Avery Dennison (AVY) Q2 2026 Earnings Call Transcript

DATE

Thursday, July 30, 2026 at 11:00 a.m. ET

CALL PARTICIPANTS

• Vice President of Investor Relations - William R. Gilchrist
• President and Chief Executive Officer - Deon Stander
• Senior Vice President and Chief Financial Officer - Gregory S. Lovins

TAKEAWAYS

• Reported Sales -- $2.3 billion, an 11% increase year over year driven by 8% organic growth, 2 percentage points of foreign currency tailwinds, and 1 percentage point of growth from the Taylor Adhesives acquisition.
• Adjusted EPS -- $2.89, representing a 19% increase reflecting higher volume and productivity despite higher employee-related costs.
• Customer Inventory Impact -- $0.25 per share benefit, contributing roughly 5 percentage points of total organic growth as customers in Europe and Asia sought to hedge against raw material inflation and supply uncertainty.
• Materials Group Sales -- 10% organic growth, supported by high-single-digit volume/mix and low-single-digit pricing realization as the company passed on cost inflation.
• Solutions Group Sales -- 3% organic growth, characterized by low-single-digit gains in both high-value and base categories.
• Intelligent Labels Platform -- low-single-digit sales growth, where 10% growth in apparel and general retail was offset by double-digit declines in the logistics segment.
• Adjusted EBITDA Margin -- 17.1%, expanding 50 basis points year over year due to productivity gains and pricing actions.
• Materials Group Margin -- 17.8%, a 20 basis point expansion as volume and productivity offset unfavorable product mix and higher labor costs.
• Solutions Group Margin -- 18.6%, a 150 basis point year-over-year expansion driven by productivity initiatives and the reversal of prior year tariff-related network inefficiencies.
• Materials High-Value Sales -- mid-single-digit growth, led by specialty and durable labels as well as Intelligent Labels.
• Apparel and General Retail Sales -- approximately 10% growth, fueled by new program rollouts and recovery in general retail markets.
• Logistics Performance -- double-digit decline, resulting from a difficult comparison against outsized share gains in 2025 and softer overall customer demand.
• Embelex Sales -- low-double-digit growth, attributed to core market expansion and demand related to the World Cup.
• Vestcom Sales -- low-single-digit decline, as the business lapped a major customer rollout from the previous year.
• Regional Volume Growth -- mid-teens growth in Europe, significantly outpacing mid-single-digit growth in North America and high-single-digit growth in emerging markets.
• Raw Material Inflation -- high-single-digit sequential increase, which was slightly above management's initial expectations for the quarter.
• Adjusted Free Cash Flow -- $365 million, primarily driven by earnings growth and improvements in working capital.
• Capital Returns -- $210 million, including $138 million in share repurchases and $76 million in dividends during the quarter.
• Net Debt to Adjusted EBITDA -- 2.3 times, down from 2.4 times at the end of the first quarter.
• Full Year Adjusted EPS Guidance -- $10.00 to $10.30, anticipating organic sales growth of 3% to 4%.
• Restructuring Benefits -- more than $60 million, expected to offset wage inflation and the normalization of incentive compensation.
• Capital Expenditures -- approximately $260 million, earmarked for fixed assets and information technology investments for the full year.
• Third Quarter EPS Headwind -- $0.50 sequential decline, reflecting the expected $0.25 unwind of customer inventory stocking following the $0.25 benefit received in the second quarter.
• Sequential Inflation Outlook -- low-single-digit sequential inflation expected in the third quarter, with management planning low-single-digit sequential price increases to maintain parity.
• Year-to-Date Capital Returns -- $350 million returned to shareholders through the end of the second quarter through a combination of dividends and share repurchases.

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RISKS

• Stander stated, "Conversely, we experienced a headwind in logistics where sales were down double digits," noting this was driven by lapping outsized share gains and softer customer demand.
• Lovins warned that management is "assuming the third quarter will see a larger than normal sequential earnings decline... which will represent an approximate $0.50 sequential headwind," as customer inventory pre-buys unwind.

