Avery Dennison Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• John Eble, Head of Investor Relations
• Mitch Butier, Chairman of the Board and Chief Executive Officer
• Greg Lovins, Senior Vice President and Chief Financial Officer

Analysts

• George Staphos, Bank of America Co.
• Ghansham Panjabi, Robert W. Baird
• Anthony Pettinari, Smith Barney Citigroup
• John McNulty, BMO Capital Markets
• Jeffrey Zekauskas, J.P. Morgan
• Josh Spector, UBS Group AG
• Michael Roxland, Truist Securities
• Adam Josephson, KeyBanc Capital Markets
• Joshua Wilson, Raymond James
• Chris Kapsch, Loop Capital Markets

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, welcome to Avery Dennison's Earnings Conference Call for the First Quarter ended on April 2, 2022. [Operator Instructions] This call is being recorded and will be available for replay from 3:00 pm Eastern Time today through midnight Eastern Time April 29. To access the replay, please dial 1800-633-8284 or for international callers please dial 1-402-977-9140. The conference ID number is 21997965.

I'd now like to turn the conference over to John Eble, Avery Dennison's Head of Investor Relations. Please go ahead, sir.

[John Eble, Head of Investor Relations at Avery Dennison]

Thank you, Savannah. 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 with GAAP on schedules A4 to A9 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 Mitch Butier, Chairman and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Mitch.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Thanks, John, and hello everyone. We are off to a strong start to the year with revenue up 18% and earnings per share of $2.40, above our expectations from a quarter ago driven largely by an acceleration in pricing actions in LGM and strong volume growth in RBIS. These strong results come at a time of increasing challenges from the continuing impact of COVID-19 and supply chain constraints, to the highest levels of inflation we have seen in decades, and now Russia's war in Ukraine. All of these challenges reinforce our determination to remain vigilant in protecting the health and welfare of our team and agile to ensure we continue to meet our customers' needs. Our team continues to do a phenomenal job in managing a very dynamic environment and we remain confident in our ability to continue delivering superior value creation for all of our stakeholders across a wide variety of macro environments.

Now a quick update on the quarter by business. Label and Graphic Materials posted strong top-line growth for the quarter in both Label and Packaging Materials as well as our Graphic and Reflective Solutions business, largely driven by higher pricing.

In Labels, while demand for consumer packaged goods and e-commerce trends continue to drive strong orders, volumes were down as expected due primarily to tough comps. As you recall, volumes were particularly high last year due to the combined impact of pre-buys and the COVID-related order patterns that we discussed last year. For context, volume in the quarter was up approximately 20% versus 2019 or more than 6% annually, well ahead of GDP growth over that period.

Tough comps aside, supply chain constraints hampered our ability to meet demand in the quarter despite the tremendous job our team did to leverage our innovation capabilities and scale to offset a good portion of these raw material shortages. We expect that the recent resolution of the labor strike at a large global paper manufacturer will help ease supply chains across our industry beginning here in Q2.

As for our own operations, they were minimally impacted by COVID restrictions in Q1. That said, the recent lockdowns in the greater Shanghai area constrained our Materials business' ability to produce for much of April, reducing revenue by roughly $20 million for the month. Fortunately, these restrictions are now easing and we expect all plants will be operational imminently.

LGM's margin was strong in the quarter though down from prior year as expected. Sequentially margins expanded more than a point as we accelerated pricing actions to reduce the lead time between inflation and pricing. And while pricing is catching up with inflation relative to the beginning of the broader cycle, we continue to see further inflation as we move into Q2 and continue to raise prices accordingly. Importantly, we are on track to further increase our returns and EVA for this year in this already high returns business.

Retail Branding and Information Solutions delivered another exceptional quarter with significant top and bottom-line growth. The strong revenue growth was broad-based driven by both high value product categories, particularly Intelligent Labels and the core apparel business. Enterprise wide, Intelligent Labels sales were up more than 20% on an organic basis. The strong growth in the quarter was once again primarily driven by apparel and while we continue to expect apparel to be the primary driver of dollar growth in the coming few years, we see even greater opportunity over the long run outside of apparel.

For example, in the food segment, a number of quick service restaurants are piloting and in the early stages of rolling out Intelligent Labels solutions to improve supply chain traceability and inventory accuracy. In logistics, we continue to work with several shipping and logistics players seeking further automation to drive speed and productivity. We are seeing retailers who initially implemented RFID in apparel expand programs to other categories such as home goods. And our Vestcom acquisition is showing positive early signs and providing additional channel access to Intelligent Labels in grocery, while continuing to achieve its overall performance goals.

