Avery Dennison Corp. 2026 Q3 Earnings Call

Please go ahead, sir. Thank you, Chase, and welcome to Avery Dennison's third quarter 2026 earnings conference call.

Please note that throughout today's discussion, we will 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 Greg Lovins, Senior Vice President and Chief Financial Officer. I will now turn the call over to Dion.

Thanks, Gilly, and good morning, everyone. We delivered strong third-quarter results, continuing to demonstrate the underlying strength and resilience of our business. Organic sales grew 4%, adjusted EPS grew 2% compared to prior year, and adjusted free cash flow generation continues to be robust at over $240 million. Considering the impact of customer inventory management, as shown on slide 5, our underlying business performance remains strong, with an estimated 6% organic sales growth and an estimated 8% adjusted EPS growth year-over-year. Reported sales growth was balanced across both high-value and base categories, with each up mid-single digits. As we indicated in our recent investor showcase event, high-value categories are a key part of our growth algorithm and future margin expansion. Q3 results reinforce the value of this portfolio of solutions, which are being driven by both secular demand growth and our differentiated competitive position.

At an enterprise level, our operational priorities remain clear. First, investing in innovation and service-led differentiation to drive share gains and expand opportunities across base and high-value categories. Second, executing with commercial and operational agility, combining targeted pricing actions with relentless productivity to mitigate cost inflation. Third, disciplined capital allocation supported by a robust free cash flow as we continue to invest in our business and return cash to shareholders while maintaining our strong balance sheet. Turning to our segment results. Materials Group delivered organic sales growth of 5%, with both high-value and base categories growing mid-single digits. We continue to solidify our leadership position through commercialization of innovative solutions that support industry secular trends. Sales in the quarter came in ahead of expectations due to a more gradual pace of customer inventory destocking than anticipated.

While this unwind is taking longer to materialize, destocking is ongoing, and we continue to expect the vast majority of the first half pre-buy inventory to unwind by the end of the fourth quarter. While segment-adjusted EBITDA margins were down versus prior year, our teams continued to execute at a high level during the quarter, successfully managing volatile cost inflation and volume destocking to drive year-over-year growth in segment adjusted EBITDA. In the Solutions Group, organic sales increased 1% with a low single-digit growth in base categories and high-value categories comparable to prior year. Of note, strong growth in Embelex continued despite lapping a significant World Cup headwind. From a profitability perspective, our team executed exceptionally well, delivering adjusted EBITDA growth and strong adjusted EBITDA margin expansion. Shifting to enterprise-wide Intelligent Labels. Sales were up low single digits compared to prior year, reflecting contrasting dynamics across end markets.

In apparel and general retail, sales rose approximately 10%, driven by program expansions and general retail recovery. In food, adoption momentum continues to build with strong growth as we ramp up another large grocery customer, expand pilot activity, and continue to move towards commercialization with the largest U.S. grocery retailer. In logistics, sales declined double digits, reflecting the normalization of outsized share gains in 2025, alongside softer overall customer demand. We remain actively engaged across logistics providers and continue expanding pilots with new partners. Turning to our full year 2026 outlook. Reflecting our strong year-to-date execution, we are slightly raising the midpoint of our range, representing roughly 7% growth at the midpoint on full-year organic sales growth of 3.5%. Regarding Q4, operationally, our business remains healthy, and we anticipate that the remaining pre-buy inventory will largely conclude by year-end.

On the leadership front, I am extremely pleased to welcome Helen Sheirbon as our new president of the Solutions Group, effective November 3rd. Helen brings over two decades of global leadership, most recently serving as senior vice president and chief operating officer of Global HP Solutions. Her proven track record in driving growth, transformation, and customer-centric innovation across solutions, and her deep operating experience fit exceptionally well with leading the Solutions Group moving forward. In summary, our third quarter results demonstrate improving underlying growth while reinforcing the durability, differentiation, and competitive moat of our business. We remain focused on driving our long-term strategies while executing with discipline needed to navigate near-term inventory and cost inflation dynamics. Supported by robust free cash flow generation and a strong balance sheet, we maintain the financial flexibility to invest in high-value opportunities while consistently returning capital to shareholders.

