Avery Dennison Stock

Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference Call for the Second Quarter ended on June 30, 2026. [Operator Instructions] 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 Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ellen, and welcome to Avery Dennison's Second Quarter 2026 Earnings Conference Call. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled from GAAP on schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release.

On the call today are Deon Stander, President and Chief Executive Officer; and Gregory Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Deon.

Thanks, Gilly, 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 the 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're investing in innovation, 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, executing commercial and operational agility, including productivity and pricing actions to mitigate inflationary pressures. And third, 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 prebuys.

In Label Materials, customer prebuying 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 high teens with margins expanding compared to prior year.

In the 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 expansions 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 the 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 our 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 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 strengthens 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.

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 prebuys 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 prebuy activity. Reported sales also benefited from approximately 2 points of growth from foreign currency translation and 1 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 2.3x. 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 prior year, driven by high single-digit volume mix growth. Excluding our estimate of the year-over-year benefit from customer prebuys, 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 and 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 costs, 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 expectations. 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're 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 and 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 0.5 point headwind from the fiscal calendar change. We expect full year adjusted earnings per share in the range of $10 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're assuming that 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 prebuys 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 earnings 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 2.3x. 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'll now open up the call for your questions.

[Operator Instructions] Your first question comes from the line of Ghansham Panjabi with Baird.

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 2Q? And in particular, how is 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 3 months ago?

Thanks, Ghansham. Yes. Our anticipation has always been that 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're doing as well as the continued strengthening in some of the general retail execution as well.

In logistics, specifically, we're expecting a continued share and volume challenge relative to 2025 when we grew outsized 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 the logistics pipeline.

And in food, we're 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're seeing in the food sector, Ghansham.

Your next question comes from the line of George Staphos with Bank of America.

Congratulations on the progress. I wanted to dig into the prebuy effect in materials and there are a couple of components to it. I think you said that the effect of prebuy was more or less 5 points, mid-single digits in the second quarter and recall the figure being 1 point in the first quarter, and I think it was 1.5 points at the materials level. Did I relate those correctly? And does that mean, in essence, there's 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?

Yes. Thanks, George. So in 1Q, we talked about relatively around 1 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 5 points of growth in the first half or added net first half about 2.5% growth for the whole half of the year. And 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'll have more pricing action versus prior year, where we still had deflation in the first quarter carryover from last year. We'll have more pricing impact year-over-year in the second half.

I think to your point, we're seeing that more in Europe and Asia, and that's where we're 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. And obviously, it's been quite up and down since then. So customers are still seeing a pretty uncertain environment. And I think that's what led to a lot of the stock build that continued throughout the second quarter.

Your next question comes from the line of John McNulty with BMO Capital Markets.

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 and if you'll 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're kind of hitting a high watermark. Anything special about that in terms of why you're kind of at these levels? Or is this kind of the new baseline now that you're starting to see volumes stabilize and IL starting to grow again?

Yes. Thanks, John, for the question. So when we look at the second quarter from a price/cost perspective, and I'll 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 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 there. So we've 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, Q2 to Q3.

If I shift to your second question on Solutions margins, I think overall, there's a couple of drivers there. That team has continued to drive pretty significant productivity year-over-year. Certainly, that's having a benefit on our margins there. At the same time, there's a nice volume rebound. Our apparel business was growing mid- to high single digits in the quarter as we lapped 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.

So overall, it's both strong volume growth in apparel as well as productivity across the business. And we did have a couple of small onetime type benefits in the quarter, but still strong underlying results. We may see a little bit of moderation in that margin in Q3, but we still expect the second half to be above prior year.

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

A two-part question. It sounds like you're gaining more traction with your customers in Intelligent Labels in the general food category. Is it baked goods or frozen foods? Or are there themes that are allowing you to expand your reach?

And for Greg, you've talked about inflation in employee costs. Is this onetime? Or what's the rate? Or how large are your employee costs as a percentage of your cost base? Can you help frame the employee cost issue?

Thanks, Jeff. Let me deal with the first and then Greg can take the second. 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've done and some of the rollouts that have been underway for a while. I think the way I'd characterize it, Jeff, is the initial focus has been really around bakery. It's the more simple one to implement. But we are, as you know, working through protein now, which has been more technically difficult to do, but that's where we brought our innovation to bear where I think we continue to sustain advantage.

And then beyond protein within the next categories really at the periphery of the store will be in perishable items, the further perishable items. And I think those will follow in suit. I certainly think that 2 things are also playing in thematically. So one is, I think retail at an aggregate level is recognizing that the greater urgency with which they have digitized their stores overall to drive more of a digital platform to their stores, the more they're likely to succeed in driving the efficiencies and consumer connections 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, gross margin expansion and sales uplift. We've seen that consistently, particularly in perishable foods.

And so I think the only other thing I'd say from our perspective is it's an area where we're 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 includes a number of other 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 it, and I see it as a longer-term growth opportunity within our broader high-value category portfolio overall.

Yes. And Jeff, on your second question, I think there's 2 areas of employee costs where we're seeing a headwind year-over-year. One is the normal year-over-year wage inflation that we see across the business. And that's more normal levels of what we've 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're on track at or above, depending on the business, to deliver on our targets. So there's 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's roughly the size of those headwinds versus our productivity.

Your next question comes from the line of Josh Spector with UBS.

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 percent 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 don't know if there's an offset that we're missing.

Yes. 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 of points of that, we would estimate from stocking as we've 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. It's a headwind in the second half, largely offset by the fact that price now, we're no longer lapping the deflation from prior year. So the price actions that we're taking are a positive year-over-year in the second half. So I think underlying volume mix trends relatively similar, low to mid-single digits in the first and second half with a little bit of price differential between the halves as well that's impacting that in addition to the stocking impact.

Your next question comes from the line of Matt Roberts with Raymond James.

Deon, I appreciate all the comments you've given thus far on food, but if I could dive a little bit deeper on the contribution in the second half, very specifically on just how far has that rollout progressed? Is there still incremental run [indiscernible]. Walmart, I know that's beginning here in the second half, but what percent of that initial rollout should we be thinking about in '26?

Matt, you're breaking up on. Matt, you're breaking up on it. Can you start again from the top. I missed the question, Matt.

Yes. Is that better now?

Yes, try that.

Okay. Basically, I'm looking to get a little bit more granular on the food contribution, specifically Kroger, how far along that rollout has progressed? Is there anything incremental in second half from that? Walmart, I know that begins to ramp in the second half, but any percentage terms you could frame around that rollout in '26 and '27 and into '28.

And I believe a third grocer here has announced a 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.

Yes. Let me end where you -- the end part of your question, Matt, and I'll address the rest here. I think there is certainly much more accelerated interest from customers. They can clearly see the benefits of returns they get, as I said, on labor productivity, gross margin expansion and sales uplift as well.

Specifically on Kroger, the rollout continues to go as they've planned. And the second half of the year, the only thing that is different that we said we're working on, which we are, which is really the protein piloting. And as that goes successfully in the second half of the year, we'll be looking to roll that out as we go into the start of next year.

On Walmart, I think my observation on that customer 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 food area as well. And they continue to see the return on investment of the technology as well, both in those areas as well as in food. Typically with kind of large-scale deployments, time lines can vary slightly, but our current assumption is the commercial rollout in this customer to begin in the second half of '26, and we're 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 won't go into detail, but which specific customers they are, and we anticipate that largely those will manifest in '27 and beyond. And that's when you see the benefit of those positive pilots turning into broader implementation and rollouts.

Your next question comes from the line of John Dunigan with Jefferies.

Deon and Greg, I really appreciate all the details and congrats on a good quarter. I want to go back to the customer inventory build. It sounded like there was some carryover from the inventory build in 1Q. But did you see destocking through the quarter? And has it progressed into 3Q? 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 didn't sound like it from your comments, but just wanted to confirm.

And then one last point of clarification, Greg. 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?

Yes. Thanks for the question, John. So on stocking, as we said in the first quarter, we had about $0.05 earnings per share impact 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 continued to see more uncertainty as we move through the quarter and inflation continuing to increase in the middle part of the quarter. So we saw that stocking really continue not only through April, but also through May. And it's a little bit different by region, but Europe and Asia, where we've 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're expecting that or a large portion of that to come out in the third quarter. And we've started to see signs of that here in 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, really a Materials Group phenomenon that we're seeing here. We really haven't seen that stocking impact on the Solutions or Intelligent Labels side of the business.

From the sequential headwind, basically, the roughly $0.25 benefit we got from our customers increasing their inventory in Q2, our outlook would be that assumes a roughly $0.25 headwind then in the third quarter. So that's the 50% or $0.50 Q2 to Q3 sequential headwind that we'll have from an earnings perspective. And again, that's an estimate based on what we're seeing right now, as I said, with that destocking starting, and we'll obviously see how the situation in the Middle East evolves as we go through the quarter. But right now, that's our estimate of what the Q3 impact would be.

And John, let me just reiterate on -- particularly in apparel and general retail, there was no impact of inventory stocking or building that Greg spoke about. Most of that growth was really driven by new program rollouts that we've had -- that we talked about in the past, and some of them are delivering as we go through the second quarter into the third and fourth quarter as well.

Your next question comes from the line of Mike Roxland with Truist Securities.

A really high-level question here. Just I 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're done lowering prices. They're going to focus on raising prices at the expense of volumes. And then really, it's all being driven by the fact that they've seen margins compress over the last several quarters as a result of lowering prices. So how should we think about this renewed focus on price affect volume? And how does that affect the materials business? Could you see volume -- the materials business shift from a GDP plus business to a GDP or GDP minus, particularly if you see CPGs more aggressively go after price? Any color you can provide would be helpful.

