Q1 2025 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the first quarter ended on March 29, 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 30, 2025. To access the replay, please dial (800) 770-2030 or (609) 800-9909 for international callers. The conference ID number is 5855706. I'd now like to turn the call over to John Eble, Avery Dennison's Vice President of Finance and Investor Relations.

Please go ahead, sir.

Thanks, 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 will 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 Gregory Lovins, Senior Vice President and Chief Financial Officer. I will now turn the call over to Deon.

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 the prior year and improved significantly on a sequential basis as customer working capital actions at year-end normalized as expected. Volume in Europe was up sequentially and down slightly compared to the 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 is solid with particular strength in the ASEAN region, while volume in China was comparable to the 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, VESCOM, 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. Embellix, 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 US performance brands and new program launches that benefited Q1 last year.

We expect Embellix growth to strengthen later this year partially driven by 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 in 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. But it is not clear how things will play out, The recent change in tariffs will likely have both direct and indirect impacts on our business.

We expect the direct impacts on 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 we have had. With that, before I hand the call over, I want to officially welcome Greg back.

It is 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.

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, and it is definitely great to be back. So in the first quarter, we delivered adjusted earnings per share of $2.30, up 4% excluding currency translation compared to the prior year. Has benefits from higher volume and productivity, partially offset by the net impact of pricing raw material cost as expected.

Compared to the prior year, sales were up 2% on an organic basis, as higher volume was partially offset by deflation-related price reduction. Adjusted EBITDA margin was strong, at 16.4% in the quarter, up 10 basis points compared to the prior year with strong margins in both segments. Free cash flow was roughly negative $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 rebate and employee incentive payments.

Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter-end of 2.3 which includes paying down 500 million euros 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.

So turning to segment results for the quarter, Materials Group sales were up 1% 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 label in late channel, and the base business was down low single digits. In the first quarter, we reclassified roughly $10 million of Intelligent Label 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 the growth of intelligent labels in new categories. Overall, label materials volume was in line with expectations. Looking at regional volume growth versus the prior year in the quarter, North America was up low single digits. Europe was down low single digits.

As we left a strong Q1 2024 which included the pull forward Deon noted earlier. Asia Pacific was up low single digits and Latin America was also low single digits. Compared to the prior year, both graphics and reflective and performance takes and 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 the 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 are 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, VESCOM was up high single digits driven by strong growth with both existing customers and new program rollouts. Imbalance was down in the quarter as Deon noted, and we expect to return to strong growth in this platform 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 a strong adjusted EBITDA margin of 17.2%, up 110 basis points compared to the prior year. As benefits from productivity and higher volume, were partially offset by growth investments. Now shifting to our outlook, we are 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 is also important to note that the vast majority of our imports and exports between the US, Canada, and Mexico including RFID in late, 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. We apparel, retailers and brands serving the US 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 US 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 to $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 the prior year. We expect a sequential increase in earnings will be driven by our traditional seasonality, as both the calendar and lunar new years impacted our Q1 well as ongoing business momentum some of our high-value categories. Such as VESCOM, 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 have discussed. We have also outlined some contributing factors to our full-year results on slide thirteen of our supplemental materials. To highlight a few of the key drivers, we now anticipate a roughly $7 million headwind 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.

And 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 expect to grow earnings sequentially in the second quarter. And 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. We will now open up the call for your questions. Ladies and gentlemen, if you would like to register a question, press.

You will hear a confirmation of your request. If your question has been answered and you would like to 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.

Hey, guys. Good morning. Greg, welcome back. It is 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 prebuying, etcetera, might have impacted the first quarter. You know, I think apparel was up mid-single digits, and then you are calling out Q2 as down mid-single digits. So just, you know, any more color on there would be great. And then I know you are staying away from annual guidance, but, you know, for RFID specifically, apart from just the tariff uncertainty, is there anything good or bad plus or minus versus your outlook you know, three months ago as it relates to 2025 in terms of new programs and so on?

Thank you so much.

Hey, Ghansham. Let me address that. In the first quarter, we actually did not 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 announcements, we were anticipating seeing some of our customer base adjust as they went through.

But we did not 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, did see some retail brands, apparel brands look at their sourcing decisions, their pricing decisions in that last couple of weeks that we saw a slightly more muted demand there. If you then look in the second quarter, our anticipation, as you said, is we are looking we are expecting sort of mid-single-digit declines for apparel. And what we are seeing so far at the start of the quarter is roughly about high single-digit declines.

