Ladies and gentlemen, thank you for standing by. During the presentation all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. [Operator Instructions]. Welcome to Avery Dennison's Earnings Conference Call for the Fourth Quarter and Full Year ended on December 30, 2023. This call is being recorded and will be available for replay from 5:00 p.m. Eastern Time today through midnight Eastern Time, February 6. To access the replay, please dial 800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 22028081. I'd now like to turn the call over to Mr. John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Frank. 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 A-4 to A-9 of the financial statements accompanying today's earnings release. We 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, John, and hello, everyone. In the fourth quarter, we again delivered sequential earnings growth, with earnings up significantly compared to prior year and in line with our expectations. We grew volume sequentially and compared to prior year in both segments, significantly expanded margins, generated strong free cash flow and delivered significant growth in Intelligent Labels. Looking at the full year, while market conditions in 2023 turned out to be very different than we anticipated, and we did not deliver on our initial expectations for the full year. I am pleased with how we navigated the challenging environment. We protected margins as the industries we serve experienced significant destocking, improved service for our customers, deepened our insights on the drivers of demand and inventory throughout the value chain, continue to shift our portfolio towards high-value categories as we delivered on our growth opportunities, particularly in Intelligent Labels and generated strong free cash flow, highlighting the strength and resilience of our overall franchise. During this period, we leveraged our core strengths of productivity, cost management and capital stewardship and increased our potential in Intelligent Label solutions to minimize the impact of the low volume environment on our bottom line. More broadly, we see the reduction of excess inventory throughout the value chain as a good thing. As it positions our industries and business to return to a more normalized growth trajectory in 2024 and demonstrate the growth power of our Intelligent Labels platform in particular. Importantly, the macro uncertainty and volume impacts in 2023 have seen customers increasingly looking for help to solve some of the most complex industry challenges, such as labor efficiency and supply chain effectiveness, waste reduction, circularity and transparency and helping better connect brands and their consumers. It is clear physical items will need a digital identity…

Thanks, Deon. Hello, everybody. I'll first provide some additional color on our fourth quarter results and our performance against our long-term targets, then walk you through our 2024 outlook. In the fourth quarter, we delivered adjusted earnings per share of $2.16, in line with our expectations, up sequentially and up 31% compared to prior year, driven by benefits from higher volume and productivity. Compared to prior year, sales were up 3% ex-currency and 1% on an organic basis. As higher volume was partially offset by deflation related price reductions. Adjusted EBITDA margin was strong at 16% in the quarter, up 3 points compared to prior year, with adjusted EBITDA dollars up 29% compared to prior year and also up sequentially. We generated strong adjusted free cash flow of $218 million in the fourth quarter and nearly $600 million for the full year. With our working capital metrics on target to end the year, resulting in more than 100% adjusted free cash flow conversion. We invested $285 million in fixed capital and information technology in the year, paring back investments in our base given the lower volume environment while continuing to invest in our high-value categories, particularly Intelligent Labels. And our balance sheet remains strong with a net debt to adjusted EBITDA ratio at year-end of 2.4%. We're continuing to execute our disciplined capital allocation strategy, including strategic acquisitions and continuing to return cash to shareholders. In 2023, we returned nearly $400 million to shareholders through a combination of our growing dividend and share repurchases, and we deployed roughly $225 million for M&A. Turning to segment results for the fourth quarter. Materials group sales were down 4% ex currency and on an organic basis, driven by low single-digit volume growth, which was more than offset by deflation related price reductions and…

Thank you. [Operator Instructions] Our first question comes from Ghansham Panjabi with Robert W. Baird. Please proceed.

Just going back to your comments on Europe being a little bit better -- could you first of all Deon expand on that? And then, second part of the question is really specific around intelligent labels. You obviously had a very lumpy rollout during the back half of last year, clearly very successful and so on and so forth. And I'm just curious, will there be similarly lumpy sort of customer rollouts in 2024 as well? Or would it be more so a reflection of just the natural uptick of your business there?