Yes. Thanks, Mike. I mean we've seen the cycle go through this when it comes to CPG volumes. You're right. CPG volumes, I think largely over the last couple of years, have been relatively flat, if not slightly down. But we did see some encouraging signs in the first quarter around certain segments of CPG volumes. Home and Personal Care certainly grew a little bit. But I think partly the continued weighing in of inflationary impact has -- no doubt, has the CPGs weighing up how they balance of promotional activity for volume relative to pricing and the consumer impact thereof. And we don't necessarily see it fundamentally changing forward as we move 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, absolute retail sales. And I think we provided some detail in the materials. GDP has, I think, moved slightly lower globally, varies by region. Retail sales on aggregate are around 1% growth at the moment overall. And think about our business being largely consumer staple led in our base label business with some elements of logistics going into that as well.

So we don't see fundamentally a big shift in our volumes of base label volumes. Greg talked about kind of low single-digit volume growth as we move through the rest of the year. We don't anticipate it to be very different from that. The only other thing I'd say in there is we continue to take share in this business -- in our base label business overall. And we've made a significant effort to make sure that as we think about how we service our customers, really anchoring around what it takes for service excellence and differentiation is starting to yield some benefit. We've also lent a lot more, and you've heard me talk about this, into our innovation to make sure we continue to secure differentiation and move forward. So as an example, a lot of the work that we've seen around where the growth in the base label business come from, which is largely filmic products, we tend to have a leadership advantage in filmic products.

There's also a lot of impact that we're seeing from sustainability, recyclability. And there, some of our innovation like our AD CleanGlass or AD CleanFiber are really starting to resonate with customers. And so a combination of those helps us drive more share gain, which I think is very durable. And then there's 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 the flight to the market leaders for surety really. So we certainly do benefit a little bit from that impact as well.

Your next question comes from the line of Anthony Pettinari with Citi.

A lot of my questions have been asked, but I'm just wondering with the reinstatement of the full year guide, is it fair to think of that as just kind of a onetime action to kind of help us understand the impact of the prebuy 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 about that?

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

And secondly, I think as Deon mentioned earlier, we've got a little bit more uncertainty, as we've 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's a little bit better for us to give full year at this stage. Our intention is not to go back and forth between different guidance time horizons in the future, though. So we're obviously not talking about 2027 guidance here, but our intention would be to stay with one approach as we go forward.

Our final question comes from the line of George Staphos with Bank of America.

A point of clarification and then a question on Intelligent Labels. So Greg, and I think John asked the question. So if we're assuming a $0.50 headwind because the up $0.25 becomes a down $0.25 and recognizing there's not scalpel-like precision with this, it isn't 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's $0.30 that has to come out and therefore, it's more of like a $0.60 sequential downtick in 3Q?

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

Thanks, George. As you said, we had about $0.30 impact in the first half is what we estimate the impact of destocking was at our customers. And we're doing our best to try to triangulate around how we think that will come out between Q3 and Q4. Our view right now is a quarter or so of that comes out in the third quarter, and we've got a little bit of hangover and the rest of that in the fourth quarter. Again, it's a little tough to call, especially given how much of that stocking happened in Europe where we've seen the bulk of the inflation and the impacts there, especially with the holiday period that starts in August. So we'll see how that settles out. But that's our best case assumption -- or our best guess right now on what we're seeing so far in July and how we think that plays out and what we're hearing from our customers through the rest of the quarter.

Yes. And George, on your question is, is AI an accelerator for IL? Yes, I believe it is, absolutely. And maybe I'll just give you a slight context that I still think the biggest secular trend we're going to see over the next 5 or so years is the continued digitization of industries and of 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 is made, where it has made its life through the supply chain into retail, how it gets used in retail and ultimately to the end in terms of consumer use and disposal, you're 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's the real benefit it brings. And 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've done using IL, which in itself then creates a flywheel for more AI adoption. That's the hypothesis that I have, and I think we're starting to see that play out.

I'd say a more -- stepping back at a more broader level for AI, at least for Avery Dennison, I think I've spoken in the past, George, around we're seeing this both as a driver for efficiency internally in 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've invested -- we're investing in it. We have a Chief Digital Officer that we brought on board, and we've actually dedicated teams just to make sure that the big bets that we're taking will ultimately manifest in driving our growth algorithm or improving our profitability.

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

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're happy to address any follow-up questions you may have. Thank you again, and this concludes today's conference call.

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.

Ladies and gentlemen, welcome to Avery Dennison's earnings conference call for the first quarter ended on March 31, 2026. [Operator Instructions] As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website.

I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lucas, and welcome to Avery Dennison's First Quarter 2026 Earnings Conference Call. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled from GAAP on schedules A4 to A8 of the financial statements accompanying today's earnings release. We'll remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. On the call today are Deon Stander, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Deon.

Thanks, Gilly, and hello, everyone. We delivered a strong start to 2026 with first quarter organic sales up 1%, driven by mid-single-digit volume mix growth and adjusted EPS up 7% year-over-year. These results once again demonstrate the benefits of our diversified portfolio and our strong productivity and cost control management. .

Our performance this quarter was a clear display of our resilience as stronger Materials group results offset a softer Solutions Group performance. and growth in our base Label Materials business more than compensated for temporary softness in certain high-value categories. As we have seen in past cycles, geopolitical uncertainty has triggered a significant shift in raw material inflation.

While we do not know how long this inflationary pressure may last, we are responding proactively, implementing price increases and driving material reengineering where necessary to offset these pressures. Our history of successfully managing through inflation cycles gives us high confidence in our ability to protect our profits. Furthermore, our proven ability to manage security of supply to meet customer demand remains a distinct competitive advantage, helping to ensure we remain the partner of choice for our customers if supply chains were to tighten.

We continue to take decisive actions to drive both earnings growth and business resiliency by leaning into our proven playbook. Firstly, our focus remains on investing in innovation and service-led differentiation to drive growth through share gains and expand new business opportunities.

To this point, we recently signed an agreement to invest an incremental $75 million in Wiliot, a move that deepens our long-standing partnership and strengthened our enterprise-wide Intelligent Labels platform. This investment includes a dedicated joint go-to-market team to accelerate adoption across retail, food and logistics. It also positions us as the preferred [ inlay ] commercial partner, leveraging our leadership in design and manufacturing to bring commercial scale to Wiliot's complementary technology.

Secondly, we are maintaining our commercial and operational agility by taking swift commercial, procurement and cost actions to stay ahead of inflationary pressures. Thirdly, we're extending our scenario planning, a strength of ours and driving greater productivity and disciplined cost management to protect our bottom line through a wide range of scenarios.

Turning to our segment results. Materials Group delivered reported sales growth of 11% over the prior year. On an organic basis, sales grew approximately 2%, driven by mid-single-digit volume and mix growth that was partially offset by deflation related price reductions. The quarter's performance once again highlighted the strength of this business. We saw strong growth in our base categories, which grew mid-single digits and provided a critical offset to a quieter quarter for our high-value categories, which were down low single digits.

Within our high-value platforms, graphics and reflectors declined mid-single digits and Performance Materials were down low single digits, reflecting a combination of difficult year-over-year comparisons, customer order timing and softer auto end market sales. We anticipate these high-value categories to return to growth as we go through the year. In Label Materials, we observed some customer prebuying during March that has persisted into April. While it's difficult to predict the exact amount and timing of the unwind, we currently expect this volume to largely unwind during the second half of Q2.

Our teams remain focused on aligning production levels and cost structures with the shift in demand, utilizing our framework for managing stocking cycles. From a profit standpoint, adjusted EBITDA was up low double digits and margin up 10 basis point increase compared to the prior year. This was a direct result of our team's execution. We leveraged our operational rigor as well as contributions from raw material engineering initiatives.

These efforts effectively counter the headwinds from a less favorable product mix and higher employee-related costs, ensuring we grew the bottom line while continuing to serve our customers. In the solutions group, reported sales for the quarter decreased 3% with sales down 1% on an organic basis. The quarter was defined by the steady performance of our high-value categories, which grew low single digits and continue to serve as the long-term growth driver of this segment.

Within the high-value categories, Vestcom and Embelex both delivered solid mid-single-digit growth, which was partially tempered by intelligent labels, which was down low single digits. In our base categories, sales were slightly worse than expected, down mid-single digits. From a profitability perspective, adjusted EBITDA margin for the quarter was 16.4%, down 80 basis points compared to the prior year.

While we realized clear benefits from operational efficiencies and a net benefit from pricing and raw material costs, these gains were more than offset by higher employee-related costs, lower base category volumes and our investments in future growth. We remain committed to these investments as they are critical to ensuring innovation-led differentiation, which translates to strong long-term growth and margin expansion.

Turning to our enterprise-wide Intelligent Labels platform, sales were down low single digits compared to the prior year, a result that came slightly below our growth expectations. However, this headline number really reflects a tale of 2 different dynamics across our end markets. In our largest category, apparel and general retail, we saw encouraging performance despite the high hurdle of a pre-tariff comparison from the first quarter of 2025, sales were up low single digits.

This growth was fueled by successful program expansions, demonstrating that adoption and apparel continues to expand. Conversely, we saw a more pronounced headwind in logistics, where sales were down low double digits. This is largely a reflection of softer logistics customer demand and managing inventory during this customer's transition to an updated chip. We remain focused on the long-term adoption curve here. And as we navigate these market -- varied market timing, we are continuing to position the platform for the retail and food rollouts we have planned for the back half of the year.

Looking ahead, we continue to expect 2026 growth for our enterprise Intelligent Labels platform to outpace 2025, with performance more heavily weighted towards the second half of the year as major programs scale. In apparel and general retail, we expect to deliver full year growth, while our food category is set for an inflection as our rollout with the largest U.S. grocery retailer across bakery, meat and deli ramps up in the back half of the year.

Finally, in logistics, we are lapping outsized volume share in 2025 and proactively managing this by expanding pilots with new partners throughout 2026. Turning to our outlook for the second quarter. We anticipate earnings growth at the midpoint of our guidance range with organic sales growth of 0% to 2%. Our performance will once again be driven by the levers within our control, scaling our differentiated solutions in both our high-value category and base businesses, accelerating pricing to offset increased raw material inflation, maintaining a relentless focus on productivity and cost management, and effectively deploying capital to drive earnings.