That is based on discussions we are seeing with brands and retailers really anchored around what are they trying to do to resolve the significantly high tariff rate they see currently in place with China. And they are really focused on three actions. So one is what sourcing decisions can they make to move goods? We are actively involved with them in that.

That is actually one of our inherent strengths because of our global network. We see advantage for us in that regard. The second is that they are thinking through how do they leverage supplier partnerships in the whole ecosystem to help offset some of those additional costs. And then the third element is really as they think through what are they going to do in terms of pricing strategy.

And then this is an area where they are actually holding largely on some of their pricing decisions because 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 to be in advance they are gonna hit the market. They have to make decisions to determine what they are actually gonna price these garments. That is really why there is a bit of a slowdown. We anticipate that as they make these decisions in the very, very short term, that we will continue to see orders rise still anticipating given the visibility we have, that apparel will be sort of mid-single-digit decline for the quarter.

On our material side, what it is worth, we have not seen really any impact of tariffs so far. Not seen really any pull forward of orders either in the first quarter. And order patterns for the first three weeks so far would are as expected. Perhaps a little bit of elevated volume in North America, that is probably because we have been discussing potential price surcharges.

We do not expect that to be material anyway. Turning to your second quarter, on RFID, 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. Recall that 10% to 15% range that we gave. Again, one of the reasons why we are actually only focused on the second quarter is because even in that 10% to 15% range, apparel still makes up roughly 60% to 65% of our overall sales.

And given the uncertainty over there, we thought it better that we focused on the second quarter and what we know now. If I look across the rest of the segments, Ghansham, I do not see any change in the growth programs that we have planned. Which as you recall, we said would scale during the year. They are all on track in the way that we anticipated and remain very confident in those overall.

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

Yeah. Good morning. Thanks for taking my question. So 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? Or if not, can you help us to understand maybe why we saw that ramp up the way that it did? And then just, you know, another kind of somewhat related issue on the low single-digit impact from tariffs.

How do you anticipate dealing with that? Is it again, some of it may be 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?

Yeah. Thanks for the questions, John. So 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 the 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 is a little bit of an impact for that, but nothing really major that I would look at there. 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 it had on incentive for that year.

So 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. So 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 are 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.

So it will be a combination of those things that we are looking at. Not 100% pricing, but certainly in the US 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.

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

Thanks very much. So 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? And then for Greg, know that 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, but at the same time, what you did is you opt to 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?

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 are 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 is in-country or actually through the supply chain even back into the United States?

And largely, this is really a China tariff issue at the moment. That is the way I would characterize it. I think Greg made the point of saying 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. And what we are seeing with customers over there is trying to determine how much they can move to other sourcing locations done that historically for them for a very long time with their prime partner in that.

Actually see advantage for us in that. And the second piece is then how do they then also make decisions on what they are gonna price point these into the in the markets ultimately when they arrive? In stateside. I do not see it very easy to distinguish between if it is a tariff issue, if it is an economic issue because, ultimately, any high tariffs of that order of magnitude will have likely consumer volume impact at some point.

Again, it is on a very small part of our business overall, and that is the way I would characterize it. I think it also highlights at least for me, Jeff, just the broad strength of the franchise that we have. This is a smaller part in this. We have a significant opportunity in some of our high-value category growth areas.

Our base business across the world outside of apparel in China continues to do well. Competitive advantage over there We have a strong balance sheet that we are gonna leverage and move as we move forward through the cycle as well. Alright. Thanks.

And, yeah, Jeff, on your question on share buyback, nothing's really changed from our approach to capital allocation. I think you heard us talk about that many times and how we think about capital allocation. Specific to share buybacks. You know, our focus there over the years has been on and 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. So from that perspective, know, we increase the pace of our buybacks accordingly as we think we can then generate a strong return. So that has been our focus in how we think about buybacks.

Of course, we use a grid-based approach, and we are disciplined in that. But you know, when we think the share price is in a period where it is declining and well below our intrinsic value, then we will look to accelerate our purchases. So that is what we have done here in the last few months. Think the uncertainty that we are 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.

So that is a little bit different than I think our approach. We will continue our approach on buyback, I should say. We will continue you know, with our capital allocation strategies we always had. You know, I would not say that we are necessarily gonna buy, you know, $250 million of shares every quarter, but, of course, we are gonna continue executing our strategy the way we have in the past.

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

Thanks. Hi, everyone. Good morning. Great to hear you back, Greg, and also congrats to Danny.