As always, I want to thank our global teams for their support, their leadership, and their agility, and in continuing to make possible solutions for our customers and value creation for all of our stakeholders. With that, over to Greg.

Thank you, Dion, and hello, everybody. In the third quarter, we delivered adjusted earnings per share of $2.42, up 2% compared to prior year, coming in above our expectations, largely due to a more gradual pace of customer destocking in Materials Group, as well as strong operational execution. We estimate that customer inventory destocking unfavorably impacted sales by roughly 2 points and adjusted EPS by roughly $0.15 or 6 points in the quarter, leading to underlying growth in adjusted EPS of roughly 8%. Reported sales rose 5% year over year to $2.3 billion, with organic sales growth of 4%. This was driven by low single-digit price realization to offset raw material cost inflation and a low single-digit impact from volume mix growth. Reported sales growth also benefited by more than a point from the Taylor Adhesives acquisition.

Adjusted EBITDA margin was 15.8%, which was down year over year as strong productivity initiatives were more than offset by the dilutive margin percentage effect of passing through raw material-related pricing, the normalization of incentive compensation, and unfavorable mix. Free cash flow generation remained very strong. We generated adjusted free cash flow of $246 million in the quarter, bringing year-to-date adjusted free cash flow to $716 million, a conversion rate well above 100% of net income. Our balance sheet remained strong, with net debt to adjusted EBITDA improving to 2.2 times. Capital allocation remained consistent with our disciplined framework. We continued to invest organically in our business with capital spending on a year-to-date basis up versus last year. We also returned approximately $135 million to shareholders during the quarter through $75 million in dividends and $60 million in share repurchases.

This brings year-to-date capital return to shareholders to more than $480 million. In addition, year to date, we've spent approximately $80 million on venture investments, underscoring our ongoing focus on strengthening our portfolio. Turning to our segment results, Materials Group sales increased 8.5% to $1.6 billion, with organic sales up 5%. Destocking was an approximate 3-point headwind to segment organic growth. As Dion mentioned, while inventory destocking did begin in the third quarter in Label Materials, it proceeded more gradually than we had anticipated. High-value categories grew mid-single digits organically, led by specialty and durable labels and performance materials. Base categories also grew mid-single digits, supported by end market growth, share gains, and pricing in labels. Materials Group adjusted EBITDA dollars grew slightly, with margins at 16.4%, which was down roughly a point compared to prior year.

This was driven by 2 primary factors, the dilutive impact on the margin percentage from pricing actions to offset cost inflation and higher employee-related costs. Together, these drivers more than offset strong productivity savings. Shifting to Solutions Group, reported sales were $687 million, down 1.8%, with organic sales up 1%, slightly higher than anticipated. Base categories grew low single digits, while high-value categories were comparable to prior year. Within high-value platforms, Embelex overcame World Cup headwinds and grew mid-single digits. Vestcom rose low single digits, and Intelligent Labels sales within Solutions Group declined, driven by the anticipated share normalization and softer customer demand in logistics. Solutions Group adjusted EBITDA grew year over year, with margins expanding 80 basis points to 17.8%, as our teams continued to drive significant productivity, which more than offset higher employee-related expenses.

Turning to our full-year 2026 outlook, we are narrowing our adjusted EPS guidance range to $10.10 to $10.24 and slightly raising the midpoint of our guidance. The new midpoint represents roughly 7% growth year-over-year. We anticipate reported sales growth of approximately 5.5% for the year, including organic sales growth of approximately 3.5%, approximately 1.5 points from currency translation, roughly one point from the Taylor Adhesives acquisition, an approximate 40 basis point headwind from the calendar adjustment. Key earnings drivers supporting our full year outlook include incremental restructuring savings now exceeding $65 million. A net EPS benefit of approximately $0.30 from favorable currency translation and lower share count, partially offset by higher interest expense and adjusted tax rate. Headwinds from wage inflation and the continued normalization of 2025 temporary savings, largely related to incentive compensation.