Thanks, Ghansham. Yes, we did see slightly stronger volumes in Q4 in Europe and we continue to see that trend in early January as well. And I think as you recall last time, Ghansham, we said that we thought that destocking had largely ended at the end of Q3. And the growth in Q4, which we'd anticipated has started to come through. I will also make the point, though that European retail volumes are still muted. In fact, they are the decline in the third quarter. And I think it just underlines the broader macro uncertainty out there. But despite that, as we see the inventory destocking ending both in Europe and North America, we anticipate the recovery of that volume specifically in the normalization of our labels business. Turning to intelligent labels. We saw the growth really in the business in the second half of the year for intelligent labels largely impacted by apparel and the destocking in apparel as well as some muted sentiment around apparel for the whole year. And then you clearly saw the growth we saw in our non-apparel categories, up 75% for the year and accelerating as we went through the back end of the year, particularly over 100% in the fourth quarter, largely on logistics and food. As we look into 2024, we're still targeting that 20% plus growth rate as we move through this year. And I think three things are going to have to happen in that regard, Ghansham. So one is we're going to continue to see those new programs that we launched during last year, both in apparel, food, logistics and other categories, annualize as we go through this year. Those are in-flight and will happen. There is a degree of seasonality that will come, particularly in logistics, which tends to have a higher fourth quarter than first quarter. And then we'll also continue to see, as Greg indicated, the normalization of our apparel volume during the second half of the year, that will also start to reignite some of the growth we've seen typically in apparel. And then, the final piece is there will be new programs that we will continue to launch across all segments, not just apparel, both in logistics, food and apparel. And I'll give an example of just 1 of those, Ghansham, just to help qualify it, we're right now involved in food with a bakery trial with a very large U.S. retailer, grocery retailer and we've been able to clearly demonstrate that not only can you have an impact on food waste reduction for perishable items, but also significant labor efficiency improvement. And we're anticipating that those results will start to lead to broader adoption as we go through the 2024.

Our next question comes from John McNulty with BMO Capital Markets. Please proceed.

So a question on the material space. So 4Q, you had a nice solid margin lift even with destocking continuing to impact the business at least in North America. I guess how should we be thinking about the potential for margin step up from that level as we look out to 2024?

Yes. Thanks, John. As we've talked about, when we set our targets, our long-term targets back in 2021, we're looking to get materials kind of at the level they were in 2020, which is around 17% EBITDA. I think we did a good job in the back half getting above 16% and improving margins despite the destocking with a lot of the productivity actions the team was driving there. So our focus here in '24 is continuing to make progress towards that 17% EBITDA target, not necessarily suggesting we'll get that exactly in 2024, but we'll continue to make progress there and expect to be able to deliver on our long-term target in 2025.

Our next question comes from Anthony Pettinari with Citigroup Global Markets. Please proceed.

This is actually Bryan Burgmeier, sitting in for Anthony. Thanks for taking the question. I appreciate all the detail on the guidance and organic revenue growth guidance. As prices kind of come down, which I think is embedded in your guide consistent with raw material prices. Do you expect labels can maintain positive [Technical Difficulty] cost. So as price comes down, do you think that will kind of match input costs one for one, or do you think there's a little bit of opportunity for Avery to pick up some margin or do you kind of have to get back a little bit more price? Thanks.

Yes. I think as we've been talking about over the last few quarters, given just the sheer magnitude of the inflation that we saw in '21 and '22. We've been largely passing through the deflation we've been seeing since, I guess, around the second quarter of 2023 through pricing. So our expectation is right now, we're seeing a little bit of sequential deflation in Q1, not a lot and we'd have a little bit of price down to go with that. But mostly price year-over-year will be carryover of the impacts from the prior year would be our expectation. Now that will depend on what happens with material costs as we move through the rest of the year. But overall, our view is, given the amount of deflation and the amount of pricing we put through in '21 and '22, that we'll be passing most of that back as we see deflation through pricing.

And Bryan, I'll just want to add that our approach has always been that as we see ourselves as the industry stewards to make sure we maintain the health of the industry as well as part of our role. But as we've lent into productivity, we tend to maintain and hold into our productivity benefits as we move sequentially through the years, given the investments in our core capability in our scale and innovation capability.