SUMMARY

**Avery Dennison Corporation** (AVY +4.59%) reported that organic sales growth accelerated during the quarter and adjusted EBITDA margins expanded despite a volatile cost environment. Management stated the performance was supported by a combination of underlying volume recovery, productivity actions, and a temporary benefit from customer inventory stocking in the Materials Group. The company indicated strategic focus remains on expanding digital identification platforms in the food and apparel sectors, while continuing to execute on cost-reduction initiatives and disciplined capital allocation. Management updated full year earnings guidance to reflect expected sequential volatility in the second half of the year as customer inventory levels normalize.

• CEO Stander noted that while customer pre-buying in Label Materials persisted longer than anticipated due to raw material inflation, management expects the majority of the unwind to occur in the third quarter.
• The company is preparing for an acceleration in the food segment during the second half of the year, driven by a rollout with the largest U.S. grocery retailer and expanding activity in protein and bakery categories.
• CFO Lovins identified incentive compensation as a significant year-over-year cost headwind, noting that payouts are currently on track to reach target levels unlike the below-target payouts in 2025.
• Management views artificial intelligence as a strategic accelerator for Intelligent Labels, with CEO Stander stating, "AI helps you make more sense of data... which in itself, then creates a flywheel for more IL adoption."
• The Intelligent Labels platform is expanding its pilots in the logistics sector with new customers to mitigate the impact of normalizing volume from a major partner.
• Pricing actions in the second half of the year are expected to turn into a year-over-year positive, contrasting with the deflationary comparisons seen during the first quarter.

INDUSTRY GLOSSARY

• AD CleanGlass and AD CleanFiber: Specific proprietary product lines designed for recyclability and sustainability in labeling applications.
• DSD Deliveries: Direct Store Delivery; a distribution method where products are delivered directly to retail stores rather than through a central warehouse.
• Embelex: A specialized branding and embellishment solution within the Solutions Group serving apparel and footwear markets.
• Intelligent Labels: The company's platform for digital identity solutions, utilizing RFID technology to provide item-level data and visibility.
• Materials Group: Avery Dennison's segment that manufactures pressure-sensitive label materials and functional materials for various industries.
• Pre-buy: A customer practice of ordering products in advance of needs to secure supply or hedge against anticipated price increases.
• Productivity Playbook: Management's standardized operational strategy focusing on cost-out reengineering, strategic sourcing, and productivity actions.
• Solutions Group: The business segment providing branding, information, and RFID-based digital identification solutions for apparel and retail.
• Vestcom: An Avery Dennison business specializing in shelf-edge labeling and productivity solutions for the retail and grocery sectors.

Full Conference Call Transcript

Operator: Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference Call for the Second Quarter Ended on June 30, 2026. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. At that time, if you would like to ask a question, please raise your hand and enter the queue. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website. I would now like to turn the call over to William R. Gilchrist, Avery Dennison's vice president of investor relations. Please go ahead, sir.

William R. Gilchrist: Thank you, Ellen, and welcome to Avery Dennison's second 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 A-4 to A-8 of the financial statements accompanying today's earnings release. 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, President and Chief Executive Officer and Greg, senior vice president and chief financial officer.

I will now turn the call over to Deon.

Deon Stander: Thanks, Bill, 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 in 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 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 are 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, we are executing commercial and operational agility including productivity and pricing actions to mitigate inflationary pressures. And third, we are 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-single-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 in the high teens with margins expanding compared to prior year. In Solutions Group, organic sales grew 3%. The quarter was characterized by solid low-single-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 expansion 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 that 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. grocery 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 $10.00 to $10.30 in adjusted earnings per share on organic sales growth of 3% to 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 strengthen 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.