As the leader in ultra high frequency RFID we are positioned extremely well to not only capture these new opportunities but create them. As for the bottom line, RBIS' EBITDA was up more than 60% in the quarter compared to prior year due to the contributions of Vestcom and continued strong growth in the underlying business.

Turning to Industrial and Healthcare Materials. The segment delivered modest sales growth in the quarter as margins declined. This group of businesses continues to be impacted by soft automotive end markets, as well as similar supply chain constraints and inflationary pressures as discussed in LGM.

Turning to our outlook for the year. Given our strong performance in Q1 and our revised expectations for the rest of the year, we have raised our full year outlook and now anticipate top-line growth of 15% to 17% ex. currency and EPS of $9.45 to $9.85. I'm pleased with the continued progress we are making towards the success of all of our stakeholders. Our consistent performance reflects the strength of our markets, our industry-leading positions, the strategic foundations we've laid, and our agile and talented team. We remain focused on the consistent execution of our five key strategies; to drive outsized growth in high value categories, grow profitably in our base businesses, focus relentlessly on productivity, effectively allocate capital, and lead in an environmentally and socially responsible manner.

We are confident that the consistent execution of these strategies will enable us to achieve our long-term goals, including consistently delivering GDP plus growth and top-quartile returns. And once again, I want to thank our entire team for their tireless efforts to keep one another safe while continuing to deliver for our customers during this challenging period. The team continues to raise our game each quarter to address the unique challenges at hand. Thank you.

Now, before turning the call over to Greg, as I'm sure you all saw, we recently appointed Deon Stander as President and Chief Operating Officer. Deon has done a tremendous job leading RBIS over the last seven years and the team and I are excited to partner with him in this new capacity.

Over to you, Greg.

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

All right, thanks, and hello everybody. As Mitch said, we delivered a strong start to the year with adjusted earnings per share of $2.40, consistent with last year and up 5% excluding currency, roughly a dime above our expectations.

Sales were up 18% ex. currency and 13% on an organic basis, driven by higher prices and higher volume and mix. Despite the impact of inflation and supply chain disruptions, we delivered a strong adjusted EBITDA margin of 15.3%, up 40 basis points sequentially. Significant revenue growth and strong margins drove EBITDA growth of 6% compared to prior year, up 10% excluding the impact of currency.

Turning to cash generation and allocation, we generated $73 million of free cash flow down compared to last year but well above our historical Q1 levels. Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 2.35. Our current leverage position gives us ample capacity to continue executing our disciplined capital allocation strategy, including investing in organic growth and acquisitions while continuing to return cash to shareholders. In the quarter we paid $56 million in dividends and repurchased more than 800,000 shares at an aggregate cost of $152 million.

Now turning to the segment results. Label and Graphic Materials sales were up 12% on an organic basis driven by higher prices, which more than offset a modest decline in volume and mix due to tough comps as Mitch mentioned. Label and Packaging Materials sales were up low-double digits on an organic basis with strong growth in both the high value product categories and the base business.

Graphics and Reflective sales were up high-single digits on an organic basis. Looking at the segment's organic sales growth in the quarter by region, North America and Western Europe sales were both up high teens while emerging markets overall were up low to mid teens. The Asia Pacific region was roughly flat with strong growth in India offset by a decline in China due to tough comps related to the price increase driven pre-buys we discussed last year. And Latin America grew low-double digits.

LGM's adjusted EBITDA margin increased 110 basis points sequentially to 15.6% largely driven by accelerated pricing actions to offset inflation. And as Mitch mentioned, while EBITDA margins were strong, they declined versus prior year for three primary reasons. First, the mathematical impact of raising prices alone reduced the margin percentage by roughly 2 points. Second, the remaining gap from the price inflation lag reduced margins roughly half a point. And third, impacts from the Russian in Ukraine reduced margins by roughly one-third of a point.

And looking ahead, our input cost have continued to rise and supply chains remain tight. We now anticipate inflation will be roughly 20% for the year with a high-single digit increase expected sequentially in Q2. We continue to address the cost increases through a combination of product reengineering and pricing actions.