In summary, our first quarter performance as well as our ability to grow share in earnings demonstrates our differentiation in a dynamic environment. We are focused on the underlying secular growth drivers that inform our strategy as well as the business resiliency actions to manage through cyclic pressures, inflationary shifts with agility. The proactive actions we are taking to ensure supply chain resilience and accelerate innovation led differentiation, evidenced by our deep in partnership with Wiliot further strengthens our competitive moat.

Our proven strategies, market-leading resilient businesses, agile teams and disciplined capital allocation approach, drive confidence to continue to deliver growth in 2026 and beyond. I want to extend my sincere gratitude to our global team for their focus on creating value for all our stakeholders their agility and their continued dedication to excellence. Over to you, Greg.

Thank you, Deon, and hello, everybody. In the first quarter, we delivered strong adjusted earnings per share of $2.47, up 7% compared to prior year. Earnings growth was driven by higher volume productivity and favorable foreign currency translation, partially offset by higher employee-related costs and targeted growth investments. As Deon mentioned, the quarter benefited from customer prebuys ahead of price increases, particularly in the last few weeks of March, which we estimate was an approximate $0.05 tailwind to earnings in the quarter.

First quarter reported sales were up 7% over prior year, with organic sales of 1% as strong volume mix was partially offset by deflation related price reductions. Reported sales also benefited from approximately 5 points of growth from foreign currency translation and 1 point of growth from the Taylor Adhesives acquisition. Adjusted EBITDA margins were at 16.4% in the quarter comparable to prior year. We generated strong adjusted free cash flow of $104 million in the quarter, primarily driven by an improvement in working capital compared to prior year as well as continued disciplined capital expenditures.

Our balance sheet remains strong with quarter end net debt to adjusted EBITDA ratio of 2.4x. Our capital allocation during the first quarter remained consistent with our established framework, and we returned $133 million to our shareholders through a balanced combination of $72 million in dividends and $61 million in share repurchases with the majority of the repurchases completed in March.

These actions underscore our commitment to returning capital, while preserving the financial flexibility and balance sheet strength to define our capital allocation approach. Turning to the segment results for the quarter. Materials Group organic sales growth came in 2% higher year-over-year as mid-single-digit volume mix growth was partially offset by low single-digit deflation related price reductions. Organically, base categories grew mid-single digits, more than offsetting high-value categories, which were down low single digits.

Turning to label materials. We believe we successfully gained share during the quarter while also benefiting from customer purchase timing ahead of price increases. From a regional perspective, volume mix in North America was up mid-single digits, while Europe delivered approximately 10% growth. In emerging markets, Asia Pacific also grew approximately 10% and Latin America grew high single digits. Organic growth in our high-value categories in Materials Group was down low single digits overall, with low single-digit growth in specialty and durable labels which was more than offset by a mid-single-digit decline in Graphics and Reflectives and low single-digit decline in Performance Materials, which includes our performance tapes and adhesives businesses.

Regarding the Taylor Adhesives acquisition, the business continues to perform in line with our expectations. Materials Group adjusted EBITDA was up 12% compared to prior year, with margins up 10 basis points. The expansion reflects our continued strong execution on leveraging productivity, the net benefit of pricing and raw material costs, inclusive of material reengineering, and strong label volumes, partially offset by employee cost, mix and investments.

Regarding raw material costs, we experienced low single-digit year-over-year raw material deflation in the first quarter. That deflation shifted to inflation as we went through March. We saw impacts on commodities, which are linked to petrochemical prices. Our teams are leveraging our proven playbook to navigate the inflation spike through strategic sourcing adjustments in the implementation of pricing.

Overall, we are anticipating high single-digit sequential inflation in the second quarter. Shifting to Solutions Group. Organic sales were down 1% while high-value categories grew low single digits. Base categories declined mid-single digits. This reflects continued softness in apparel demand as we lap a strong pre-tariff baseline in 1Q 2025 as well as ongoing inventory management from our customers.

Within high-value categories, Vestcom was up mid-single digits, driven by the continued benefit from new program rollouts. Embelex was up mid-single digits, driven by both the World Cup and industry growth. Intelligent Labels fell low single digits on lower logistics industry and general retail. Solutions Group adjusted EBITDA margin was 16.4%, which was down 80 basis points year-over-year. We're continuing to benefit from our productivity focus and net pricing and raw material costs but these are more than offset by higher employee-related costs, lower base category volumes and ongoing growth investments.

Turning to our outlook for the second quarter. We anticipate reported sales growth of 2% to 4%. This sales growth includes organic growth of 0% to 2%, approximately 1% from currency translation, and approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share in the range of $2.43 to $2.53 representing approximately 3% growth year-over-year at the midpoint. This earnings growth is driven by benefits of productivity actions, which more than offset headwinds from wage inflation and growth investments. The anticipation of destocking, which is projected to impact label material volumes in the latter half of the second quarter and the normalization of 2025 temporary savings, largely from incentive compensation expense and a net benefit from combined currency, share count interest and tax.

We've also outlined key contributing factors for our full year 2026, which are largely unchanged from our prior outlook on Slide 9 of our supplemental materials. We continue to expect an approximate $0.25 EPS benefit from the combination of favorable currency which largely benefited Q1 and a lower share count, partially offset by a higher adjusted tax rate and interest expense. We've increased our expectations for restructuring savings, now anticipating greater than $55 million as we continue to lean into our productivity levers. And we remain committed to strong adjusted free cash flow, targeting roughly 100% conversion for the year with fixed and IT capital spending of approximately $260 million. And assuming current economic conditions persist, we anticipate sequential increase in earnings throughout the year in line with our recent historical seasonal patterns and excluding the impacts of destocking from the prebuy timing.

In summary, we delivered a strong start to the year, achieving adjusted EPS growth of 7% compared to prior year. These results reflect our ability to drive volume and productivity while navigating a dynamic environment. We are well positioned to offset the latest round of significant inflation by leveraging our procurement excellence, improving pricing discipline. And we generated $104 million in adjusted free cash flow this quarter, and returned $103 million to shareholders, and we continue to operate within our disciplined capital allocation framework, while maintaining a strong balance sheet.

With that, we'll now open up our call for your questions.

[Operator Instructions] Your first question comes from the line of Ghansham Panjabi from Robert W. Baird.

So on Intelligent Labels, how did that play out relative to your initial expectations for 1Q? And also, has that -- has your view on 2026 core sales for this business change just given the events over the past couple of months or so?

Ghansham, Q1 played out slightly lower than we had anticipated, mostly on kind of the logistics volume that we saw both at the customer level and some changes that they were managing through inventory in preparation for a new chips they were having. While we haven't given an outlook for the rest of the year, I still believe we're going to see growth through the whole of '26 relative to 2025 overall Ghansham. And in particular, because we're going to see the second half of the year when we're going to see some of the new programs ramp, particularly in food, as we talked about the Walmart ramp for us in the second half of the year.

We also have a number of other apparel programs that were planned in and a couple of new ones that are also coming along as well. And so overall, while it's difficult to know what the second half of the year will play out from a macro perspective, I feel good about our ability to drive those new programs and have them roll out and hence, we'll start to see an expansion of our growth rate as we go through the year.

Your next question comes from George Staphos from Bank of America Securities, Inc.

I wanted to [ peer ] into the revenue bridge for the quarter. So I appreciate the detail again. You said sales growth is put at 2% to 4%, organic is 0% to 2%. We have 1% from FX and 1% from Taylor. So it suggests there's not a lot of impact if we're not misreading this from pricing. Can you talk about how the work you're doing to offset cost pressure will materialize in terms of pricing in 2Q and perhaps more in 3Q given lags.

Relatedly, any common denominator in terms of the weakness in volume we saw in the high-value categories in materials?

Yes. Thanks, George. I'll start with the first question. So I think you're talking about the second quarter outlook. So we look at the amount of inflation, I think I mentioned in the prepared remarks that we're seeing high single-digit sequential inflation in Q2, and we are implementing price increases pretty much across the globe to manage through that. So we would expect sequentially from Q1 to Q2 kind of a low to mid-single-digit price impacts to offset that inflationary pressure.

Now from a year-over-year perspective, we still have some carryover deflation, which is part of what drove pricing down, as I talked about in the first quarter, down in low single digits in Q1 versus prior year, really driven by carryover pricing with the deflation that we were seeing last year. So some of that carryover deflation -- carryover price down offset some of that price increase in the second quarter, but we would expect a slight overall net price increase in Q2 versus prior year.

Your next question comes from sorry...

So George, the only other thing I'd add is that historically, when we talked about kind of price and inflation, we've always historically seen historically in the past of about a quarter gap. But as we've gone through the last few cycles in this, we know now that our ability to manage pricing to offset inflation is really much improved, and we don't anticipate any really gap in the timing of how we manage inflation and as well the pricing we put through.

In terms of your high-value category question on Materials group overall, there were some idiosyncratic reasons for it in the first quarter, particularly on graphics and tapes were down, largely to do with a really strong comp in the first quarter of last year, some inventory -- intra-quarter inventory dynamics with some distributors and some end market sales where we saw some softness in our graphics business. But our anticipation is that we go through the year, we're going to see a return to growth for those categories and overall volume to increase as we go through the year.

Your next question comes from Jeff Zekauskas from JPMorgan.

You're estimating flat earnings per share in the second quarter relative to the first quarter. And normally, the second quarter is seasonally stronger. And I understand there's a little bit of prebuying and you called that out as being a nickel. But usually, the seasonality is stronger than that. So is what's restraining second quarter earnings growth, the timing of the raw material inflation that you'll get back later. .

And then in the third quarter, you're usually seasonally weaker than you are in the second, but you'll have growth in intelligent labels, you'll have a little bit more price. So in the third quarter, are we beginning to go up or flat or down? Where do we step?

Yes. Thanks, Jeff. So on your first question, so as I mentioned, we had about a $0.05 benefit of prebuy in Q1, which then comes out of the second quarter, which creates really a $0.10 swing from the first quarter to the second quarter. Now historically, we've had somewhere around $0.10 to $0.15, depending on the year, a sequential seasonal benefit, as you mentioned, so largely offsetting that.