Gregory S. Lovins: Thanks, Deon, and 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 Deon 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. And 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 the 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, And 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; 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 reengineering. 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 expectation. Our teams continue to execute our proven playbook to navigate the current inflation environment through strategic sourcing actions, reengineering, and the timely implementation of pricing actions. Looking ahead for the remainder of the year, while the situation remains uncertain, we are 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-single-digit growth. Within high-value categories, Embelex delivered strong low-double-digit growth; Intelligent Labels grew low-single-digits, with particular strength in apparel, general retail categories, while Vestcom was down low-single-digits as we lapped new program rollouts from the prior year. Solutions Group adjusted EBITDA margin was 18.6%, expanding 150 basis points year-over-year and 220 basis points sequentially. This margin expansion was driven by continued execution of our productivity initiatives, the reversal of prior year tariff-related network inefficiencies, and a positive net price/cost impact inclusive of tariff-related costs. Together, these benefits more than offset higher employee-related costs and our targeted investments in growth.

Turning now to our full year 2026 outlook, we anticipate reported sales growth of 5% to 6%. This includes organic growth of 3% to 4%, with approximately 1.5% from currency translation, 1% from the Taylor Adhesives acquisition, and a nearly half point headwind from the fiscal calendar change. We expect full-year adjusted earnings per share in the range of $10.00 to $10.30, representing 7% growth year-over-year at the midpoint.

This full-year earnings growth is driven by benefits of organic growth, which is primarily volume/mix driven, a largely neutral impact from customer inventory management for the full year, productivity actions, including restructuring benefits of more than $60 million, offsetting headwinds from wage inflation, and the normalization of 2025 temporary savings which are largely incentive compensation-related. And a net benefit of approximately $0.30 from combined currency, share count, interest, and tax. Additionally, we remain committed to strong free cash flow, targeting roughly 100% conversion for the year, with fixed and IT capital spending of approximately $260 million.

From a quarterly earnings cadence perspective, we are assuming the third quarter will see a larger than normal sequential earnings decline driven by our customer destocking timing assumption, which will represent an approximate $0.50 sequential headwind versus the benefit we saw in the second quarter. While we expect a sequential headwind in the second half as these customer pre-buys unwind, underlying earnings momentum remains strong across the balance of the year. In summary, we delivered a strong second quarter achieving 8% organic sales growth and 19% adjusted EPS growth. We generated very strong free cash flow, increased our dividend, and accelerated share repurchases while maintaining a strong balance sheet, with leverage coming down to 2.3 times.

Our updated 2026 outlook anticipates 3% to 4% organic sales growth and roughly 7% EPS growth, demonstrating positive momentum toward our long-term targets. Overall, our resilient portfolio, agile execution, and disciplined capital allocation give us high confidence in our ability to deliver strong, long-term value to all stakeholders. With that, we will now open up the call for your questions.

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, please press 1 on your telephone keypad. If your question has been answered, and you would like to withdraw your registration, please press 1 again. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. Please stand by as we compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi with Baird. Your line is open. Please proceed with your question.

Ghansham Panjabi: Thank you, operator. Good morning, everybody. Can you just give us a bit more granularity as it relates to the growth outlook for Intelligent Labels for 2026, relative to the low-single-digits you generated in Q2? And in particular, how's your view on the major end market verticals such as apparel, general retail, food, and logistics changed, if at all, relative to the last time you reported three months ago? Thank you.

Deon Stander: Thanks, Ghansham. Yes, our anticipation has always been we would continue to see our growth ramp in the second half of the year. And then when I look at the individual segments, in apparel and general retail, we continue to expect solid growth as we go through the second half of the year, largely on the new program rollouts we are doing. As well as the continued strengthening in some of the general retail execution as well. In logistics, specifically, you know, we are expecting this continued share and volume challenge relative to 2025 when we grew outside share. And volume in that period.

And we expect that to persist for the remainder of the year, while we continue to also expand pilots with our existing customers that we have and some new customers in logistics pipeline. And in food, we are expecting a much more meaningful contribution from the food programs as we go through the second half of the year largely on the significant retailer rollout that we talked about for a while, as well as a lot more activity in new customer programs overall that we are seeing in the food sector, Ghansham. Panjabi.

Operator: Your next question comes from the line of George Staphos with Bank of America. Please proceed with your question.