Shifting now to Retail Branding and Information Solutions. RBIS sales were up 3% ex. currency and 20% on an organic basis as growth remains strong in both the high value categories and the base business. The apparel business saw broad-based strength across channels and continued double-digit growth in external embellishments. And for the quarter, Intelligent Labels sales were up more than 20% organically. Adjusted EBITDA margin for this segment of 19% was up nearly 2.5 points with the positive benefits from higher organic volume and acquisitions, more than offset growth investments and higher employee-related costs.

Turning to the Industrial and Healthcare Materials segment. Sales increased 1% on an organic basis, reflecting low-double digit growth in healthcare largely offset by a low-single digit decline in industrial categories as automotive markets weighed on the segment. Ajusted EBITDA margin decreased to 12% driven by lower volume and mix and the net impact of pricing, freight, and raw material costs.

Now shifting to our outlook for 2022. While there continues to be a high level of macro uncertainty, we have raised our guidance for adjusted earnings per share to be between $9.45 and $9.85, a $0.10 increase to the range. The increase reflects a roughly $0.10 headwind from non-operational items such as currency and taxes, more than offset by roughly $0.20 operational increase, roughly half of which we realized in Q1.

This outlook reflects a roughly 50% increase in EBITDA compared to 2019. And we now anticipate 15% to 17% ex. currency sales growth for the full year above our previous expectation, driven by higher prices to mitigate the increased pace of inflation. In summary, we delivered another strong quarter in a challenging environment and we remain on track to deliver on our long-term objectives to achieve GDP plus growth and top-quartile returns on capital, which together drive sustained growth in EVA.

We will now open up the call for your questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question is from George Staphos with Bank of America. Please proceed with your question.

[George Staphos, Analyst at Bank of America]

Thanks. Hi, everyone. Good morning. Thanks for all the details. My two questions, the first is around margins broadly and then the second is just on you -- on the impact of the strike in Europe and it's ending, what it might mean for you. In terms of margin, gentlemen, can you talk a little bit about qualitatively if you can't quantify, what kind of margin trend you're seeing in Intelligent Labels, either year-on-year or sequentially in the quarter? And the same question around emerging markets. I know it's a broad region but can you talk about the margin trends you're seeing in emerging markets? My second question, with the strike now having ended, how will it most immediately impact and likely benefit your business and what are the ramifications of that? Thank you, and I'll turn it over.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Sure, George, good morning. So yes, as far as your first question on Intelligent Labels, we haven't disclosed specifically what our Intelligent Labels margins are. They are consistently above the average for the company and the average for RBIS. And what I'd say is, they have stayed -- remained in a relatively tight band over time as we continue to drive growth, but also reinvest a portion of the growing profits into new growth opportunities for -- which you know are significant.

As far as emerging markets margins, yeah, I mean the margins remain strong within the emerging markets. So no big update from that perspective. We've talked about it in the past that our margins have kind of, across the board, have -- we've seen converged over the last number of years, so there's not a lot of variation of what you see on the global level for LGM versus the individual regions.

And as far as the strike in Europe, yes, that's unfolding in real-time. It takes a little bit of time to restart paper mills and so forth, and the lead time between once the manufacturing starts happening to when we and the rest of the industry will be able to receive product. But our assumptions here are that we will start to see product here in mid to late Q2 and it won't really probably be a full run rate until late Q2.

[Operator]

Our next question is from Ghansham Panjabi with Robert W. Baird. Please proceed.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Hey guys, good day. Thanks for taking my questions. Mitch, you made some comments on China COVID and the impact on April and some of the plants being impacted opening imminently. It looks though some of the other regions may be impacted in China, also including Beijing off the weekend [Phonetic], et cetera. I'm just curious as to the impact potentially on you, not just on LGM but also RBIS on the base business? Maybe you can just kind of give us a sense as to what may be different with the shutdowns in China this quarter on versus 2020 and how you're navigating that?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Yeah. So it's hard to predict what each shut down, if there are future ones, or what the exact impact will be. We -- there was about $20 million lower revenue from the Materials businesses that we have in the Shanghai area. We have an operation in the general Beijing area but quite a bit smaller overall as far as size and impact. And RBIS' footprint in China is in South China, so in the Pearl Delta region, so not in the Beijing area in general. So that's where we are as far as what the impact is.

I think the bigger question everybody's making their assessment is what does it really do to end demand? Does end demand -- everybody has obviously been depleting their inventories, bounce back and so forth or not. We feel well positioned regardless of the situation. If it were to get to the South China, obviously our RBIS plants would be impacted at that time. But just as we saw that Vietnam was shut down last year, which is a major hub for us as well. We were able to leverage the rest of our global manufacturing capability to help offset that and quickly come back from.

