Q3 2026 Avery Dennison Earnings Conference Call - AVERY DENNISON CORP

Financial Performance:

• Reported Q3 sales grew 5% YoY to $2.3 billion, with organic sales growth of 4%; underlying business performance estimated at 6% organic sales growth.
• Adjusted EPS reached $2.42, a 2% increase YoY, with underlying growth estimated at 8% after accounting for destocking headwinds.
• Adjusted free cash flow generation was robust at $246 million for the quarter, bringing year-to-date adjusted free cash flow to $716 million (over 100% of net income conversion).
• Adjusted EBITDA margins were 15.8% enterprise-wide; Materials Group margin dipped ~100 bps YoY to 16.4% due to pricing pass-through and labor costs, while Solutions Group margin expanded 80 bps to 17.8%.
• Net debt to adjusted EBITDA improved to 2.2x, reflecting a strong balance sheet.
• Customer inventory destocking unfavorably impacted Q3 sales by ~2% and adjusted EPS by ~6%.

Guidance and Future Outlook:

• Full-year 2026 adjusted EPS guidance midpoint raised to $10.17 (range $10.10–$10.24), representing ~7% YoY growth.
• Full-year organic sales growth guided at ~3.5%, with reported sales growth expected at ~5.5%.
• Q4 outlook anticipates the conclusion of the majority of customer inventory destocking, with sales growth facing a ~1.5% YoY headwind from calendar shifts.
• Fiscal 2027 outlook includes expectations for Intelligent Labels (IL) to achieve double-digit growth, driven by the Walmart Fresh commercial ramp, third large grocer rollout, and expanding logistics pilots.
• Restructuring savings are now projected to exceed $65 million for the year, with ~20 cents of carryover benefit expected into 2027.
• Capital expenditures are forecast at approximately $240 million for the year, with potential timing shifts to 2027 due to volume swings.

Business Segments and Product Lines:

• Materials Group: Organic sales up 5%; both high-value and base categories grew mid-single digits, driven by share gains and pricing actions.
• Solutions Group: Organic sales up 1%; base categories grew low single digits, while high-value categories remained flat year-over-year.
• Intelligent Labels (IL): Enterprise-wide sales grew low single digits; Apparel/Retail saw ~10% growth due to program expansions and retailer recovery.
• Food & Logistics: Food adoption continues with a new large grocer commercializing and expanded pilot activity; Logistics sales declined double digits due to normalization of 2025 share gains and softer demand, though new pilots are active.
• Product Launches: Strong growth in Embellish (mid-single digits) despite World Cup headwinds; Vescom benefiting from new SaaS software solutions for electronic shelf labels (ESL).

Market and Competitive Landscape:

• End Markets: CPG unit volume expansion remains muted (<1%) but slightly improved; retailers remain cautious regarding holiday demand due to inflation.
• Competition: Avery Dennison continues to gain share in Materials, aided by global reach, consistency, and vertical integration in filmic products.
• Secular Trends: Growing demand driven by sustainability regulations (PPDWR, Extended Producer Responsibility) and the shift toward high-value, software-integrated solutions.
• Consumer Behavior: Noted bifurcation in consumer behavior due to inflation, with price-driven sales in apparel and general retail.

Risks and Challenges:

• Inventory Management: Customer destocking in Europe and Asia is ongoing, creating near-term revenue headwinds despite gradual unwinding.
• Cost Inflation: Raw material costs (particularly paper) and employee-related wage inflation continue to pressure margins, requiring continuous pricing and re-engineering efforts.
• Geopolitical & Macro: Uncertainty regarding geopolitical situations, bond yields, and inflationary pressures affecting consumer spending and global trade.
• Customer Concentration: Reliance on large-scale deployments (e.g., Walmart Fresh) introduces timing risks for revenue recognition.

Management Commentary and Tone:

• Confidence: Management expressed strong confidence in the underlying resilience of the business and the long-term growth algorithm, particularly for Intelligent Labels.
• Strategic Focus: Emphasis on innovation, service-led differentiation, commercial agility, and disciplined capital allocation to drive high-value category expansion.
• Leadership: Welcomed Helen Sherbon as the new President of the Solutions Group, effective November 3, 2026, citing her extensive experience in global solutions and transformation.
• Operational Discipline: Highlighted successful management of volatile costs and volume swings through productivity initiatives and targeted pricing.

Analyst Questions and Answers:

• Margins: Discussed that Materials margins are down YoY due to pricing math on cost pass-through and incentive compensation normalization, while Solutions continues to drive margin expansion via productivity.
• Destocking: Confirmed destocking is largely an Europe and Asia phenomenon, expected to conclude by year-end, with Q2 stock build impacts offsetting Q3/Q4 destocking.
• Intelligent Labels Cadence: Walmart Fresh commercial ramp delayed into 2027; Food growth expected to be robust and ramping throughout 2027; Logistics normalization to continue into 2027.
• CapEx: Lowered guidance attributed to project timing and focus on managing supply chain volume swings rather than a strategic reduction in investment.
• Free Cash Flow: Strong cash flow driven by improved working capital productivity and inventory turns; incentive compensation timing variations noted.

Other Key Points:

• Capital Return: Returned ~$135 million to shareholders in Q3 ($75M dividends, $60M buybacks), bringing year-to-date returns to over $480 million.
• Venture Investments: Invested ~$80 million year-to-date in venture capital to strengthen the product portfolio.
• Taylor Adhesives: Acquisition contributed >1% to reported sales growth.
• Pricing Strategy: Pricing actions successfully covered inflation on a dollar basis, though margin percentage is impacted by the pass-through mechanism during the inflation cycle.
• Pilot Expansion: Significant traction in beauty and personal care adjacent segments to apparel within the Intelligent Labels portfolio.