George Staphos: Hi, there. Thanks, everyone. Thanks for taking my question, and congratulations on the progress. I wanted to dig into the pre-buy effect and materials And there are a couple of components to it. I think you said that the effect of the pre-buy was more or less five points mid-single-digits, in the second quarter and I recall the figure being one point in the first quarter and I think it was 1.five points at the materials level, Did I relay those correctly? And does that mean in essence, there is 6% or 6.5% that ultimately has to be destocked over the rest of the year. How should we interpret that? And why is there so much going on?

Especially, it sounded like in Europe. Thank you, guys.

Gregory S. Lovins: Yeah. Thanks, George. So in Q1, we talked about a relatively around a point of growth from customer inventory building. I think I mentioned earlier about half of our organic growth in Q2 we would estimate is related to inventory build. So in total, closer to five points of growth in the first half or at net first half about 2.5% growth for the whole half of the year. We would expect to see that come out in the second half as we said. So I think you would see that change from first half to second half.

At the same time, from an organic growth perspective that will largely be offset in the second half by the fact that we will have more pricing activity. Action versus prior year, where we still had deflation in the first quarter carryover from last year. We will have more pricing impact year-over-year in the second half. I think to your point, we are seeing that more in Europe and Asia. That is where we are seeing more of the inflationary pressures as well. As well as just more customer concern, I think, about surety of supply.

And as we move through the second quarter, we continue to see that inflation increase in the middle part of the quarter, obviously, it has been quite up and down since then. So customers are still seeing a pretty uncertain environment. And I think that is what led to a lot of the stock build that continued throughout the second quarter.

Operator: Your next question comes from the line of John McNulty with BMO Capital Markets. Please proceed with your question.

John McNulty: Yes. Good morning. Thanks for taking my question. So I guess maybe a couple of related points on the margin side. I guess can you help us to think about price/cost in the second half if you will catch up with pricing just given your expectations for cost to be kind of up in the high-single-digits? And then I guess somewhat related on the margin front in Solutions, you are kind of hitting a high-water mark. Anything special about that in terms of why you are kind of at these levels? Or is this kind of the new baseline now that you are starting to see volumes stabilize and IL starting to grow again?

Gregory S. Lovins: Yeah. Thanks, John, for the question. So when we look at the second quarter from a price/cost perspective, and I will talk sequentially, we saw high-single-digit inflation from Q1 to Q2 and we had mid-single-digit price increase from Q1 to Q2. To help mitigate that in addition to, obviously, material engineering and our procurement teams continuing to work to mitigate that as well. So I think we largely mitigated the majority of that in the second quarter from a sequential perspective. When we look at Q2 to Q3, we would expect low-single-digit sequential inflation, largely carryover from what we saw as we move through the second quarter. But I will say it continues to be a pretty uncertain environment.

So we have seen oil, like I said a minute ago, move up and down quite a bit over the last few weeks. But right now, our expectation is low-single-digit sequential inflation and low-single-digit sequential price as well from Q2 to Q3. If I shift to your second question on solutions margins, I think overall, there are a couple of drivers there. That team has continued to drive pretty significant productivity year-over-year. Certainly, that is having a benefit on our margins there. At the same time, it is a nice volume rebound.

Our apparel business is growing mid to high-single-digits in the quarter as we lap some of the tariff implications from Q2 last year, with some strong growth in our Embelex platform, our high-value category there that we talked about earlier as well. Overall, it is both strong volume growth in apparel, as well as productivity across the business, and we did have a couple of small one-time types of benefits in the quarter but still strong underlying results. You may see a little bit of moderation in that margin in Q3. We still expect the second half to be above prior year.

Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Jeff Zekauskas: Thanks very much. two-part question. It sounds like you are gaining more traction with your customers and Intelligent Labels in general food category? Is it baked goods? Or frozen foods or are there themes that are allowing you to expand your reach And for Gregory, you have talked about inflation and employee costs. Is this one-time, or what is the rate? Or how large are your employee costs as a percentage of your cost base? Can you help frame the employee cost issue?