And there it's a little bit different because most of the end market is really linked to demand in both the US and Europe, and so we tend to see that there is a shortening of supply chains or adjusting -- adjustment of supply chain lead times in order to adjust for that. So it's different by business.

Overall, I think there is -- yeah, positive of the fact that the Shanghai area's opening. As far as our direct interactions, we've gotten the green light to open up operations. Everything else obviously takes a little while for the gears of industry to start moving. All the customers need to be able to open up and suppliers. And we're hoping that from the high degree of lockdown that there are lessons learned from this more broadly and that with each new lockdown, should there be one that will have less impact on industry in general.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Got it. And then Greg, in your comments, when you were giving us the variance for 2022 EPS versus your initial, I think you said $0.20 better operations or some version of that, half of it came from the first quarter. What is that specifically being driven by? And then at what point do you expect to reach price cost parity, based on what you see at this point?

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah, so just to reiterate, I guess. Overall, I said about $0.20 operational beat for the year from our previous expectations offset by about $0.10 with some headwinds, things like currency translation and a little bit on tax, for instance. The beat in the first quarter is driven by a couple of things. One, the RBIS volume as Mitch mentioned earlier was pretty strong in the quarter. Very strong on Intelligent Labels, good growth on external embellishments, and we continue to see strong apparel imports in the US and that's continue to see strong volumes in our overall apparel business even outside of IL.

At the same time as we talked about, we've been accelerating the pace of pricing to manage the increasing pace of inflation as well. And we closed a little bit more of that gap in the quarter than we had really expected at the beginning of the year. So overall, we feel good with the pace of that. I think we still had a gap. I mentioned, we had about 1.5 point gap in LGM margins year-over-year due to price inflation. We do see sequential inflation Q1 to Q2 of high-single digits and we're putting new pricing actions there. Our guidance assumes inflation in the back half is relatively stable. So if that happens, we will look as we enter the back half of the year to hopefully close that gap between price and inflation.

[Operator]

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

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Good morning. The revision to the full year organic growth guidance, is that entirely driven by price, presumably passing along higher costs? Or is there any change in the volume outlook either positively or negative or mix or anything else that we should be aware of?

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah, I think that's largely price. So we talked about it on inflation, we now expect full year inflation of about 20%. Last quarter, I think I said low to mid teens. So that's a pretty healthy increase on the pace of inflation and we are increasing prices accordingly to mitigate that. So most of that increase is really around the incremental price to deal with the incremental pace of inflation that we're seeing. Volumes continue to be strong in RBIS as we mentioned and call in the back half is difficult right now with the number of things moving around, a lot of moving parts, of course. So we don't have visibility on the inflation pace much past the next couple of quarters and we'll look to manage that as we move through the year.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Okay. And then, 1Q benefited from $9 million in restructuring savings. In terms of maybe seeing a similar level in the coming quarters, is there anything you can say about if restructuring is maybe a potential earnings contributor this year? Have you pulled forward some projects, given inflation headwinds there, was this always sort of in the plan? Any -- in there.

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah, so we talked about it over the last couple of years, we've accelerated a number of projects particularly in 2020. We had a number of projects that we had on the horizon. We accelerated and pulled into the year. We're still seeing some benefits from those and some initiatives we executed late last year that are helping here in the first half. So a lot of that is carryover of some of those projects that we've been executing over the last year or so.

[Operator]

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

[John McNulty, Analyst at BMO Capital Markets]

Yeah, thanks for taking my question. So the Intelligent Labels business, it looks like it did a lot better than I think many were expecting. I guess at the same time, we've heard there are some supply chain issues even there and component issues. I guess was there anything that actually held back any of the growth in that segment for you in the quarter that we should be thinking about where they might end? And also, how should we be thinking about when those kind of issues might be alleviated?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Yes. So we grew more than 20% within the quarter and that was broad-based. And yeah, as it was said, apparel was most of the dollar growth but percentage wise the food and logistics categories and now home goods are, from a percentage wise, offer a very small base growing even faster. So -- continue to build momentum. What we did say and I think you might be referring to, John, is given where the supply chain constraint specifically around microchips that we'd be challenging to go above the long-term growth range that we have a 15% to 20% this year and we do see that there will be-should be some easing and change a little bit what you're talking about as we go into 2023.