When we look at other factors, I would say, we have probably a very slight price inflation lag impact, but that's largely offset by productivity increases as we're moving through the year as well. So overall, it's really the seasonal benefit, offset by the prebuy impact largely driving that. Now if we look at the rest of the year, I think as we mentioned in our remarks, we do expect continued sequential earnings growth as we move through the year.

Now prebuy impacts, as you said, with lower Q2, that should be a benefit from Q2 to Q3. And exactly, as you mentioned, we expect continued improvements in things like high-value category growth as we move through the back half of the year, continued earnings impacts from share buybacks as well and continuing to drive productivity growth. So we would expect to continue to see sequential improvements in earnings as we move through Q3 and Q4.

Your next question comes from John McNulty from BMO Capital Markets.

Maybe just dig a little bit more into the IL business. Logistics weak, it sounded like on 2 things: customer volumes and then the chip change. I guess can you -- presumably, the chip change is a temporary thing and you get that back? I guess, can you help us to think about how much of it was just from general weakness in volumes versus that chip shift. And then just as a secondary kind of related question, the investment that you just made in Willie, if you can give us some thoughts on how you can leverage that opportunity and how that maybe brings that business potentially more meaningfully to you over time?

Yes, John, the majority of what we saw in logistics softness was down to end customer demand volumes, and I think you've seen that publicly announced today as well. I think there was some degree of impact on the chip timing, but it will largely be resolved by the time we get through the second quarter as well.

I will say on logistics, you recall what we talked about in our call last time is that we -- we are really -- we did really drive outsized growth and share in 2025. And this year, we're going to be looking to lap that. That growth in share came because a large number of our competitors weren't necessarily able to service the accounts in the way anticipated and we had to step in to sort of provide support in that.

And our planning and expectation is that will normalize in time as well. We have yet to see that in the first quarter, but that's our planning and expectations stand at the moment. And what we're doing in logistics, specifically is to make sure we continue to accelerate when I'm seeing some very positive pilots in logistics with our other logistics providers at the moment as well.

Turning to Wiliot. I'm really pleased with the investment in this complementary technology. They've been a partner for us for a long time and we're deepening that relationship. We're specifically making sure that we're effectively getting joint go to market and our role in providing support for them as the largest manufacturing designer from our scale and network, I think, will be invaluable to both of us as we move forward. Wiliot in itself is a technology that's reliant on Bluetooth. So it's not RFID in the way that you think about it. And it's largely applicable, John, when you think about condition monitoring.

So when items need sensing as it relates to changes in temperature, humidity and light, this is where the technology really comes to bear. We've always talked about having a portfolio of sensors that are applicable in each business case really. So think about this being really applicable in sort of food, pharmaceuticals, some logistics where at a case in pallet level, where you need more of that condition sensing technology to bring to bear.

Our view as we move forward is that there's 2 things for us. It opens up the total addressable market further for our Intelligent Labels platform overall. We think that condition monitoring is probably another 75 billion units in the long term. And at the same time, it gives us a position of strength as we think about our breadth of solutions that we can provide in partnership now to all of our customers moving forward.

Your next question comes from the line of Josh Spector from UBS.

I wanted to just clarify 2 things. One, on the price cost side, I think, Greg, you talked about it being a slight negative in 2Q. I'd be curious just is all the costs flowing through in 2Q? Or do you have something else to deal with in 3Q based on what we see today? And then just in your answer to Jeff's question earlier just around your comments about sequential earnings growth through the year. .

I mean you have that qualifier about with historical earnings seasonality, but I heard you answer that you think earnings would be up in 3Q. And then seasonally, you're normally up in the fourth quarter. Is that the right way to think about it? Or would you characterize it differently?

Yes. So on the price/cost, I think I mentioned a slight negative headwind, I think, Q1 to Q2 from price/cost to timing. We are continuing to see inflation increase as we move here into at the end of April and early May. So we're continuing to do price increases. Some regions are seeing higher inflation than others and are even entering a second round of pricing action.

So there may be a slight headwind, but overall, pretty closely matching price inflation here as we go through the second quarter. I think there will be some carryover sequential inflation then based on that in Q3. So inflation that we're seeing somewhat middle of the second quarter will flow into the third quarter as well. And we'll see a little bit of sequential inflation impact in as well as sequential price benefit from Q2 to Q3.

I think I was talking about -- I mean we're not giving second half guidance, so I won't comment specifically there. But our expectation is that, as I said, we continue to drive significant productivity. We increased our restructuring outlook as we gave in the slides here today. We continue to drive high-value category growth, and we're continuing to allocate capital in a way to hopefully continue to increase earnings as well. So our focus is continuing to drive a sequential improvement as we move through the quarters.

Your next question comes from the line of John Dunigan from Jefferies.

Thanks for all the details, Deon, Greg. Really appreciate and congrats on performing well in a pretty tough environment. I wanted to ask on the Intelligent Label business, you talked about the headwind from the logistics share gains that you had last year, but I think you mentioned that you didn't really see any of that giveback in 1Q. I mean, how much should we pencil in for a headwind year-over-year here in 2026?

John, overall, we're not necessarily forecasting with the remainder of the year. We'll look like my view is that we are anticipating planning for some of that outsized volume and share that we gained in 2025, we'll lap against that if things normalize. But the way we're thinking about that is we're going to be working to make sure we're offsetting some of that with an impact of additional pilots we're expanding with some of our other logistics customers.

The biggest part of our overall IL program during 2026 is really going to be our food program as we roll out with Walmart during the second half of the year. And just recall, what I said about that was we thought it'd be somewhere in the sort of high single-digit to low double-digit equivalent value across a 2-year period on our total 2025 IL revenue.

We're still planning to see the start of that significant ramp during the second half of this year. And because of that announcement, we've also seen a lot more inbound from other food retailers and food supply chain players who are interested in understanding how they can leverage the technology. I'm encouraged by pilots that are running one in North America and one in Europe with some large grocery retailers that I think will have a lot of impact as well as a supply chain part of the direct-to-store delivery for one of our retail customers as well, which is a different use case.

So overall, from a food perspective, we're expecting that to ramp and then in apparel, we're going to continue to see new programs roll out, a couple that are already in flight and 2 that will start later in the second part of the year. The other piece that I'm really encouraged by is the traction we're seeing with some of our innovation technology that comes to bear in this as well, John. We spoke last year a lot about the rollout that we've done with the Inditex Group based on our loss prevention and visibility solution. We actually now have a second customer, another footwear brand that we'll be [ starting to use ] that as we go into the second half of the year. So not just new customers but extending technology to be able to drive new use cases as well.

Your next question comes from Mike Roxland from Truist Securities.

Deon, just a follow-up on John's question. It sounds like you're expecting -- or pretty confident in Intelligent Labels ramping in the back half of the year relative to the first half. So to the extent you can comment, how do you think about the cadence of IL over the duration of the year? Because certainly, to hit your guide for 2026 in terms of growing beyond excuse me, for -- yes, growing beyond 2025, it implies some loyalty growth, which it seems like it's going to be more 2H weighted than 1H weighted. And then secondly, just relatedly, any update on your key logistics customer and deployment internationally?

Yes. So Mike, you're right. We are going to be seeing a significant ramp in the second half of the year. And sequentially, our run rate of growth will improve as we go through from here through the second half of the year as well and that gets us to seeing our growth above 2025 by the time we exit the end of the year.

As it relates to our logistics customer, we are continuing to work with them on the international expansion piece, and that's going relatively well according to the plan that we have with them. The [ secondary ] piece we're also doing, you probably saw some commentary out in the press on this is not only we are focused on what's called the last mile fulfillment centers, where we've been very active over the last couple of years. But as they orientate and also start to think about first mile, so this is the shippers themselves, their own franchise stores, stores and other customers, we're involved in providing support in that regard as well. And ultimately, I think in logistics, we're going to get a combination of business models that some people will choose to focus on last mile. First, others will focus on first mile, and we're seeing that with 2 or 3 other logistics players as we go through some of the pilots as well.

Your next question comes from Matt Roberts from Raymond James.

A couple of times during the call you referenced the playbooks for cost reduction and specifically for inflationary pressures. So given you all have a unique window into a wide range of end markets into how your customers are thinking about pricing going forward, whether that's in food, apparel or other categories? How are your customers looking to offset their own cost via price?

And what impact do you expect that to have on the volume outlook going forward? You talked about extended scenario planning. Maybe how far are we from reaching a threshold that consumer elasticity, if you will, following years of price increases at retail. So kind of a holistic general question there on inflation and customary elasticity.

Sure, Matt. Look, I think let me just start with saying relative to our assumptions at the start of the year, it's clear that inflation is certainly will be higher than we had originally planned, and the economic indicators are lower than when we started at the beginning of the year. Now what's very difficult for us is to estimate the impact, the timing and the consequence of how that might play out as we go through the second half of the year.

But as you pointed out, we are expanding our scenario plans and widening it further to make sure we're really prepared for all eventualities in the volume environment that may or may not play out. I think the biggest part, and Greg talked about this earlier on, why I feel confident in our earnings growth trajectory as you go through the year, just to reiterate again is because we're going to continue to accelerate some of our productivity. You've seen -- we've updated our restructuring to $55 million. The largest part of it will play out as we go through the second half of the year.

We know our high-value categories will continue to expand as we go through the year, not just because, for example, materials group had some idiosyncratic growth was challenged in the first quarter, and that will improve as we go through the year, but also our IL growth will ramp as we go through the second half of the year. And then finally, of course, we're having the impact of share count reduction that will help us as we go through the second half of the year as well.

I think when I look at our end markets overall, here's what I see currently, and it is varied across end markets varied within the end markets as well. I'd say on our materials business, our label side, customers have been depending on where they are by regions where we've seen stronger inflation. They've been more cautious in the way that they've been thinking about the end outcome.