Deon Stander: Thanks, Jeff Zekauskas. Let me deal with the first and Gregory can take the second. Thank you. We continue to have very strong we continue to have very strong conviction in the growth in the food segment as we move forward over the years to come. Because we see the return on investment at the retail level, to be so strong in all the pilots that we have done and some of the rollouts that have been underway for a while. I think the way I would characterize it, Jeff Zekauskas, is the initial focus has been really around bakery. it is simpler to implement.

But we are, as you know, working through protein now, which has been more technically difficult to do, but where we brought our innovation to bear where I think we continue to sustain advantage. And then beyond protein i.e., the next category, really at the periphery of the store, will be perishable. i.e., the further perishable items. And I think those will follow suit. Certainly think that two things are also playing in thematically.

So one is I think retail at an aggregate level is recognizing that the greater the urgency with which they digitize their stores overall to drive more of a digital platform to their stores, the more they are likely to succeed in driving the efficiencies and consumer connection they really desire. And clearly, technologies like IL play a very significant role in enabling that driving return on investment both from a labor productivity, a gross margin expansion and sales uplift. We have seen that consistently particularly in perishable foods.

And so I think the only other thing I would say from our perspective is, you know, it is an area where we are going to continue to invest the scale of our customers that are now in pilot has continued to expand. Our pipeline has expanded in that regard. It includes a number of the U.S. retailers and European retailers. And also some areas very specifically where, for example, DSD deliveries are taking place in certain categories as well. So we have high conviction in that, and I see it as a longer term growth opportunity within our broader high-value category portfolio overall.

Gregory S. Lovins: Yeah. And Jeff, on your second question, I think there are two areas of employee costs where we are seeing a headwind year-over-year. One is the normal year-over-year wage inflation that we see across the business. And that is more normal levels of what we have seen in the recent past. I think the other one is the larger one really this year from a year-over-year perspective is incentive compensation. So last year, clearly, we delivered below our targets, incentive comp payouts were well below target levels last year. And this year, we are on track at or above depending on the business to deliver on our targets. So a relatively sizable incentive compensation headwind.

When I look at the overall earnings growth formula kind of year-over-year, from an order of magnitude perspective, our productivity is basically largely offsetting our wage inflation and our incentive compensation. So that is roughly the size of those headwinds versus our productivity.

Operator: Your next question comes from the line of Joshua David Spector with UBS. Please proceed with your question.

Josh Spector: Hi. I wanted to just dig into the organic growth guidance. So the 3% to 4% range, if we try to unpack that a bit, I mean, my calculations here would say pricing in the second half is up call it, 3% maybe to 4%. And you have that, call it, 3%-ish headwind in the second half. So, therefore, volumes then at the base level, excluding the kind of destocking dynamics, are maybe flattish. Is that how you would frame it? Because you sound more positive on some of the higher growth areas within materials, RFID improving. I do not know if there is an offset that we are missing. Thanks.

Gregory S. Lovins: Yeah. So I think, Josh, when you look first half to second half, first half organic growth is around 4.5% on the full first half basis. With a couple points of that, we would estimate from stocking as we have talked about here. And we had, as I said earlier, a little bit of price down particularly in the first quarter as we start to lap some of that deflation from prior year. So volume growth, volume/mix growth in the first half of the year in that low to mid-single-digit range. I think second half is somewhat similar from a volume/mix perspective but we have the destocking impact coming in that is a headwind in the second half.

Largely offset by the fact that price now, we are no longer lapping the deflation from prior year. So the price actions that we are taking are a positive year-over-year in the second half. So think underlying volume/mix trends relatively similar, low to low to mid-single-digits in the first and second half. With a little bit of price differential between the halves as well that is impacting that. In addition to the stocking impact.

Operator: Your next question comes from the line of Matthew Burke Roberts with Raymond James. Please proceed with your question.