An important part of this is we've been able to leverage -- we're bit unique in being able to drive this level of growth and certainly for the new market development, just leveraging our scale and our partnerships that we have up to -- up the supply chain as the chipset manufacturers and so forth work through this challenging time to have unconstrained supply, but we're all aligned on what the opportunity is around RFID and Intelligent Labels more broadly.

[John McNulty, Analyst at BMO Capital Markets]

Got it. No, that's helpful color. And then I guess the second question is just, when I think about your new guidance or your updated guidance, the midpoint of the range essentially is just -- it looks like it's taking 1Q and just kind of straight-lining it across. And yet it does seem like on the puts and takes, with the Finnish strike kind of behind us at this point, evidence that you're getting all the pricing that you need. It seems like you've probably got more tailwinds than headwinds at this point. So I guess is that a fair characterization or are there other things we should be thinking about on the negative side to kind of give you that more balanced approach to how you're thinking about the year?

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yes, I think there is a lot of moving parts here between, as you said, the strike of our paper supplier starts to get better later here in the second quarter as Mitch talked about. It doesn't have a huge impact on Q2, given that that just ended pretty much here at the end of April. So that will start to get better as we get to the middle of the year. But we talked about at the same time, we have a little bit of a China headwind in the month of April, at least from there that we didn't have in the first quarter. And then we exited the sea shipping to the Russia market, which we had shipped for much of Q1 at least. So there is a number of impacts there when you look from where we were in Q1 to where will be the rest of the year. And just difficult to call what the environment will be in the back half from an inflationary perspective as well as from a continuing macro perspective.

[Operator]

Our next question comes from Jeffrey Zekauskas from J.P. Morgan. Please proceed.

[Jeffrey Zekauskas, Analyst at J.P. Morgan]

Thanks very much. Your operating income in Label and Graphic Materials was down $20 million year-over-year. Roughly was half of that from volume and half of that from price cost?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Well, half of that was actually from currency translation year-over-year. The rest of it was a bit of a gap as I talked about between price and inflation still, as well as some increasing just employee costs, wage inflation year-over-year, et cetera. So it's really about half of the currency and the other half or a large part of the other half is remaining gap on price inflation.

[Jeffrey Zekauskas, Analyst at J.P. Morgan]

Okay. And do you expect your volumes to decrease in LGM year-on-year for the next two quarters and then to begin to grow, is that your best guess?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

We have a variety of different scenarios we will lay out, so we don't pinpoint a specific target base. As we said, the comps in Q1, Jeff, were the toughest and the comps get easier as we go throughout the year. So that's, I guess, the biggest thing I'd highlight. So we don't have -- we don't give quarterly guidance or in general or by business. That -- Q1 is the toughest comp within the Materials business overall.

[Jeffrey Zekauskas, Analyst at J.P. Morgan]

Is your price raw material spread getting better sequentially or you can't tell?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Sequentially, it's gotten better. We've accelerated. I think one of the things when we commented on performance in Q1 being better than we expected is to be at a number of initiatives, just given the short duration, magnitude and consistency of the inflation we've been experiencing. We have been fine-tuning our pricing strategies and our execution capabilities and we're targeting specifically to reduce that lead time. And we were successful in doing that, we're going to need to continue doing that given the incremental inflation which is going from the low to mid teens, as Greg said, for the full year to the roughly 20% for the full year. So it was better than expected is the short answer, Jeff.

[Operator]

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

[Josh Spector, Analyst at UBS Group]

Yeah. Hi, thanks for taking my question. So it just -- again on the -- just on the inflation for the high-single digit Q-on-Q, I'm wondering if you could maybe break out how much of that would you say is direct materials or the cost of the material itself going up versus is there some element of that from you operating differently? So using film instead of paper or sourcing from a sub-optimal location that is creating an additional cost burden, but perhaps goes away when supply normalizes. Is there a way to differentiate between those two?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Well, I mean what we're talking about there is really the direct inflation, whether it'd be in raw materials, freight utilities, all of those areas really. So it's really about the direct inflation. The cost of substitute materials isn't that significant, but that's -- that wouldn't be included in that bucket as well, at least from a Q1 to Q2 perspective. And the way we tend to look at that is that's a different product. If your stuff's today having a filmic liner versus the paper line, it's a different product at a different price point, so.