Certainly, some of them have been doing some prebuy. We particularly see that in Europe, in Asia, a little bit emerging in North America as well. When you talk to customers over there, I think there's twofold. I think our end market retailers are really thinking and end market brands are really thinking about consumer confidence in that regard.

Now as you've known, for last couple of years, CPG volumes have been really muted. And the encouraging thing, at least at the start of this year, we've seen at least a couple of CPGs starting to indicate they're seeing some volume growth. That could be a positive benefit for us despite what's happening from an inflationary perspective. I think when you look to apparel, certainly, apparel sentiment has been pretty soft for quite a long time.

It went through the tariff challenges during last year. Now we're seeing apparel customers thinking about what it may mean from an inflationary perspective on end market demand. It is, after all, a discretionary purchase. That said, apparel imports are still continue to be very low and apparel inventory to sales ratios are at the low since it been '21.

And as go through the year, we may see some upside as things normalize in that regard. We continue to work with customers. We're hearing different things about how they're managing as they're thinking about back-to-school sourcing and then ultimately into holiday as well. So our assumptions are, if we don't see any further deterioration in the macro environment from where it is now, we would anticipate sequential earnings growth, as Greg called out, as we go forward through the year.

Your next question comes from Anthony Pettinari from Citi.

Just following up on Intelligent Labels. Understanding the big ramp is in the second half of the year. But I'm just wondering, was there anything notable in terms of the exit rate in the first quarter? Was that stronger or weaker it seems like comps could get potentially easier in 2Q. So I'm just curious if you saw any acceleration in the March or April.

Nothing that stood out dramatically, Anthony. Certainly, in the second quarter, we should see easier comps on our apparel and general merchandise because if you recall, tariffs really took hold in the second quarter of last year when we saw, I think, a negative outcome during the second quarter then as well. So no leading indicators would suggest there's any difference.

I will say that as I look into where we are now, our current run rates as we're seeing in April reflect on both businesses, just a continuity of what we saw during March really overall. Apparel continues to be solid from what we can see initially and for our materials business, particularly labels business, we continue to see some of that elevated activity, which as Greg spoke about, we're anticipating unwinding as we get through the second quarter.

Your next question comes from Hillary Cacanando from Deutsche Bank Securities.

In terms of capital allocation, you bought back $61 million shares this quarter, given that your leverage is stable at 2.4x leverage. How should we think about the pace of buybacks for the remainder of the year, particularly balancing against your investment pipeline?

Yes. Thank you, Hillary. So we continue to follow our playbook, I think we followed for a while on share buybacks where typically, we take a return-based approach where we use a grid in a period where we're seeing share price increase, we may pull back a little bit on the pace of repurchases in a period like we saw in March where we saw the share price decelerate, we increased our pace of purchases. So the vast majority of our Q1 share buyback, actually, came in the month of March and then April kind of continued at a relatively similar pace. So it will somewhat depend, of course, on how that plays out as we go through the year. We'll continue to take a return-based approach on our share buybacks accordingly.

Overall, from an allocation perspective, we feel good about the capacity that we have to continue investing in the business organically, of course, with CapEx, with innovation, related investments, investments like Wiliot, it's, of course, like to help increase our future growth rates as well as looking at opportunities for both M&A and continuing to do share buybacks. So we feel good about our capacity across all of those fronts, and we'll continue to take the balanced disciplined approach on all those as well.

Your next question comes from George Staphos from Bank of America Securities Inc.

Two quickies here. First of all, Deon and Greg, can you elaborate further on how you're expanding the scenario planning? Is it just pulling more levers on the productivity and maybe ramping the buyback as the market has allowed you? Or are there any other elements that you can share here on the call in terms of how you're expanding the playbook? Secondly, in terms of pre-buys recognizing at the end of the day, you're in business to serve your customers. What are you doing to prevent, if you will, too much pre-buying that gives you a bit more of a destocking that has to be managed 2Q and perhaps into 3Q.

Thanks, George. Yes, in terms of expanding our scenarios, you touched on the major drivers of those. You look to understand where there's additional productivity opportunities for us in lower volume scenarios or less, if their volume continues to grow. I think the only other thing I'd say is we continue looking at what are we going to do from an innovation perspective. And when we have new products or solutions in the pipeline, can we accelerate them even quicker to get to market? .

The final element I will say is our teams have been really focused on thinking through what it takes to continue to win and drive share with our customers, both new and existing customers as well. And part of that comes down to our commercial excellence backed up by the innovation that they are seeing that we're delivering to the market and, of course, supported by our consistent quality and service delivery. So those relationships we have with customers, we see an opportunity for us to continue to increase our share of wallet with them as well.

Final point I'd make is typically what we see in more uncertain environments, particularly inflationary environments and where and if supply chains are more challenged, we normally see a migration from customers back to the market leaders because they trust the security that we can provide. And that may represent another upside for us as we think through just in terms of expanding our nid scenarios for more share gain as well.

Yes, I think some of that addresses the question on prebuy as well. I mean there's 2 primary reasons that customers do prebuy. One is to ensure certainty of supply and materials. And the other is to manage price increases that they see coming in the market. I think overall, as Deon said, our global scale is a big competitive advantage for us when it comes to ensuring certainty of supply to our customers, leveraging our procurement excellence, our sourcing strategy.

We learned a lot from the challenges of '21 and '22 from that perspective, expanded our supplier and sourcing strategies from there. I really feel good about our ability to ensure certainty of supply for our customers. So I think that's one way we help limit the impact of prebuys getting too large. I think what we're seeing here is a much lower scale than what we saw in '21, '22 when we saw 3 or 4 quarters of inventory building before the destock happened in 2020 -- late '22, early '23.

So right now, it's a month or so of inventory build. We're going to continue to manage that very closely, and we'll see how that plays out as we move through the quarter, but we're going to stay on top of that, of course, as we go.

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

Thank you, Lucas. On behalf of everyone at Avery Dennison, I want to thank everyone for joining today's call and for the continued interest in Avery Dennison. This concludes today's conference call.

Thank you. 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.

Ladies and gentlemen, welcome to Avery Dennison's earnings conference call for the fourth quarter ended on December 31, 2025. [Operator Instructions] As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website.

I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir.

Thank you, Miriam, and welcome to Avery Dennison's Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled from GAAP on schedules A-4 to A-8 the financial statements accompanying today's earnings release.

We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release.

On the call today are Deon Stander, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Deon.

Thanks, Gilly, and hello, everyone. We delivered solid full year 2025 results with adjusted EPS of $9.53 and $707 million of adjusted free cash flow, a performance that once again underscores the durability of our franchise and our ability to activate multiple levers across a range of macro scenarios. While ongoing trade policy changes and softer consumer sentiment have been headwinds for our business, we successfully leveraged our productivity playbook to maintain an adjusted EBITDA margin of 16.4%. Our results demonstrate the resilience of our model as we remain focused on driving outsized growth in high-value categories, accelerating innovation to advance our differentiation, delivering productivity to protect base margins and allocating capital effectively.

Turning to the fourth quarter segment results. In Materials Group, reported sales increased 5%. While sales were down slightly on an organic basis, we saw low single-digit volume in mix growth that was more than offset by deflation-related price reductions. We are continuing to advance our strategic shift towards high-value categories, which now represents 38% of the segment's portfolio, a figure we expect to expand with a full year of Taylor Adhesives.

Within this segment, Intelligent Label delivered high single-digit growth, underscoring its role as an important growth engine, while Performance Materials grew mid-single digits and Graphics and Reflectives grew low single digits. High-value categories helped balance our base categories, which were down low single digits in the quarter, lower than expected, on softer customer volumes.

From a margin perspective, adjusted EBITDA margin was 16.6%, down 40 basis points compared to the prior year. This reflects the impact of higher employee-related costs and some onetime benefits in the prior year fourth quarter, which our team worked diligently to partially offset through the benefits of our ongoing productivity actions.

In Solutions Group, sales increased roughly 1.5%. This segment continues to lead our portfolio shift, with high-value categories now representing 60% of the Solutions Group portfolio. This proved critical this quarter, as our high-value categories provided a necessary offset to our base solutions, which continue to be impacted by tariff-related uncertainty. Specifically, our base apparel business was below our expectations, down roughly 7% as customers balance inventory positions with the impact of post-tariff pricing decisions.

Within our Solutions Group high-value platforms, Vestcom grew more than 10%, Embelex delivered high single-digit growth, and Intelligent Labels, tempered by the consumption trends in apparel and general retail IL, grew low single digits. From a profitability perspective, our disciplined focus on our productivity playbook and a favorable high-value mix allowed us to deliver an adjusted EBITDA margin of 17.8%, which is up nearly 1 point sequentially and comparable to prior year, successfully offsetting high employee-related costs and our continued investments in future growth.

Turning to our enterprise-wide Intelligent Label platform. Sales grew mid-single digits compared to prior year, in line with our expectations for a sequential improvement in the rate of growth. This was driven by our key growth market segments and a partial recovery in apparel, which grew low single digits this quarter. While apparel and general retail sales have been impacted by tariff policy changes, resulting in flat full year sales, our food, logistics and other categories delivered outsized performance with high teens growth in Q4 and approximately 10% growth for the full year 2025.

Looking ahead to 2026, we continue to anticipate growth in this platform above the pace we achieved in 2025. We expect the pace of growth to be stronger in the second half than the first half as we lap a stronger first quarter 2025, which was largely unaffected by tariffs and as new programs roll out.

In apparel and general retail, we expect to return to growth as we continue to navigate the impacts of tariff policy uncertainty. In food, adoption is set to accelerate through our major fresh grocery rollout with Walmart, with revenues ramping in the back half of 2026. Finally, in logistics, we are focused on expanding pilots with new customers, following a year of outsized growth with our largest customer.

Pivoting back to the enterprise level. While I am pleased with our ability to protect margins and earnings in this environment, I am not satisfied with our organic revenue growth. While much of this is due to cyclical challenges, we are taking decisive action to inflect this growth trajectory.