Matt Roberts: Deon, I appreciate the comments you have given so far on food, but if I could dive a little bit deeper on the contribution in the second half. Specifically on just how far has that rollout progressed? Is there still incremental from Walmart, I know that is a big beginning here in the second half, but what percent of that initial rollout should we be thinking about in 2026? Yeah. You are breaking up, Matt, you are breaking up on us. Can you start again from the top? I missed the question, Matt. Yeah. Is that better now? Yes. Try that. Okay. Basically, I am looking to get a little bit more granular on the food contribution specifically.

Specifically on Kroger, how far along has that rollout progressed? Is there anything incremental in second half from that? And from Walmart, I know that begins to ramp in the second half. But any percentage terms you could frame around that rollout in 2026 and into 2028. And I believe a third grocer here has announced the pilot, and you referenced some pilots in grocery. So how material are those new programs in second half? Or how long would you expect them to be in pilot phase before any expansion given it seems like food is certainly newer, but perhaps broadening faster than other categories?

Deon Stander: Yeah. Let me end where you did, at the end part of your question, and I will address the rest. Yes. I think there is certainly much more accelerated interest from customers They can clearly see the benefit, the returns they get. As I said on labor productivity, gross margin expansion and sales uplift as well. Specifically on Kroger, rollout continues to go as they planned. And the second half of the year, the only thing that is different that we said we would be working on with them, which we are, which is really the protein piloting.

And as that goes successfully in the second half of the year, we would be looking to roll that out as we are into the start of next year. On Walmart, you know, I think my observation on that customer that continues to be that they are really committed to the technology. You can see it roll out across all of their stores. In terms of both general merchandise and apparel, and increasingly now in the pro—sorry, in the food area as well. And they continue to see their return on investment of the technology as well both in those areas as well as in food, typically with kind of large-scale deployments.

Timelines can vary slightly, but our current assumptions for commercial rollout with this customer to begin in the second half of 2026, and we are working very closely with them now on key deployment milestones to ensure a successful implementation. As it relates to the other customers, yes, the pilots are accelerating. I am not going to detail, but which specific customers they are, And we anticipate that largely those will manifest in 2027 and beyond. And that is when you would see the benefit of those positive pilots turning into broader implementation and rollouts.

Operator: Your next question comes from the line of John with Jefferies. Please proceed with your question.

John Dunigan: Hey Deon, Gregory. Really appreciate all the details, and congrats on a good quarter. Want to go back to the customer inventory build. It sounded like there was some carryover from the inventory build in Q1. But did you see the stocking through the quarter? And has it progressed into Q3? Or are you already seeing some of that destocking? And related, was there any portion of the 10% apparel and general retail RFID growth that was tied to the customer inventory build? It did not sound like it from your comments, but just wanted to confirm. And then one last point of clarification, Gregory.

I just want to make sure I heard you correctly on the 3Q EPS you said it was $0.50 lower quarter over quarter. Did I get that right?

Gregory S. Lovins: Yes. Thanks for the question, John. So on stocking, as we said in the first quarter, we had about a $0.05 earnings per share impact that we estimated from stocking that started really kind of early to mid-March in the first quarter. We saw that continue as we talked about last quarter through April. At the time, we thought it would reverse later in the quarter. But we continue to see more uncertainty as we move through the quarter and inflation continuing to increase in the middle part of the quarter. We saw that stocking really continue not only through April, but also through May.

And it is a little bit different by region, but Europe and Asia where we have seen most of that stocking impact, we saw some of it continue in June—early June, but largely June started to more normalize from a volume impact. And then we are expecting that or a large portion of that to come out in the third quarter, and we have started to see signs of that here the first few weeks of July as well. So I think our expectation is that will continue as we move through the rest of this quarter. None of that is in solutions. It is really a Materials Group phenomenon that we are seeing here.

We really have not seen that stocking impact on the solutions or Intelligent Labels side of the business. From the sequential headwind, basically, roughly a $0.25 benefit we got from our customers' increase in their inventory in Q2, our outlook would be that assumes that roughly a $0.25 headwind in the third quarter. So that is the $0.50 Q2 to Q3 sequential headwind that we will have from an earnings perspective. And, again, that is an estimate based on what we are seeing right now. As I said, with that destocking starting and we will obviously, you know, see how the situation evolves as we go through the quarter.