My question's on again, solutions and apparel tags. And so if we think about the amount of volume or revenue that is looking to move from China to elsewhere. Recognize there is gonna 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, i.e., either because you do not have the capacity in place or for some other reason if so, would there be a way to quantify that? Related question, and we totally understand that the uncertainty might you know, lead to delays in some of the pilots, but I just want to make sure that I am understanding it correctly. You know, coming into the year, the outlook for IL growth was 10% to 15%. With the lower end of that range, Deon seemingly being relatively baked in based on what you knew right now.

So can you under 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.

Sure. On the first on your first question, George, what we have historically seen in time is, and this is probably been for the last decade, is we have helped customers move their sourcing for apparel other countries, Bangladesh, Vietnam, Cambodia, Thailand, you know, Latin America, Eastern Europe, is that we have actually, over that time, built up a fairly robust network. It is one of the things that I keep reiterating at it is one of the advantages we have. It is one of the reasons partners work with us in that regard.

I will also say that, you know, there is still a substantial amount of garments still being sourced in China. It is a 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.

And particularly because in some of those other countries, there is not still yet the full value chain established domestically. There is not every piece of componentry that you will need to make garments, and so 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, and 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 of these if the existing tariffs stayed 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 US volume. And we know within our network, we can manage it across our network. Again, I will point to whether the industry has enough garment manufacturing and vertical capacity to absorb that approach. And there is probably a question mark there.

It will also take time to stand up factories for garment manufacturing to stand up those supply chains. So I think there is an advantage for us there, and we are involved in conversation with all of those with those customers. Just turning to IL. I was very clear when we talked to 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 would have new programs that were already in rollouts, and we were just fulfilling those programs. And then the additional 5% we talked about was for new program rollouts, not speculative, but planned for a specific time, and the variability could come if those timing changed. In that 10%, clearly, we still have a very large portion of apparel, George, that is anchored at roughly 60% or 65% is still apparel. And so any volatility or uncertainty as it relates to apparel, particularly the applicability of tariffs now makes it more difficult to understand.

And 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 are seeing significant increased interest from our food channel on the strength of what they have seen at the Kroger rollout.

Which so far we are in 25% of their stores on track for the rollout over there. And we continue to see really strong interest from the pilots that we have in food that actually expanded even further. In logistics, we continue to see further interest as well. I will still say that is more likely to be a 2026 application rather than the 2025 application.

In general retail, we have seen high levels of retailers wanting to drive compliance. And it is one of the reasons we have stood up our Materials Group channel program because we access all of those channel partners, and we have 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.

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

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

Thank you.

Just two quick ones for me. Just in terms of Intelligent Label Supply, globally, it seems to be increasing competitive dynamic obviously has negatively impacted the logistics vertical. With the potential for further negative impacts. Before I get a sense, like, Deon, like, what are you doing to try 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 pipe with respect to 2026 with logistics. So any additional color you could give us around deployments that could potentially happen next year? Thanks.

Sure. So, Mike, yeah, I think I have spoken previously about where we see the overall competitive landscape to be for ILUM. I will just remind everybody that it is not just in a singular node. It is a series of nodes.

The chip manufacturing, that is not us. There has been taking that chip and putting it on to an inlay specifically designed and attenuated for its applicability, whether it is food, logistics, apparel, whatever the case may be. We are world leaders in that. With much of our intellectual property centered there.

Then you are gonna manage data on that device. Again, we are world leaders in that. You have to have some form of hardware or software that or hardware that reads it, and we play partner in that area. And then 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.

And we selectively play have bought and have stood up applications, including our app and our IO. So I would say across that ecosystem, Mike, we remain the go-to person to enable large-scale rollout and adoption. Is also typically when it rolls out that we tend to be the only or largely predominant supplier. And then in time, as sourcing decisions change within brands, retails, and customers, may bring on a second real service 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, Raul, I will be similar.

So our aim is to make sure we are maintaining our majority share because we will disproportionately benefit them as these new segments roll out. And we are doing that really in three things. We are continuing to really lean into our innovation capability. And during this year, we will see new innovation, proprietary innovation that we bring to market that is gonna help unlock some of these new segments even further, and we will benefit from that.

We lean into our process engineering role to role manufacturing capability producing billions of licenses to maintain our low-cost leadership in the world in this area that also provides us competitive advantage. And I think the final thing is that we have learned over time as the team that most people call the first time how to position the value creation that this technology will provide then we back that up with support throughout the network, whether you are at source, wherever your garments are sourcing, food sourcing, whether you are in the supply chain or even in retail where we help retailers do cultural adoption.