As you can see on Slide 10, our high-value categories, which have secular tailwinds, remain a key enabler of enterprise growth and portfolio strength, growing at a mid-single-digit CAGR over the past 6 years and expanding to roughly 45% of our sales in 2025, a 12-point increase since 2019. Expanding these solutions to new customers and end markets will add to our growth trajectory.

Accelerating innovation outcomes in both high-value categories and the base categories is also key to changing our growth trajectory. This allows us to expand our opportunity with existing customers and to grow into new markets.

Within our Solutions Group, we're advancing this through examples such as our Intelligent Labels Fresh solutions for food traceability, the expansion of Vestcom Storelink software platform for centralized retail execution, and the growth of Embelex's Custom Studio Fanzones to drive in-venue fan engagement. Similarly, in Materials Group, new innovations such as the expansion of our Cleanflake portfolio to more packaging substrates to advanced circularity and the introduction of smart materials to accelerate Intelligent Label adoption throughout the channel.

Additionally, to further enhance our differentiation, we are also expanding our digital capabilities, use of automation and leveraging AI to enable additional operational productivity and fixed cost innovation, strengthen our service and quality, shorten our innovation cycles and provide more data-driven solutions that our customers require to address their fundamental challenges.

Stepping back, as you can see on Slide 9, executing on all our key strategies with proven business resilience enables us to deliver GDP-plus growth and top quartile returns across cycles. In addition to investing in innovation to drive growth in our high-value categories and base businesses and positioning ourselves to lead at the intersection of the physical and digital, we will continue to relentlessly focus on productivity to strengthen our market-leading positions in both our businesses. We will also continue to be disciplined in capital allocation to deliver returns and improve our portfolio.

Finally, I'm pleased to report that we achieved our 2025 sustainability objectives which we laid out in 2015. These include reducing our energy intensity and enabling more sustainable products and solutions for our customers. Similarly, we're making good progress towards our 2030 sustainability objectives we set in 2020.

Now moving to the outlook for 2026. In line with our recent practice of providing a quarterly outlook, we will be continuing this approach for the foreseeable future. As such, for the first quarter of 2026, we expect adjusted earnings per share to grow approximately 6% at the midpoint on organic sales growth of 0% to 2%. Given key economic indicators remain largely consistent with 2025 levels, we are not planning for any macroeconomic tailwinds in the near term. Our performance will instead be driven by the levers within our control: Scaling our differentiated solutions in high-value categories, returning our base business into profitable growth, maintaining a relentless focus on productivity and effectively deploying capital to drive earnings.

In summary, we have exited a dynamic and challenging year not just more resilient, but structurally stronger to deliver longer-term value creation. Advancing our strategic priorities underpins our confidence in returning to stronger growth and delivering top quartile returns. We are entering 2026 with the right playbook, the right team and a path to return to growth in line with our long-term targets. I want to extend my sincere gratitude to our global team for their dedication to excellence and their unwavering focus on executing our strategies.

And with that, over to you, Greg.

Thanks, Deon, and hello, everybody. In the fourth quarter, we delivered solid adjusted earnings per share of $2.45, up 3% compared to prior year. Earnings growth was driven by higher volume and productivity, partially offset by higher employee-related costs and targeted growth investments. From an overall sales perspective, our business continued to be impacted by a softer consumer environment and customer uncertainty due to the impact of trade policy changes.

Fourth quarter reported sales were up 3.9%, with organic sales comparable to prior year, as positive volume was offset by deflation-related price reductions. As expected, we benefited from an estimated 1.5 points impact from our shift to the Gregorian calendar at the end of the year and 1 point of growth from the Taylor Adhesives acquisition.

Adjusted EBITDA margin remained resilient at 16.2% in the quarter, down slightly compared to prior year. And we again generated strong adjusted free cash flow of $303 million in the quarter, bringing our full year 2025 free cash flow to $707 million with a free cash flow conversion rate of greater than 100%. And our balance sheet remains strong with our quarter end net debt to adjusted EBITDA ratio at 2.4.

We continue to execute our disciplined capital allocation strategy. For the full year, we returned approximately $860 million to shareholders, including $572 million in buybacks and $288 million in dividends, reinforcing our commitment to delivering shareholder value while maintaining a strong balance sheet.

Now turning to segment results for the quarter. Materials Group organic sales were down approximately 1%, as low single-digit volume mix growth was more than offset by low single-digit deflation-related price reductions. Organically, high-value categories grew low single digits, while our base categories were down low single digits.

Turning to regional label materials organic volume mix trends versus prior year. In developed markets, volume mix was down low single digits in North America as consumer product demand continued to impact volumes, while Europe delivered mid-single-digit growth. In emerging markets, Asia Pacific and Latin America were both up low single digits. Our high-value categories in Materials Group delivered low single-digit organic growth. This growth was driven by Intelligent Labels, which delivered a high single-digit increase. Performance Materials, which includes our Performance Tapes and Adhesives businesses, was up mid-single digits, while Graphics and Reflectives were up low single digits, and Specialty and Durable labels were comparable to prior year.

Materials Group continued to deliver resilient margins with an adjusted EBITDA margin of 16.6% in the quarter. While this was down slightly compared to prior year, it reflects our ability to largely defend profitability through productivity efforts, which nearly offset the headwinds from higher employee-related costs and a lower volume growth environment.

Regarding raw material costs, including the cost of tariffs, we continued to experience modest sequential raw material deflation in the fourth quarter, capping a year where total raw material costs declined low single digits. Our teams remained agile in navigating dynamic markets, mitigating tariff costs through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including tariffs, our outlook is for relatively stable sequential material costs as we enter 2026.

Shifting to Solutions Group, sales were up 1.3% organically. High-value categories performed well, up high single digits, with base solutions down mid-single digits, driven by softer base apparel sales. Within high-value categories, Vestcom was up more than 10%, driven by the continued benefit from new program rollouts. Embelex was up high single digits, driven partially by World Cup sales, and Intelligent Label sales grew low single digits on lower apparel and general retail volumes.

Now turning to enterprise-wide Intelligent Labels. Sales expanded mid-single digits compared to prior year. Growth was once again driven by food, logistics and industrial categories, which were up high teens for the quarter and now represent approximately 30% of our total IL portfolio. Offsetting this strong momentum was the performance in apparel and general retail, which, combined, were down low single digits for the quarter. And these markets represent 70% of our Intelligent Label sales and continue to be impacted by tariff-related pressures. Solutions Group adjusted EBITDA margin was 17.8%, which was comparable to prior year, as benefits from our continued productivity efforts and higher volume were offset by higher employee-related costs and ongoing growth investments.

Now stepping back to look at our long-term financial performance. We remain focused on delivering strong results across cycles. Reflecting on our 2020 to 2025 targets, we delivered solid results despite multiple cyclical challenges by leveraging the strength of our portfolio. We successfully exceeded our top line goals and performed well on our profitability targets, with EBITDA margin ahead of our long-term objective. However, we did fall short of our adjusted EPS target, which came in at 7% ex currency, trailing our 10% target, partially due to the impact of acquisition intangibles amortization. Additionally, ROTC, while in the top decile of our peers, finished at 15%, largely driven by the impacts of our acquisitions, including Taylor Adhesives, which closed in the fourth quarter of 2025.

Turning to our '23 to 2028 targets. We are currently in line or ahead on most of our targets. And as Deon mentioned, our focus is to shift our organic sales growth trajectory to achieve our targets for this cycle.

Now turning to our outlook. For the first quarter of 2026, we anticipate reported sales growth of 5% to 7%. Our guidance does not presume an improvement in external market conditions. This sales growth includes organic growth of 0% to 2%, approximately 4% from currency translation and approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.40 to $2.46, representing approximately 6% growth year-over-year at the midpoint. This earnings growth is driven by benefits of organic volume mix growth and productivity actions, which more than offset headwinds from wage inflation and growth investments and the normalization of 2025 temporary savings, including incentive compensation, and a net benefit from combined currency, share count, interest and tax.

We've also outlined key contributing factors to our full year 2026 on Slide 14 of our supplemental materials. We expect an approximate $0.25 EPS benefit from the combination of favorable currency and a lower share count, partially offset by higher adjusted tax rate and interest expense. We expect restructuring savings of approximately $50 million as we continue to execute our productivity playbook, and we expect the normalization of a majority of the 2025 temporary savings, which was largely related to lower incentive compensation costs.

We remain committed to strong free cash flow, again, targeting roughly 100% conversion with fixed and IT capital spending of approximately $260 million. And we anticipate a sequential increase in earnings throughout the year, in line with our recent historical seasonal patterns.

In summary, we delivered a solid fourth quarter, achieving adjusted EPS of $2.45, which was up 3% compared to prior year. And this capped off a year where we leveraged our proven playbook to protect bottom line results. We generated over $700 million in full year adjusted free cash flow and returned approximately $860 million to shareholders while maintaining a strong balance sheet.

For the first quarter, we expect at the midpoint, an improvement in organic sales and earnings as we continue to deliver actions to increase the pace of our earnings growth, and we remain well prepared for a variety of macro scenarios. We're positioned to execute our profitable growth and disciplined capital allocation strategies to deliver superior long-term value for our stakeholders.

Now we'll open up the call for your questions.

[Operator Instructions] Our first question comes from George Staphos, Bank of America Securities Inc.

My question will be on materials. You called out a few things that made comparisons difficult this fourth quarter versus last fourth quarter, so we appreciate that. But I was wondering if you could parse a bit further, the puts and takes, the pluses and minuses behind the 40 basis point drop in margin? It was a little bit worse than we were expecting. In that regard, the higher employee-related costs, we can guess what that is, but if you could provide a bit more color? And last thing, was there any impact from higher raws in that number? I know you said there was deflation, particularly though around paper, paper pricing and the like.

Thanks, George. This is Greg. So I think there is, of course, a number of factors. We talked about our base volumes were a bit soft in the quarter. And when we look at -- every year, we have wage inflation year-over-year, and we need a bit of volume growth to offset that wage inflation. So when our base volumes are down, a lot of our productivity actions are going in to offset wage inflation and some of those headwinds.

