know, it's an area where we're going to continue to invest this scale of our customers that are now in pilot has continued to expand. Our pipeline has expanded in that regard., includes a number of other US retailers and European retailers and also some areas very specifically where, for example, DSD deliveries are taking place in certain categories as well., so we have high conviction in it and I see it as a longer term growth opportunity within our broader high value category portfolio. Overall.

Yeah. And Jeff, on your second question, I think there's two areas of employee cost where we're seeing a headwind year over year. One is the normal year over year wage inflation that we see across the business., and that's, that's more normal levels of what we've seen in the recent past. I think the other one is the larger one really this year from a year over year perspective is incentive compensation. So last year, clearly we delivered below our targets incentive comp payouts were well below target levels. Last year. And this year we're on track at or above, depending on the business to to, to deliver on our targets. So there's a relatively sizable incentive compensation headwind. When I look at the overall earnings growth formula, kind of year over year from an order of magnitude perspective, our productivity is basically largely offsetting our wage inflation and our incentive compensation. So that's roughly the size of those headwinds versus our productivity.

Your. Next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Yeah. Hi., I wanted to just dig into the organic growth guidance. So the 3 to 4% range, if we try to unpack that a bit, I mean, my calculations here would say pricing in the second half is up. Call it 3%, maybe to 4%. And you have that call it three ish percent headwind in the second half. So therefore volumes then at the