Avery Dennison 2026 Q2 Earnings Call

Please go ahead, sir. Thank you, Ellen, and welcome to Avery Dennison's second quarter 2026 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 A4 to A8 of 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, Gilly, and 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 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 and 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. 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 double-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 pre-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 double-digit growth across both our high-value categories and base solutions. Within our high-value platforms, Embelex 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 on 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 anticipated, 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 outsized 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 U.S. grocer retailer and expanding activity across other customers.

Finally, in 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%-4%. In summary, our strong second quarter performance, delivering another quarter of accelerating sales and earnings growth, highlights the differentiation and underlying 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 proactive 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, Dion. 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 Dion mentioned, customer inventory pre-buys were a 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.

We generated strong adjusted free cash flow of $365 million in the quarter, primarily driven by earnings growth and 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, an 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 pre-buys, 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 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 and high single-digit growth in Intelligent Labels. Industrial tapes grew low single digits, and 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 cost, inclusive of cost-out re-engineering. 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 double-digit growth. Within high-value categories, embellishments delivered strong low double-digit growth.