At the same time, we did have a little bit of small onetime items last year. Nothing major, but a couple of items that added up to a few cents that were a headwind in year-over-year for us as we look at prior year Q4 '24 to Q4 '25. And then in addition to that, we did have the extra calendar days this year. And those were 4 extra calendar days that come with fixed costs for those days, but pretty soft shipping days because they are the days right before New Year. So the flow-through on those is typically well below our average as well. So it's a number of impacts there.

Now when I look at our sequential margins from Q3 to Q4, I think it's largely in line with our historical seasonality. Historically, we do see a 60 basis point or so drop in Q3 to Q4 margins in materials, largely due to the holiday impacts as well as mix of our VI labels in the fourth quarter versus the third quarter. And in addition to that, as I said, we had the calendar shift impacts in the quarter. So overall, pretty much in line, historical seasonality from a margin perspective. And year-over-year, had some onetime items in prior year that impacted the year-over-year comparison.

Your next question comes from Ghansham Panjabi, Robert W. Baird.

I guess on Intelligent Labels and the low single-digit growth during 2025, how are you at this point thinking about growth for 2026? And related to that, can you share your view on growth expectations for some of the other high-value categories, Vestcom, Embelex, et cetera?

And then Deon, on your decision to only give quarterly guidance for now, where do you lack specific visibility in context of a portfolio that's relatively diverse both by business and geographically? And what would need to change for you to kind of go back to that annual guidance construct?

Yes. Let me start with the first question on IL. We had low single digits in 20 -- growth in 2025, and we're anticipating our growth rate in 2026 to be above what we delivered in 2025. In 2025, I'd say, largely, the biggest impact was really on apparel and general merchandise, really tied in tariff activity that was happening. And I still fundamentally continue to believe in the significant growth opportunity this platform has. Just to restate -- and this is a 300 billion unit plus opportunity, $8 billion-plus opportunity, and we're really at the nascent stage and what gives me that level of confidence that we're going to continue to see that growth during 2026 and beyond.

The fact that we are already seeing, as you've seen, more adoption in these individual sectors, more apparel customers continue to adopt the technology as well as extend the use of the technology, for example, in loss prevention. We now have -- and we're working through the planning and the execution as we go to the second half of the year on the second grocery customer, which I think itself will be a significant inflection point for that segment.

And then -- and I think then in logistics, we're going to continue to really lean into more pilots, expanded pilots with a number of our other customers and with our large customer, where we drew -- we drove outsized growth in 2025, largely on our execution as some of the other competitors struggled and we gained some share. We're anticipating that large customer has also provided lower outlook for volume guidance in this year, and we're going to factor that in, we'll see how that goes in logistics overall.

As it relates to the other high-value categories -- and we just reinforce again, for us, high-value categories are critical because they provide both a growth catalyst and acceleration for growth. Most of our high-value categories are typically higher growth in our base business, and they have a typically high margin profile. So as we accelerate that portfolio mix, we're going to get natural mix accretion both on our growth and on our margin profile as well.

Typically, we expect, Ghansham, the majority of these high-value categories to be at kind of mid-single-digit plus. They vary by individual ones across materials and solutions. In Vestcom and Embelex, as you asked specifically, we're anticipating kind of mid-single-digit growth, all things being equal, assuming no fundamental change in environment for those two categories. As we continue to see new customers for Vestcom, the rollout of their Storelink software, that really will enable in-store productivity for their existing customer base.

And then on Embelex, while we are up against a headwind as related to World Cup last year, we also believe that depending on how the in-arena execution goes during World Cup, we could benefit from some of that as well. So we'll wait and see to how that plays out overall.

To your final question around quarterly guidance, I think Q4 demonstrated that we continue to see a very dynamic environment which limits our visibility really on the market side of the growth piece. I just want to remind everybody, over the last 5 years, we've seen a number of largely one-off cyclical events negatively: Pandemic, inflation, supply chain, destocking, tariff consequences. And as a short-term cycle business, it makes having a long-term perspective during these type of events very challenging. I remain really confident, very high confidence in our strategies, the actions we're taking to drive growth and differentiation to deliver value creation. But I'm not planning for any macro tailwinds in 2026. And so for the foreseeable future, we're going to continue to provide updates and outlooks on a quarterly basis.

Our next question comes from John McNulty, BMO Capital Markets.

Yes. And I appreciate some of the color and the historical perspective around the high-value categories. Maybe digging into that a little bit more deeply, I guess, can you help us to think about the margin differential for the high-value categories versus kind of the core? And also, has that shifted or changed much as we've progressed from, say, 2019 to 2025, either gotten higher, or has it contracted at all? How should we be thinking about that?

Yes. Thanks, John, for the question. I think we haven't talked specifically about margins by specific category. But in general, of course, as we talked about for a product category to be a high-value category, it's got to have higher variable margins than the rest of the portfolio. And that's a big part of our focus there is as we grow faster in these high-value spaces, it allows us to continue expanding margins as well. So typically, they are a number of points above our average, certainly above -- significantly above the base categories as well.

When you go back and look over the last few years, you can see our gross profit margins over the last few years have gone up a couple of points. And a big part of that is the shift towards high-value categories that you can see on the slide that we laid out, in addition to the productivity actions and other things that we've been driving as well. But the shift towards more and more high-value category growth is definitely showing up in our gross profit margins as we've expanded those over the last few years.

And John, I'll just add that our high-value categories right across the business I think really enable us to have a resilient portfolio, allows us to pull multiple levers, should things happen. I'll also say from a high-value category perspective, which you saw grow more than 6% since 2019 on an organic basis really resonates with customers because we're providing differentiation at the point that a solution or a problem is being solved. These examples include what we do with adhesive tapes in the automotive industry, not just to bind things together, but for example, to provide additional noise and sound vibration dampening. So they provide utility beyond the simple application.

That extends also then to some of the examples we quoted on our Intelligent Labels platform, where we brought new innovation, for example, in food to enable protein. But it extends also to other areas, for example, our Materials Group, where we've really launched new innovation on our Cleanflake portfolio, which enables recyclability not just historically on, for example. PPE for PE, with HDPE, now glass and other packaging as well.

And so for us, a final constituent component of our high-value categories is the need for constant innovation outcome acceleration because that continues to bolster margins. Typically, when we bring a new product that's highly differentiated, we're able to extract more value from that because we create more value. And that's been a very big part of the focus over the last couple of years, and it will be so moving forward as well.

Our next question comes from Jeff Zekauskas, JPMorgan.

Two-part question. Since you signed your agreement with Walmart, have you had more inquiries from other sellers of grocery items? And secondly, on Slide 14, you talk about the majority of 2025 temporary savings, including incentive comp, being a headwind. How large is that headwind?

Yes, Jeff, I think the Walmart -- the Walmart announcement with our partnership, I think it's added an additional catalyst to interest and inquiry within our pipeline. We've always known that bringing a digital identity to a physical object, particularly, for example, in the grocery space, will be able to allow you to reduce waste because you're able to manage your best before expiry date in a much better way, reduce labor, efficiency -- reduce labor and increase efficiency that goes with it, and finally also provide a better consumer experience. At the end of the day, freshness is one of the biggest drivers in Net Promoter Score in the grocery environment. And the fresher items are, the more they're available. Typically, grocers [ to bend grow ]. And that's the basis of Walmart's expansion with us on it.

Since we've seen that announcement, our pipeline has actually grown with a number of other grocers or -- and/or both on the bakery and protein side continuing to approach us. This is both domestic in Europe as well as in -- sorry, domestic in the United States as well as in Europe. And so I'm confident that as we go through this year, we're going to see more pilots and trials through that. I'm not anticipating another rollout during the start of this -- during this year, but certainly setting the framework and the groundwork for us to be able to do so as we move forward.

Yes. And on your second question, Jeff, those temporary savings, again, which is largely an incentive compensation impact year-over-year. Obviously, incentive comp in 2025 as we performed below our original expectations was -- a tailwind in '25 will be a headwind in 2026. That is on an order of magnitude basis probably pretty similar to the size of the restructuring actions, that $50 million that I highlighted there.

Now on top of that restructuring, that isn't the only productivity we're driving. We continue to drive ongoing productivity all the time in terms of ELS savings, looking at reducing scrap, being more efficient in our operations. Deon touched on digital investments to continue to get more efficient in our G&A type of functions as well. And then in prior year, we talked about in 2025, having some network inefficiencies related to some of the tariff, shifts of production in parts of our portfolio as well. So we would expect other productivity actions on top of that restructuring to help give us a benefit in 2026 versus '25.

Our next question comes from Josh Spector from UBS.

I wanted to ask on just the apparel market in general. I think the declines that you saw in fourth quarter were more than we expected. And as you show in your appendix, the sellout from apparel has been semi resilient, your volumes have been down. I guess, how are you thinking of the trajectory from here? I guess our view is it's probably a tough comp in 1Q, but then easier comps in 2Q. But you have a better ear to the ground on how apparel producers are going to be producing and if that's going to be a tailwind or not at this point.

Yes, Josh, let me just spend a bit of time just digging into that. At the high level, I still say there's a high degree of tariff uncertainty. So while largely, tariff rates are assumed to be in place, as you've seen, I think everybody has seen, that can pretty dramatically change depending on what the administration decides to do with the broader tariff policy. And that can have an impact at any one point in time until all these tariffs are actually formally ratified.

That said, as we went into the fourth quarter, we anticipated to see sort of low single-digit apparel-based volumes. We actually saw greater than that, around about 7% decline. I think a couple of factors played into that. I remember saying last time on this call that what we've seen is a change in the way apparel retailers have been managing their supply chains given this volatility and uncertainty. Historically, apparel retailers would typically place a season's orders 60% in advance and then typically chase 40%. As this concern around how much tariff policy would impact end retail prices and the likely impact on consumer demand, they we're starting to have less forward placing and chasing more.