But right now, that is our estimate of what the Q3 impact would be.

Deon Stander: John, let me just reiterate particularly in apparel and general retail, there was no impact of inventory stocking or building that Gregory spoke about. Most of that growth was really driven by new program rollouts that we have had that we talked about in the past, Some of them are delivering as we go through the second quarter into the third and fourth quarters as well.

Operator: Your next question comes from the line of Mike Roxland with Truist Securities. Please proceed with your question.

Michael Roxland: Yeah. Thank you, Deon, Gregory, for taking my question. A really high level question here. I just want to get a sense, Deon, from you of how you think about volume growth in your base label business. A number of leading CPGs recently said they are done lowering prices. They are going to focus on raising prices at the expense of volumes. And then, really, it is all being driven by the fact that they have seen margins compress over the last several quarters as a result of lowering prices. So how should we think about how this renewed focus on price affects volumes? And how does that affect the materials business?

Is it you know, could you see buying, you know, the materials business shift from a GDP plus business to a GDP or GDP minus? Particularly if you see CPGs more aggressively going after price? Any color you can provide would be helpful. Thank you.

Deon Stander: Yes. Thanks, Mike. I mean, we have seen the cycle go through this when it comes to CPG volumes. You are right. CPG volumes, I think, largely over the last couple of years have been relatively flat. Slightly down. But let's say, we did see some encouraging signs in the first quarter in certain segments of CPG volume. Home and Personal Care certainly grew a little bit. But I think partly the continued weighing in of inflationary impact has no doubt had the CPGs weighing up how they balance out promotional activity for volume relative to pricing and the consumer impact thereof.

And we do not necessarily see that fundamentally changing as we go through the rest of this year, given the uncertain environment we see. I will say, our best measure that we look at is we typically look at both GDP and then we also look at retail sales. Retail sales. I think we provided some in detail in the materials. You know, GDP has, I think, moved slightly lower globally; it varies by region. Retail sales on the aggregate are around 1% growth at the moment overall. And if you think about our business being largely consumer-staples-led in our base label business, some elements of logistics going into it as well.

So we do not see fundamentally a big shift in our volumes, the base label volumes. Gregory talked about kind of low-single-digit volume growth as we move through the rest of the year. We do not anticipate it to be very different from that. The only other thing I would say in there is we continue to take share in this business in our base label business overall. And, you know, we made a significant effort to make sure that as we think about how we service our customers, really anchoring around what it takes to service excellence and differentiation starting to yield some benefit.

Also lent a lot more, and you have heard me talk about this, into our innovation to make sure we continue to secure differentiation moving forward. So as an example, you know, a lot of the work that we have seen around the growth in the base label business to come from largely filmic products. We tend to have a leadership advantage in our filmic products. There is also a lot of impact that we are seeing from sustainability, recyclability. And some of our innovation like our AD CleanGlass and AD CleanFiber are really starting to resonate with customers. And so the combination of those helps us drive more share gains, which I think is very durable.

And then there is a secondary element, which is typically during more uncertain times, Mike, you tend to see customers when there are uncertain times in those areas, particularly in Europe and Asia, with a flight to market leaders for surety really. We certainly do benefit a little bit from that impact as well.

Operator: Your next question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.

Anthony Pettinari: Good morning. A lot of my questions have been asked, but I am just wondering with the reinstatement of the full year guide, is it fair to think of that as just kind of a one-time action to help us understand the impact of the pre-buy and the reversal over the full year? Or would you anticipate going back to a full year guide? Or just kind of how do you think that?

Gregory S. Lovins: Yeah. Thanks, Anthony. So I think there are obviously a lot of drivers when it comes into thinking about our guidance. I think the first one for us is that our business has been operating very well. Our teams have been doing a really nice job managing through what has been a pretty uncertain environment. And delivering solid top line growth, delivering strong productivity, and generally just increasing the pace of our underlying pace of our earnings growth. So we feel confident and good about what our teams are doing to perform there.