[Josh Spector, Analyst at UBS Group]

Okay. I guess, I mean, is there a way to think about that then in terms of the context of the first quarter, how much of that substitution maybe impacted profitability outside of the price cost dynamic?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

We don't think it had a significant impact on profitability. This was an area where and this is where demand is strong and customers and their customers need the product, and so we were able to leverage our innovation and scale capabilities to be able to quickly substitute. And we've got disproportionately more experience both on the film and paper side of the industry. So to be able to do make mix and match of different liners for different waste materials was an area of particular strength for us and that we were able to leverage those capabilities to be able to deliver. And they obviously came at a different price point. So once the supply chain normalizes, yeah, I think there will be some reversion back to the other product categories that the customer is ultimately would top want.

[Operator]

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

[Michael Roxland, Analyst at Truist Securities]

Thanks, Mitch, Greg. And congrats on a good quarter. Given that the label paper release liner supply tightness, can you just give us a sense of how you're able to manage supply this quarter? Was it mat -- was it just a matter of procuring tons wherever you could get them and passing along the higher cost to customers, did you work through inventories? I'm just trying to understand your performance relative to the issues experienced at the finished supply in this quarter.

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah, I think it's a combination of things, really. I mean I think we started the year with a little bit of inventory, so we were able to manage the early part of the quarter, at least from that perspective. But as Mitch was just talking about a minute ago, we shifted some materials to filmic liners away from paper liners where possible, again leveraging our capabilities in our plants and our R&D teams to make that change easily for customers. At the same time leveraging our scale with our suppliers and looking for other sources of materials.

Really, we talked about the strength of our teams overall, over the years and a lot of people say that. But really, clearly, we have the strongest teams in the industry and they've shown time and time again, the resilience in managing through these things and helping us find ways to mitigate the impacts of challenges like this and work through it, and still deliver for our customers. So for me, I think there's a number of factors there, but our teams really came through in the quarter overall.

[Michael Roxland, Analyst at Truist Securities]

Got you. And then just quickly, just like when John's question regarding chip availability. Obviously, Mitch mentioned, I think that's going to improve in 2023. What type of growth do you expect to see in Intelligent Labels once, if and when that ship availability improves. If you don't want to comment about 2023, look at this way. If you had the chips available today, what type of growth would you see in Intelligent Labels versus the 15% to 20% you have seen? Thank you.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Yes. So I'm not -- and we see tremendous momentum in this space. And I'm not going to deviate from our 15% to 20% long-term growth objective. So that's what we've laid out as a long-term growth objective. I said we'd be hard-pressed to go above the high end of that, we definitely see momentum for growing faster than that, but as we've seen in the past, there is a certain cadence that every market needs to go through as they adopt the technology. So that's something that we'll continue to invest ahead of the curve on and continue to lead with our customer partners to help them in their identification of how to rollout the new technologies to capture more growth for themselves, improve their consumer experiences, and lower costs.

[Operator]

Our next question comes from Adam Josephson with KeyBanc Capital. Please proceed.

[Adam Josephson, Analyst at KeyBanc Capital Markets]

Thanks, good morning, everyone. Mitch, one for you on demand. If memory serves, I think last call you said demand was the biggest source of uncertainty with respect to your full year guidance. And that was before the onset of war, that was before widespread lockdown in China, inflation's only intensified globally since then. But it doesn't seem like your demand expectations for the year have changed at all and maybe they've even gotten better. So I'm just trying to understand that and what you're expecting demand wise in the second half of the year as embedded within your guidance range?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

So overall, our volume assumptions haven't shifted all that much from where we were a quarter ago. And we came into the year with our eyes open to some of the macro uncertainties and so forth, and I remember when we gave some commentary around our volume expectations, people thought those might be a bit low. We actually saw, and obviously didn't foresee some of the specific challenges, but with all that the world has been going through the last couple of years, we obviously had a little -- some temporary dislocations around demand environment built into our overall guidance for the year. And that's proven the appropriate approach thus far.

[Adam Josephson, Analyst at KeyBanc Capital Markets]

I appreciate that. And Greg, with respect to your inflation outlook, high-single digit sequentially 1Q to 2Q. And then I think you said flat thereafter. Even though the strike in Finland is coming to an end, I would think, if anything that might put some downward pressure on your paper costs in the second half of the year. Can you just talk about why you're not expecting any sequential declines in inflation beginning in 3Q or even in 4Q for that matter?