Our next question comes from George Staphos with BofA Securities. Please proceed.

I just want to pick up on the margin discussion. So rough math, when we look at your guidance, look at the midpoint of earnings, look at the midpoint for revenue growth, we wind up roughly with about 130 basis points of margin expansion, '24 versus '23. Greg, would you agree that that's roughly in the right ZIP code? And if not, where would you have [indiscernible] and putting all of the commentary together on some of the other questions and things you said in the past, would it be fair to say that most of the margin lift in '24 will go to, will accrue to solutions versus materials, or would it be relatively split? Thank you.

Yes. Thanks, George, for the question. So on the latter point, I think it will be a combination. I mean, we had, obviously, improving margins in solutions in the back half. We also have proven margins in materials in the back half of 2023. So based on our run rates in both of those businesses, both of them I would expect to be improving margins in '24 versus where we were last year. At an overall level, I think we put it on the slide with the long-term targets. Our expectation for 2024 be 15% plus margins. So if you do your math there on the EBITDA expectations, would be closer to 16% in 2024. So that's how we thought about the plan and how we're thinking about margins increasing across the two segments as well as total company, of course.

Our next question comes from Mike Roxland with Truist Securities. Please proceed.

Congrats on a good finish to a very tough year. Just a question, you mentioned in your remarks about disruptions in terms of the Panama Canal. You obviously have that and the Suez. Do you think the issues that whether from shipping, whether it be the actual product selling for shipping costs, could that actually serve as a tailwind and maybe drive a buy or a restock particularly if retailers get concerned that they're going to be out of pocket a lot of money to try to find alternative ways to get ships? So do you think that volume ultimately could actually be higher because of some of these transportation issues?

That's not what we're hearing at the moment, Mike. What we are hearing is that retailers and brands initially, largely in Europe are rethinking about how they're trying to get their goods to their home markets quicker, because they're having to route to round the cape of good hope and what we've seen is some degree of pull forward of orders maybe the first quarter, but we're anticipating that normalizing in the second half of the first quarter, so being on aggregate, the same. I think there's also a slightly broader challenge when it comes to the Panama Canal given the water level over there. But equally there, we're seeing retailers and brands taking appropriate action to ensure that they have continuity of supply. And we don't anticipate additional volume balance as a consequence of that.

Our next question comes from Jeffrey Zekauskas with JPMorgan Securities. Please proceed.

And a couple of questions around intelligent labels. In the logistics and food category, you were up 110%. Is there a cliff that we have to worry about as maybe new business is fully loaded? Or can we continue to grow from that level? And do you think that intelligent labels will grow 20% plus in the first quarter of '24? And then from a housekeeping standpoint, in your slides, you talk about intelligent labels as being 32% of the solutions group, which is 817 and last year, it was 29%, which is 738. So are those the right numbers? Because sometimes in your slides, you talk about intelligent solutions earlier in the year, being an $800 million business, but maybe you were rounding up or there's some currency or something like that. Can you clarify what the levels really are?

Sure, Jeff. Thanks for the question. I'll address the first two, and I'll let Greg deal with the third one then. On your first question as it relates to logistics being up 110%, that or there and thereabouts that relates to effective the program that we said we've been rolling out during 2023. Recall, I said the largest single single-wave program in the industry's history. And that ramp through the year, I think we talked about this each quarter as well, Jeff, culminating in the fourth quarter as that particular customer was getting ready for their busiest holiday period as well. Now as we look forward into 2024, two things are going to be a player of this. So one is, as we've seen and we've consistently said, when we have a new segment leader start to adopt the technology and realize the benefits in this instance of shipping accuracy, it tends to be something that then drives greater adoption across that particular segment. This is what we saw in apparel, and we're going to see this again in logistics. And so we're underway in discussion already with other logistics providers around the world to understand how best we can enable and support them in their supply chain efficiency aims as well. Some of those will come to bear, either in pilot trial as we go through 2024 and then onwards from 2025 as well. I think the second thing you're going to see and specifically logistics is that because you have this peak typically in the second half of the year. The first half and largely the first quarter tends to be lower just from a volume perspective for logistics overall. And that's what we're anticipating as well in our overall first quarter. We will see some continued apparel growth slightly. And then we'll see other segments that will also contribute in terms of some of the new programs we've launched as well for the first quarter. The first half of the year will certainly be up relative to the first half of last year simply because of the annualization of some of those large programs, Jeff.

