Q3 2026 Avery Dennison Earnings Conference Call - AVERY DENNISON CORP

Explicit Guidance:

• Full-year 2026 Adjusted EPS narrowed to $10.10–$10.24, midpoint raised to represent ~7% YoY growth.
• Full-year 2026 Organic Sales Growth Midpoint raised to 3.5%.
• Full-year 2026 Reported Sales Growth anticipated at ~5.5%, driven by organic growth (3.5%), currency (+1.5 points), Taylor Adhesives acquisition (~1 point), and calendar adjustment (-40 bps).
• Full-year 2026 Free Cash Flow (FCF) conversion target >100% of net income.
• Full-year 2026 Capital Expenditures (CapEx) anticipated at ~$240 million.
• Q4 2026 Sales growth expected to face a ~1.5% YoY headwind due to calendar shift; EPS growth expected to face a modest headwind from the same calendar adjustment.

Business-Segment Outlook:

• Materials Group: High-value categories (embellish, durable labels, performance materials) to continue growing mid-single digits organically; Base categories supported by share gains and pricing.
• Solutions Group: Adjusted EBITDA margins expected to expand (achieved +80 bps in Q3 to 17.8%) driven by productivity; Intelligent Labels (IL) within Solutions expected to see double-digit growth in 2027.
• Intelligent Labels (Enterprise):
  • Food: Robust growth expected in 2027 with three large grocers now in early commercial rollout; significant traction in fresh categories with multiple global pilots.
  • Logistics: Double-digit declines in 2026 attributed to share normalization of 2025 gains; expected to be largely mitigated by year-end 2026, with new pilots expanding in "first mile" and "last mile" segments.
  • Apparel: Continued positive momentum expected through 2027 driven by new customer rollouts (including a world's largest value retailer); IL sales up double-digits in Q3 within apparel.
  • General Retail/Beauty: Pilots underway in beauty/personal care and OTC to drive shelf availability; expansion expected into adjacent categories with similar outcomes to apparel.
  • Walmart Fresh: Commercial ramp expected to accelerate primarily in 2027 following timeline shifts; commitment reaffirmed with leadership.
• Vescom (Solutions): Growth supported by new Software-as-a-Service (SaaS) solutions for Electronic Shelf Labels (ESL); strong interest from retailers in automation and efficiency solutions.

Market and Competitive Outlook:

• Consumer Behavior: Bifurcation observed; CPG unit volume expansion remains muted (<1%) but better than prior year flat; holiday outlook cautious for apparel, driven largely by price.
• Share Gains: Expectation of double-digit Intelligent Labels growth over the next couple of years to achieve growth algorithm targets; share gains in Materials driven by sustainability requirements (PPDWR/EPR) and vertical integration in filmic products.
• Destocking: Inventory destocking expected to conclude by end of Q4 2026; Q4 earnings impacted by ~1.5% sales headwind; full-year 2026 destocking impact estimated at -2 points on sales and -15 cents on EPS.
• Pricing/Cost: Pricing actions largely covering inflation on a dollar basis; raw material basket (paper, propylene) expected relatively stable Q3 to Q4, though uncertainty remains; wage inflation (mid-to-high single-digit YoY) to be offset by productivity.

Macro / Industry Outlook:

• GDP/Retail: Macro conditions (GDP ~2%, Retail Sales Volume ~1%) expected to remain stable barring material changes; continued caution among CPG and industrial customers due to inflation.
• Geopolitical/Rates: Vigilant monitoring of geopolitical situations, bond yields, and their potential impact on inflation and pricing dynamics.
• Regulation: Growing adherence requirements (PPDWR, Extended Producer Responsibility) driving demand for Avery Dennison solutions over the next couple of years.

Strategic Initiatives:

• Leadership Transition: Helen Sherbon appointed President of Solutions Group, effective November 3, 2026.
• Restructuring: Cumulative savings exceeding $65 million; ~20 cents YoY carryover benefit expected in 2027.
• M&A: Taylor Adhesives acquisition contributing ~1 point to full-year sales growth.
• Investments: Venture investments of ~$80 million year-to-date; focus on strengthening portfolio.
• Capital Allocation: Commitment to maintain strong balance sheet (Net Debt/EBITDA ~2.2x) while returning capital; $135 million returned in Q3 ($75M dividends, $60M buybacks); ~$480 million returned YTD.
• Productivity: Continued focus on "relentless productivity" and operational agility to mitigate cost inflation.

Risks and Headwinds to Outlook:

• Destocking: Remaining inventory unwind expected to complete by year-end; any delay could impact Q4 performance.
• Inflation/Costs: Uncertainty regarding raw material markets and potential for further wage inflation (incentive compensation normalization).
• Macro Sensitivity: Consumer caution in CPG and apparel segments; potential geopolitical impacts on inflation and supply chains.
• Deployment Timing: Intelligent Label rollouts (specifically Walmart Fresh) subject to quarterly timing variations; logistics share normalization impacting current sales rates.
• Currency/FX: Favorable translation (+1.5 points) partially offset by other headwinds; sensitivity to continued currency volatility.

Management Tone on the Future:

• Confidence: High confidence in the long-term opportunity of Intelligent Labels, particularly in food and apparel, describing the current state as "just the start" of a massive adoption curve (200B+ unit market).
• Resilience: Strong belief in the durability, differentiation, and competitive moat of the business despite near-term inventory and cost dynamics.
• Guidance Revision: Slight upward revision to full-year guidance midpoint reflects strong YTD execution and a more gradual destocking pace than anticipated.
• Strategic Focus: Emphasis on "investing in innovation and service-led differentiation" and maintaining financial flexibility.

Miscellaneous:

• Q3 2026 Actuals: Sales +4% (Organic +4%); Adjusted EPS +2% ($2.42); Adjusted Free Cash Flow >$240M.
• Underlying Performance: Estimated 6% organic sales growth and 8% adjusted EPS growth when excluding destocking headwinds.
• Segment Margins: Materials EBITDA margin ~16.4% (down ~100 bps); Solutions EBITDA margin 17.8% (up 80 bps).
• Taylor Adhesives: Contributed >1 point to reported sales growth.