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah, Adam. I think it's been difficult over the last year or so to really call inflation in material movements over past to next couple of months, really. So I think for us, we're looking at what we can see from the line of sight perspective. There are different views, if you look at different indices and different outlooks for the back half of where things may or may not go. But right now we're -- we know what we see for the second quarter as we talked about and we're assuming a moderate kind of environment from an inflation perspective in the back half. That could change up or down and so we'll -- we would flex our pricing accordingly, I guess.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

And just staying to build on, just to reinforce Greg's point on. Nobody really has visibility on 90 days and we've seen the indices show that there is going to be an easing of the inflation three months out, four months out, a few times over the past year and that has not panned out. So we have visibility on 90 days and we're putting in our pricing strategies and our productivity strategies accordingly. And we'll continue to pivot and adjust as need be and go from there.

[Operator]

Our next question is from Joshua Wilson with Raymond James. Please proceed with your question.

[Joshua Wilson, Analyst at Raymond James]

Yes, hello, Mitch and Greg. Thanks for taking my question.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Of course.

[Joshua Wilson, Analyst at Raymond James]

Just to make sure we're clear on the modeling side of things, can you give us an update on what you're assuming for share count in the EPS guidance and just your general thoughts on share repurchases from here since that's accelerated?

[Greg Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah. So maybe just backing up. I think our overall capital allocation and balance sheet approach is the same strategy it has been for a number of years now. We have a very strong balance sheet right now. Our debt ratio's at a relatively low level despite a lot of the acquisitions that we've or given in light of a lot of the acquisitions we've done very recently. And so we have ample capacity to continue investing in the business, continue leveraging M&A to help strengthen our portfolio and shift the portfolio towards high value categories, and capacity to continue increasing the rate of our dividend over time and continuing to drive share buybacks and return cash to shareholders.

So we've talked about it over the years, our approach there has been in periods. We're looking at share buyback to generate a return and in periods where we see maybe a pullback and shares, we'll have accelerators in our share buyback and the opposite if we see increases. So it's clearly in the first quarter. We saw the pullback in the shares and took advantage of that from a buyback perspective. Depending on how that plays out over the rest of the year would really determine how share buyback overall plays out. I think we ended the quarter with about 83 million shares and clearly, we expect to be somewhere below that by the end of the year.

[Joshua Wilson, Analyst at Raymond James]

Got it and then as we think about how the European theater[Phonetic] continues to evolve. Any color you can give on what you're hearing either from your customers or seeing in your own operations as it relates specifically to logistics and outbound freight availability and trucker availability?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

I don't think that we're seeing -- we're seeing what you're reading in the headlines overall. I mean just continued constraints. But I think the bigger item is just -- yeah, I think just questions about what the more of the economic outlook is then it is around freight availability and so forth. What's going to happen in the coming quarter, coming years and so forth. It's definitely a very sad development to see what's happening within Europe and that's what is on people's minds more than anything than what's going on, just getting product and so forth. So that's key. The sentiment has shifted in Europe overall is what I would say. I think growth trends and so far still seem fairly strong but the sentiment is more on other matters and what it means to the macro long-term.

[Operator]

And our next question is from Chris Kapsch with Loop Capital. Please proceed.

[Chris Kapsch, Analyst at Loop Capital Markets]

Yeah, hey, it's Chris Kapsch with Loop Capital. So question for LGM--

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Hi, Chris.

[Chris Kapsch, Analyst at Loop Capital Markets]

Good afternoon or good morning, I guess where you guys are. But question focused on LGM, I didn't catch the detail by region. I think you said that basically all of the segment sales growth was effectively pricing on passing through the inflation and volume flat or down. My question is the -- to the extent that paper liner availability constrains your volume, how did you -- your volume compared to the industry volumes did this constraint cause you to lose share in any region?

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

We don't have the industry data yet for Q1. So overall, that's something that we don't see. We think we were in a number of markets disproportionately in advantage, the ability to switch from one category to another. But it's hard to see exactly how things played out across the -- from just a market perspective and share perspective. Sequentially, we believe we're pretty confident we've gained share particularly in Europe but also North America year-over-year. You've got the factor of our tough comps in Asia Pacific, which were a bit more company-specific as it related to pre-buy. So overall, the share landscape. I think you tend to see, we've talked about this before, things moving around the board a bit, especially in periods of change and with price increases, but they're generally within a normal band. We would expect and we'd expect them to settle out where they have historically been.