Yes, Jeff, on your second question, I think Deon indicated in the prepared remarks, intelligent labels revenue for the year in 2023 was around $850 million. That does include some revenue that's in the materials segment. So if you just look at the solutions segment, it's a bit lower than that because some of that is sold through our converted channel through materials. Now as we talked about as well, last year, we said we had a roughly $800 million business. There is some currency translation there, of course, that impacts that number. But overall, we grew, as we said, kind of low double digits for the year in 2023 and that number is around $850 million across the enterprise.

Our next question comes from Josh Spector with UBS Securities. Please proceed.

I just wanted to ask a couple quickly on retail and really your confidence in the second half and where your volumes are today. So my multiyear stacks are getting kind of messed up, I guess, as we get further and further from 2019. I guess my data would say you're down about low single digit in the fourth quarter versus that level. I imagine that's wrong. So where would you say you are versus 2019? And then when you talk about a normalization, I guess what's the magnitude of the improvement you see in the second half as possible has worked into your guidance assumptions and what's your visibility to that today? Thanks.

So Josh, let me just start at the high level. We're anticipating that we'll see apparel normalization in the second half of the year, largely because we're seeing full uncertainty at retail and brand level, and they're factoring that into their sourcing near-term requirements as well. And compounded by, I think, some more of the geopolitical escalation that we've seen more recently. I think at the retail confidence level, we continue to see retail volumes be down both in Europe and North America at an absolute retail volume level in late 2023 and they're roughly forecast to be flat or similar in 2024. Final point I'd make is if you look at I think on Slide 6, we highlighted that we've had more than four quarters of continued significant import declines relative to normalized patterns in 2019. And at some point, that does turn and we're starting to see that now in North America for part of Q4, and I don't doubt that we'll also see that when the information comes through from Europe as well. That trend is part of our confidence around why we buy around mid-2024, we anticipate volumes for apparel normalizing at that point.

Yes, Josh. I think you can see on that slide, apparel imports in North America were down from 10% to low teens as you look at the different quarters across 23. Europe is a little worse, down in the low 20s. So look on a net basis, it's somewhere in the mid-plus teens from that perspective in 2023. We expect to still see that kind of a trend in the first half and start to improve them in the back half, as Deon talked about.

Our next question comes from Matt Roberts with Raymond James. Please proceed.

I might try to dig just a little bit more. If apparel volumes are expected to normalize in the second half, does that imply you could hit the $10 run rate in EPS as soon as 3Q? Or is that still uncertain and in regard to the 20% growth rate in intelligent labels, can you quantify how many points of that is dependent on the apparel rebound?

So Matt, I think we were clear the last time that we have confidence in the $10 run rate being achieved at some point in 2024, and that still remains the confidence, in fact, it's included in our guidance. I think the only variable that we continue to see is related to the uncertainty and the impact on timing. And so at this point where we will see a likely $10 run rate in the second half of the year. As it relates to your 20% IL growth that basically is going to account for we think about sort of 2 points of the company growth as we look for 2024. And it's based on making sure that we continue to accelerate our existing programs, roll out the new programs that we have and apparel volume rebounding as well.

Yes. I would just add to Deon's comments there. I think when we look at 20%, it's probably half or just shy of half of that from the logistics and food growth that we've talked about and then a quarter or so of that from the apparel rebound which again we've baked into the second half. And then the rest of that from general retail and some of the other programs that I think Deon already touched on as well.

Our next question comes from Christopher Kapsch with Loop Capital Markets. Please proceed.

So two questions sort of focused on margin. In your formal remarks, you mentioned in the materials segment about protecting margin in the context of, I guess, some deflation. I'm just wondering if you could elaborate on that comment? And are you referring more to just sort of giving back some of the price in the context of some raw material costs coming in? Or was there a broader comment there about just the competitive dynamic as we've evolved through this destocking period? Maybe you could just comment on that.