So we continue to see that as a predominant and key focus for us as maintaining our advantage in that area. I think on the color as it relates to 2026 and Logistics, all I will say, and I am not gonna 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 has actually extended slightly. Some of them fairly largely, they are still in the pilot phase where they are testing the returns that they will see largely anchored on labor efficiency, or routing accuracy. They are all direction you there, and if you there is not one of the large logistics providers that we are not engaged with now.

If things continue in the progress in the way they are, then I do not see why that we have not seen another progress moving forward as we go through the next year or so. But, again, that will be subject to how that particular customer sees it as a priority within all of their other strategic priorities.

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

Great. Thanks. Good morning, team. I want 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 have also seen chemical prices like propylene come down quite a bit of late. So can you just walk through the broader raw material basket and what you are seeing in the key areas and how that is sort of all netting out to inflationary in 2Q?

Thanks.

Sure. So, yeah, I think when we look at you know, our pure raw material basket, we have got 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. 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 probably start impacting us here in the middle of the quarter. So think from that perspective overall, it is probably relatively stable.

How we are 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.

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

Hey. Good morning, Greg. Welcome back. Glad to hear all is well.

Deon, you sound confident in the new program rollout and I do not want to belabor questions already brought up too much. But 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 cost higher for the end retailer and whether that be wafers for circuits made in China and whether those are exempt or not or anything on the reader. Or printer side. And do any cost increases there add uncertainty into your partner's 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.

Let me see if I can best address that. To the best of our knowledge, we are not anticipating substantial tariff impacts on the predominant pieces that make up the RFP supply chain. I am deliberately excluding semiconductors out of China at the moment. There are chips.

Because most of what happens from a semiconductor perspective that we use and the industries at the moment does not 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 are very opaque to us. And I expect very low impact overall.

In terms of hardware, there are certainly hardware players that have got manufacturing based in Asia. And then maybe some incremental cost associated with that. But I suspect, like, we are doing, all other companies are trying to make sure they are mitigating those large fees resourcing changes. And so overall, I would suspect that the increased tariff costs to retailers or customers will be very, very limited.

And in that regard, I would also say that typically, if you have such a small order of increase, it is not a deterrent. The way we have seen the return on investment for these RFP programs, it pays back within a year. Returns are so strong that it would typically offset any of those. Now in discussion that we have had with our existing plan rollouts that we have currently, this has come up a couple of times, but there has been no indication from any customer that suggests they will pull back.

I put that in the context of some of you in our apparel customers who are wanting to roll out. They are 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. And we will see and once we know more, we will come back and let all of you know.

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

Hi. It is Chris Prella on for Josh. I wanted 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? And then I have a follow-up question on US demand given it is thirty customers say?

So on the capital spend, I think I may have touched on this. John. Sorry, Chris. Do not anticipate really a significant step up in capital because we actually have available capacity.

We have available shift mechanisms. We continue to work on productivity. I think the things are 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 EBA perspective. I cannot remember your specific second question. Maybe John, you can help me on that?

Just color on US demand right now.

US demand for overall US demand? Okay. Overall US demand we are seeing at least on the materials business, no change to overall US demand. Think for retailers and brands and apparel, certainly, I think I have indicated there is a current slowdown in orders specifically for China.

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.

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

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. Q and then stabilizing. And I am 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 am just curious how you kinda think about you know, the progression of net price given the kinda cost environment that you talked about in 2Q?

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 final part, I guess, of that cycle of inflation, deflation we had, you know, for the last few years. So some price down in Q1 versus the prior year.

We would have a little bit more in Q2 versus the 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. And I will 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, we will look to implement some surcharges to manage part of that.

So 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 prices as we move through the second quarter to manage that tariff surcharge.

Our next question comes from the line of John Donegan with Jeff. Please go ahead.

Thanks for taking the question, and I will echo others and welcome you back. Greg, glad to hear you are healthy and back in the seat.

Thank you.

I just wanted to start off with slide fifteen. You gave a nice detailed sales breakout by end markets there. But it does not seem like you guys are considering every logistics exposure as maybe a bit more cyclical. In the current environment.

If that is accurate, Dean, you provide some details around why that end market should be a bit more stable and maybe how you can you could 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.

So 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. And on the material side, where we have got a lot of VI labels that go into box shipments. Let me break that into two pieces. So on our intelligent label side, actually see less variability even though there may be some economic impact to overall logistics if there is a lower volume environment.