[Chris Kapsch, Analyst at Loop Capital Markets]

That's helpful. And then I think your demand, again LGM, it's been characterized by generally healthy with strong backlog and to the extent that the strike being resolved allows you to work down the backlog. Would that be -- do you have a sense for any part of that backlog being sort of double ordering because of concern on behalf of customers to get material? And/or just how do you see that those lead times working down over time? Is that -- do you look at this as an opportunity to maybe take share as you're constraints are alleviated as this strike is resolved? Any color there would be helpful. Thanks.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Yes, sure. So as far as the backlog we've talked about lead times are much longer than they've been over the past year and particularly over the past quarter. Clearly, some of that, we're not expecting that's all just incremental demand. What happens when in a constrained environment, people get back in the queue for ordering future materials and so forth. So it's clear to us when we look at underlying demand for consumer packaged goods and e-commerce trends that end demand remains strong. And as we -- I think once the raw material environment stabilizes a bit, you'll have less of that getting in the queue early effect, so lead times will reduce a bit. But we still expect a, relative to the macro, healthy growth profile.

So as far as taking share and so forth, like I said, those things we expect would be settling out. We are the industry leader. And so we expect to be able to leverage our capabilities to help continue investing in innovation to drive the disproportionate amount of the industry's growth over the long run as we've done for since Stan Avery invented the category 8 years ago.

[Operator]

Our next question is a follow-up question from the line of George Staphos with Bank of America. Please proceed.

[George Staphos, Analyst at Bank of America]

Hi, everyone. Thanks for taking the follow-ons. Greg, Mitch, is there a way to roughly quantify what the impact of the strike might have been on your P&L from margin standpoint or in any way? And if you mentioned it prior, I apologize for having missed it, but if you could remind us then what it would be if you quantify. And then I had a couple of quick follow-ons after that.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Yeah, we haven't quantified and we're not going to overall, George. It's -- the net impact is relatively small but still impactful.

[George Staphos, Analyst at Bank of America]

Yeah.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Because if you isolate it on its own as one impact, but we've then been leveraging our other sourcing providers -- materials to providers to help mitigate that, as well as the material substitution to filmic liners and so forth. So we haven't provided that but that's -- yeah, something that's in our guidance is basically every turn that's normal, if you will, by the second half.

[George Staphos, Analyst at Bank of America]

Understood. And then another two and I'll turn it over. One, you had mentioned on the fourth quarter call, some potential that there was, and I forget the precise phrasing, but inventory in the channel that might need to be worked down. From your volume discussion and from the result overall, it didn't seem like you're seeing much effect from that, but nonetheless, are you seeing any signs of destocking, specifically within Europe and in the States? And then with supply chains being so volatile over the last, it seems like the last couple of years. Are you seeing any shift from your customers in terms of where they're planning to produce and source from? I would imagine it would be more of an effect, perhaps on your RBIS customers than turn. What that means, what the implications are for Avery's production stance over the next couple of quarters, a couple of years? Thanks and good luck the rest of the year, guys.

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Thanks, George. Yeah. So overall, around the inventory comment, we had said that we had anecdotal evidence and believe there was some inventory building going into this year, which by the way, I think is playing out well for the end markets. As far as when you're in a period of types of supply that people have some extra buffer to work through. From what we see, it looks like some of that was worked off we think in Q1. And we commented that our volume/mix within LGM was down low-single digits. So there -- comps was one reason but I think that the inventory levels could have been another. But we think it also still continuing some inventory here in Q2, which is important given that the impact of the strike won't be fully worked through until we work our way through Q2 and get towards the end of it.

And George, it wasn't clear in the second part of your question overall. I mean broadly speaking, what you've seen through this very dynamic environment is that we've been able to leverage our global scale, our strength in innovation to basically ensure that we are able to provide for our end markets. We are seen as the industry leader that are not just trying to protect our own business but also ensure the long-term health of our industries. And that's not just in LGM where a lot of discussion is, but also within RBIS and the Branding Information Solutions we provide there where with all the challenges that the apparel industry has seen that we've been able to show consistent robust growth through that cycle, especially relative to apparel and end demand. So overall very -- yeah, feel good -- very good with how we've performed. There's a lot of uncertainty on the horizon. We are confident in the team's ability to continue managing as we have over the past couple of years.

[Operator]

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

[Mitch Butier, Chairman of the Board and Chief Executive Officer at Avery Dennison]

Well, thank you. I just want to conclude by saying, strong performance in a very challenging environment. And just want to conclude by once again thanking our team for their phenomenal performance, dedication, and ingenuity. So thank you to the entire team.

[Operator]

[Operator Closing Remarks]