Yes. I think the comment, Chris, on protecting margins is really about given the volume challenges that we saw with the amount of destock. So it was really about the actions we were taking to help offset the volume impact on the bottom line whether that be through productivity actions, some of the temporary actions the team is taking to offset that, belt tightening, all those type of things, that's really what that's more referring to overall rather than the price inflation dynamics.

And Chris, let me just add from a competitive dynamic perspective, we know that we've not only maintained but slightly grown share in 2023 in our label business, both in North America and Europe and we've grown share in our Asia Pacific business as well as we continue to really focus down on service excellence and delivering for our customers. Our apparel share as well, if you're switching segments is also we've held share in apparel and in fact, are gaining in some of our new high-growth segments such as external and [indiscernible] as well. And overall, our IL share has grown as a consequence of some of the large volume programs we've rolled out as well.

We have a follow-up from John McNulty with BMO Capital Markets. Please proceed.

So on the solutions business and in particular, the margins, do you had a nice margin uplift from 3Q to 4Q with the big logistics player coming in. At the same time, when I look at it, the margins relative to, say, your revenue, revenue is kind of at an all-time high. Margin is not necessarily there. Did you have a lot of extra say, feet on the street or however you want to put it to kind of ensure that, that platform went off flawlessly as it ramped to kind of full levels? And if that was the case, how much does that kind of get dialed back as we look to 2024?

So John, I think there are two elements to this. One is we continue to, as we said, consistently forward invest ensuring that we have industries adopt. And so part of when we had lower volume overall, you tended to see the impact on margins overall. I think the second piece in this is that we will continue to see the return of some of those temporary cost actions that we've taken, as volumes pick up during 2024 as well. But the benefit of the additional volume and the way our teams are operating and the mix that we have from high-value segments and base on our solutions business will see our margins expand during 2024.

We have a follow-up from George Staphos with BofA Securities. Please proceed.

So my questions are on solutions. Deon, can you talk a little bit about how Vestcom did relative to the KPIs you would have had for the business in '23 and what the expectation is for '24 and then relatedly, within Solutions, you've covered this already to some degree. But IL for apparel it looks up a little bit, looking at Slide 7 versus '23 still down versus '22, if we're reading it correctly. Help us understand what is going on in terms of IL adoption and usage and apparel and why you're comfortable in the outlook there going forward? Thank you and good luck in the quarter.

Thanks, George. On your first question related to Vestcom, we continue to be really pleased with the progress that business is making as part of the Avery Dennison family overall. In '23, we grew at the pace and delivered the margins that we expected and, in some instances, slightly ahead. And in '24, we're expecting continued growth and actually a little bit of [Technical Difficulty] as we are in the process of piloting with a very large national retailer in the United States demonstrating the benefit of our productivity benefits that our shelf-edge labeling technology and data composition engine are able to drive that. In terms of IL, overall, you're right on that slide, what we're anticipating is that IL will slowly recover in the first half and then actually accelerate as the apparel industry recovers in the second half. And so we've got two things factored into that, George. One is some of the newer programs that we're seeing in apparel that started in '23 and are rolling out a little bit in '24, more likely in the back half '24. And then second is the recovery in the apparel base volumes, which also has an impact on the base IL volumes from apparel. I'll give you an example of just one of those. We're seeing a couple of pieces, both in apparel where we're extending beyond the base case of just inventory accuracy that historically been there. I talked previously, George, for example, Inditex is continuing to see the benefit of loss prevention from the technology. They will be continuing to roll it up, not just in that one single brand, but in other brands as we move forward. We're also seeing the extension of the technology from inventory accuracy in a large European performance brand and they're…

Mr. Stander, there are no further questions at this time. I will now turn the call back to you for any closing remarks.

Thank you, Frank, and thank you all for joining the call today. While the environment remains dynamic, we are confident in our position and prospects and our ability to deliver GDP plus growth and top quartile returns over the long term. I'm also pleased to announce that we're planning to host an Investor Day on September 18 in New York City to provide a strategy update. I hope to see you all there. Thank you very much, everyone.

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