And less 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. So it is largely, I would say, largely secure in terms of where we hence why we see less variability. I think as it relates to if there is more volatility in the volume of volume environment that impacts logistics shipments. Domestic in the United States, for example, or internationally, then some of our VI label growth that we typically see, which goes in this will be slightly impacted.

But again, it is a smaller part of the overall business for us. And so we see it as largely mitigatable. Within our control.

Yeah. I would just add to Deon's points on, you know, much of that logistics slice of that pie outside of the intelligent labels portion that goes to logistics. It 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 is not immune to the impacts of a downturn, but has been pretty stable throughout recessions. We have been able to hold or even grow in recessionary periods in that materials business. So we feel good about overall within materials. Our ability to withstand a downturn is pretty strong.

Demonstrated that, I think, over the last number of downturns that we have seen globally.

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

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?

Okay. Jeff, yeah. And general retail in the first quarter was up very low single digits. And as we saw compliance continue to be driven by some of these particular 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 originally been high single digits for the quarter. Our expectations when we started the year.

And we know now that if the apparel impact that we are seeing, which we are saying is mid-single-digit declines for the whole business, anticipate the range of our IL growth to be probably in the mid-single digits growth. Again, highly variable, could move quite a lot but 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.

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.

Thanks very much. I will ask a couple of questions in sequence here. So you talk about the trigger points for additional structural actions. Deon, Greg, can you talk a little bit about what you mean by that?

I mean, we directionally know, but if you could put some details 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 moved 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 tariff? 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.

Thank you, George. In terms of the way we think about, let me address the sourcing piece first, and we will get to trigger points after, and between Greg and I will handle that. When I laid out what I thought is around 10% movement from the existing piece that is left in China. It is probably at the upper end of what we would see possibly from a supply chain capacity perspective.

I am 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 were not substantial enough to drive divert the action straight away. And we were able to respond as we were.

If there is more of a substantive requirement, so let us say over the next nine to twelve months, people want to move by season. Substantial portions, then the gating factor is first gonna be can they get the capacity at apparel garment or shoe manufacturing in those countries? The supply chain stands up to support all of that, and then they typically turn to us and say, can you help make that possible? And, generally, even in the extreme section situation like that, I think we will have the capacity to be able to address that.

Yeah. And, 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 happened to a tariff as we move across this quarter, it clearly will be one thing we are keeping an eye on in terms of how that evolves in know, hopefully, we end up with some negotiations that when we get through a few months now that they do not go back up, or even the China wants to hopefully come down as we start to hear some easing about last night. So, hopefully, we see some improvement there, but that is something we will keep an eye on and how that evolves and then from that perspective, where that puts projections for GDP, in the macro environment for this year.

So we know that you know, projections over the last couple of weeks have come down a little bit. From a number of sources, so we will continue to monitor that. And see how that evolves. And, 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, etcetera.

There are a number of different trigger points we will keep an eye on as we move through the quarter. Know, we are following a similar playbook that has we have done how we have done in recent downturns. We look at 2020, or even in 2023 when we had the destocking. Will look at temporary savings buckets, whether that be you know, volume-driven actions or belt-tightening and discretionary spend reductions, things like that.

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

Joseph, the only thing I would 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 supply chain. So whether it is in our solutions business or in materials business, we are probably likely to see demand soften ahead of many other people as well. And part of that advantage then allows us to pull into play the playbook that Greg was talking about. I think it is for me, it just constantly underlines the fact that the strength of the franchise we have is really resilient.

You know, we have gone through down cycles and when they have happened in the past, we have actually been able to not only maintain margins on material in our materials business, slight decrement in our solutions business, but actually come about an overall stronger both from a share perspective and a market perspective overall. And I do not 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 cyclical call out Vespom as an example. This is a business for us where we are seeing significant growth because of some of the new customer.

And typically in downturns, when either pricing changes or there is less volume, you need more promotional activity and actually somewhat counterintuitively best come business will actually thrive more in a downturn economic cycle. Again, highlighting the resilience of our solutions group actually different to what it was even in 2020 when we saw the last real significant change overall. So I think overall, I think we are well-positioned. Should growth continue, we have all of the innovation we bring to the market.

We have the strength of our base business, but 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.

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

Thanks, Regina. To recap, delivered a strong first quarter in a dynamic environment, we are well prepared for a variety of macro scenarios. And 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.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.