And second, I think as Deon mentioned earlier, we have got a little bit more uncertainty as we have talked about here with timing of destocking given continued uncertainty in the Middle East and how that will play out in the quarter and will we see more destocking or less destocking between Q3 and Q4? So we think it is a little bit better for us to give full-year guidance at this stage. Our intention is not to go back and forth between different guidance time horizons. In the future, though. So, you know, we will—we are obviously not talking about 2027 guidance here, but our intention would be to stay with one approach as we go forward.

Operator: Our final question comes from the line of George Staphos with Bank of America. Please proceed with your question.

George Staphos: Hi, everyone. A point of clarification and then a question on Intelligent Labels. So Greg, you know and I think John just asked the question. So if we are assuming a $0.50 headwind because the up $0.25 becomes a down $0.25, and recognizing there is not scalpel-like precision with this. It was not intended that way on your side. Since we had a $0.05 in the first quarter that was going to reverse, should we worry instead that it is $0.30 that has to come out, and therefore, more of like a $0.60 sequential downtick in Q3.

And then Deon, the question on IL, I know you have been asked this in the past likely Do you see AI as an enabler and an accelerator for Intelligent Labels, or might it be, in some ways, a competing technology or enabler of competing technologies and so there is less of a pie to shoot after, recognizing the pie is big. for Intelligent Labels. Thank you, and good luck in the quarter.

Gregory S. Lovins: Thanks, George. Thanks, George. As you said, we had about a $0.30 impact in the first half. That is what we estimate the impact of stocking was at our customers. And, you know, we are we are doing our best to try to triangulate around how we think that will come out between Q3 and Q4. Our view right now is $0.25 or so of that comes out in the third quarter, and we have got a little bit of hangover of the rest of that in the fourth quarter.

Again, it is a little tough to call, especially given how much of that stocking happened in Europe, where we have seen the bulk of the inflation and the impacts there. Especially with the holiday period that starts in August. So we will see how that settles out. But that is our best-case assumption or our best guess right now on what we are seeing so far in July. How we think that plays out and what we are hearing from our customers, through the rest of the quarter.

Deon Stander: Yeah. And, George, on your question, is AI an accelerator for IL? Yes. I believe it is. Absolutely. And maybe I will just give you a slight context that I still think the biggest secular trend we are going to see over the next five or so years is the continued digitization of industries. and items. And if you think about it from an IL perspective, every time an item is tagged at source and has data available about how it was made, where it has made its way through the supply chain into retail, how it gets used in retail, and ultimately to the end consumer in terms of consumer use and disposal.

You are generating significantly more data at the item level than ever historically. Now AI, I think, is going to be an enabler to parse out and make a lot more sense and inference from that data. That is the real benefit it brings.

So in some ways, if you think about it, if AI helps you make more sense of data, at, for example, a retail level, you now have much more ability to make more surgical decisions about what you want to do with items which allows you to expand your ROI, based on the work that you have done using IL, which in itself, then creates a flywheel for more IL adoption. that is the hypothesis that I have, and I think we are starting to see that play out.

I would say stepping back at a broader level for AI for Avery Dennison, think I have spoken in the past, George, around, you know, we are seeing that both as a driver for efficiency internally and for productivity, a driver to help us accelerate innovation outcomes quicker and then also to help us solve customer problems to accelerate our growth algorithm. We have invested and we are investing in it. We have a chief digital officer that we brought on board, and we have actually dedicated teams to make sure that the big bets that we are taking will ultimately manifest in driving our growth algorithm or improving our profitability.

Operator: Mister Gilchrist, there are no further questions at this time. I will now turn the call back to you for any closing remarks.

William R. Gilchrist: Thank you, Ellen. On behalf of everyone at Avery Dennison, I want to thank you all for joining today's call and for your continued interest in our company. As always, we are happy to address any follow-up questions you may have. Thank you again, and this concludes today's conference call.

Operator: 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.