Our anticipation as we ended the third quarter, given what we saw during that -- sequentially during the quarter was that, that volume would slightly continue to do that. As we know now, it was a case of I think some of that volume in Q3 was in anticipation of the holiday season, a slight stock up. But then they didn't chase as much volume as they went into the fourth quarter. I think focusing -- what we heard from our customers, focusing much more on protecting margins on overall lower volumes, so not as much price discounting.

The growth that you saw in retail is largely price related, not necessarily unit related. And that's also underpinned -- if you look at one of the attaching schedules we have, if you look at the inventory sales ratios, for example, in the United States, they're one of the lowest points ever since the pandemic as well.

As we look forward, given that performance, I would anticipate seeing growth during this year -- certainly not the -- and the first quarter will be challenging because we lap against that non-tariff impacted first quarter '25. But as we move forward, all things being even, we should see some growth. I caveat that only with -- I think there's going to be continued uncertainty and continued caution on our apparel retailers' part. They're going to continue to watch how post holiday consumer spending and the consumer sentiment relates to discretionary items like apparel and the price impacts that they had to put up on those garments overall.

And so I think it's going to be a watch and see. If that plays out with more volume, then we'll certainly sort of be benefited by that. But I'm not yet certain that's going to be the case, and we'll give an update as we get to the end of the first quarter and what we're seeing from apparel customers generally.

Our next question comes from Matt Roberts from Raymond James.

If I can try to dig just a bit deeper into just some of the nonapparel Intelligent Labels category. First, on general retail in 2025, I believe there were some pauses in compliance rollouts at a major customer. Is that compliance enforcement coming back in 2026? Or are you expecting any incremental volumes from that customer with further category rollouts?

And then on logistics, again, I know you talked about the major customer and the revenue outlook and puts and takes there. But any benefit from them rolling out automation to further facilities? Or are you fully deployed there? And the pilots you mentioned in logistics, is that new pilots or expanding pilots that have already been in place?

Sure, Matt. Let me go through those sequentially. So in general retail, what we -- we saw general retail impacted last year, as we called out, quite significantly by really, the tariff environment. Most general merchandise was orientated out of China and the surrounding areas. And so there was quite a drop-off in demand, at least from retailers, for that product as they were thinking through the supply chains.

The second piece in this is because there was such difficulty in that, we do sense that some of the compliance that was in those categories has probably held back a bit to make sure that they could work through the supply chain issues. All things being equal, that should return, and that should be partly a tailwind for us in that regard as we look forward. Again, that's with the caveat that we don't see any other changes on tariffs as we move forward.

I think in terms of logistics, we've seen the benefit that has come from automating effectively, last mile fulfillment centers. And Matt, we're actually fully automated across those over here. Now what we're in discussion with that particular customer around is how do they extend that to some of their international operations, that -- as we work through that during this year. And then the secondary piece is, is there other opportunities as they think about moving to what we call the first mile, the shipper side of it as well.

In terms of the other pilots and trials, we're engaged in discussions and have been piloting and trialing with almost every other major logistics company, both in the United States and in Europe. And what we see this year is an expansion of some of those pilots being, again, from a certain limited number of fulfillment centers or inbound fulfillment centers to a broader range. And also looking at the different use cases they think through, for example, dangerous goods, managing highly valuable goods as well.

So we'll keep you all updated on that. Our anticipation of those pilots will expand as we go through the year.

Our next question comes from Anthony Pettinari from Citigroup.

Understanding you're not giving full year guidance, is there a way to think about the quarterly cadence of the timing of the $50 million restructuring benefits throughout the year? And then, I guess, as well, the roll-off of the temporary benefit headwind that Jeff asked about.

And then just, I guess, while I'm at it, you talked about Walmart sales benefiting really in the second half of the year. Should we think of that as like a step-up from 3Q to 4Q with kind of a stronger exit rate into '27? Or is there anything you can kind of say about the cadence of that rollout?

Yes. Thanks, Anthony. So I think restructuring, a good chunk of that, about 2/3 of that would be carryover projects we executed at some point during 2025 or at least kicked off near the end of the year in 2025. So I would expect from that perspective to be somewhat balanced across the year on that restructuring benefit as we have carryover savings in the first part -- or first few quarters of the year and then new programs kicking in as we move through the remainder of the year. So overall, largely balanced across the quarters.

From a headwind perspective, I think when you look at incentive comp, we're really starting to see bigger impacts on that, I would say, in the second quarter and beyond. There's a bit of a headwind in the first quarter, but I think that picks up a little bit as we go into the middle quarters of the year.

And Anthony, on the Walmart question specifically, recall, we said that the rollout, if it took place over the next couple of years, '26 and '27, will be worth, for us, somewhere between low double digits to -- sorry, high single digits, low double digits in value for us based on our 2025 sale. Our working assumption has always been that we would start this roughly in the third quarter, it would ramp up in the fourth quarter and then continue accelerating during 2027 as you go through both the departments, this is bakery, protein and deli, as well as geographically rolling out through the stores. And that's current -- still our current working assumption.

Our next question comes from Mike Roxland of Truist Securities.

Deon, in your comments, you mentioned not being happy with the organic growth and that you intend to drive better growth, especially in the high-value categories. Can you share what you'll start to do or what you're looking to do early this year to drive that growth? And what type of incremental growth you're expecting in 2026 from higher growth in the high-value categories?

And then just following up quickly on the apparel and general retail comments that you made about your confidence in getting -- in that accelerating. What are your customers telling you about their plans for 2026? And is it a matter of new adoption continuing to increase? Or is it more related to existing customers extending their use?

Okay. Let me see if I can cover all that, Mike. Yes, from a -- I'm not happy with the way our organic growth trajectory has been over the last couple of years. I know that we can -- and we've demonstrated this repeatedly -- manage through any environment, and we've demonstrated our ability to manage and deliver margin and earnings in that regard. But we fundamentally need to make sure that we're going to continue to significantly outperform the market. And that's our focus as we've gone through the back end of last year into this year.

And I touched on really, 4 elements I think that -- sorry, 3 elements that will really deliver on that. The first is, clearly, our high-value categories, when they are able to solve customer issues, have an ability to accelerate growth. They typically deliver higher growth rates, and as Greg said, at higher margins. And we're focused on making sure that a broader range of new customers understand the value they can bring, whether it's in our tapes business, getting new tapes distributors and end customers, whether it's in apparel, getting new loss prevention customers, whether it's in our materials business benefiting from our Cleanflake portfolio. Our focus there is generating new customers and then also identifying new segments that we can move the technology, and food is just one example of that, that we've done during the back end of last year and moving forward. So there's a focus on new customer acquisition for high-value categories.

The second area for me is actually a more important one will be less visible as we -- over the, let's say, this near term, but certainly more visible as we go longer term, which is accelerating our innovation outcome. So this is not just having more new products and solutions, but actually commercializing them quicker. And in that regard, I listed a whole number of those whether they are around our IL solutions, our Digital Solutions, Materials Group. Our ability to leverage our material science capability and our digital identification capability with the insight that we have through the supply chain, whether it's at a retailer, at a manufacturer, at converter allows us to ultimately be able to really design more innovation at a quicker rate that solves problems for customers.

And then the third element which I touched on was, in addition, is can we leverage the progress we made in our own digital journey and the more automation we put in to the business, as well as our learnings that we've had over the last year or so on artificial intelligence and the use of that technology. And I see those actually being able to provide even more differentiation that we could then ultimately express in driving new customers and getting into new segments. I think the application of those three combined in different ways will allow us to, for example, drive more automation in some of our manual finishing that we currently have across our businesses, automate finishing, automate packaging, a small example of that. Another example would be using AI and IoT sensors when we apply them to some of our large, for example, coating assets, we're able to make real-time in-line coat weight adjustments across the web, which allows for less downtime, and that will save us more money in that regard and that we're able to use to seek new customers as well.

And then the third one really is we've actually started to use a lot more AI to shorten some of the actual innovation cycle. I'll give you a real example of that. It historically has taken us anywhere from 8 to 10 weeks to design a new inlay in Intelligent Labels. We built with a partner, a proprietary AI model that takes all of our learnings around the physics of designing inlays and what it takes. And now we're able to reduce that cycle down to roughly 2 weeks. That allows us to produce new products and new solutions much quicker than our previous capacity had the ability to do.

And then finally, I think Greg touched on this as well. We're certainly taking all the learnings we're seeing both on automation and increasing on AI to how do we actually leverage and automate some of the more manual tasks across our SG&A in our business. We've got multiple examples. Now I will say we're at the start of the journey in that regard from -- particularly from the AI perspective. But I think we've learned a lot over the last year or so that I think it's really allowed us to see the value that we can create. In addition, we've also recruited and added to our leadership, a Chief Digital Officer because I fundamentally believe that capability will also be an accelerant to the way we move forward.

And to your second question around apparel and general retail, the way I think about that overall is that we continue to see new apparel customers adopt IL. We went through the late stages of a roll -- so early stage of rollout last -- in the fourth quarter with a large apparel retailer. We continue to see significant interest in leveraging the technology not just for inventory accuracy, but also for loss prevention. The work that we did with the -- proprietary work with, for example, the Inditex Group. And in addition, I continue to see a pipeline where we get new apparel customers continually wanting to use. So overall, those rollouts, as I mentioned earlier on, we'll part as we go through the year and ramp through the year as well.

Our next question comes from the line of John Dunigan from Jefferies.

I wanted to start off with -- just looking at your inventory levels. I mean, you touched on some of your customers in response to Josh's question and how they're managing their inventories. But I noticed that your inventories to sales ratios are elevated compared to where they were at pre-pandemic levels. So with the modest demand, at least starting off here in 2026, is there an ability to drive inventories lower to better match to the current demand environment?

And then just kind of building on that, I noticed that you had stepped up your CapEx to about $260 million here in 2026. Just wondering if that's more tied to growth projects, maybe some delayed maintenance since you kind of pulled it down a little bit in '25 or cost savings initiatives? Just how that money is being spent would be helpful.

Sure. Thanks for the question. So if I look at our -- our inventory turns over the last few years have been fairly steady, at least at the end of the year with where we've been. I think part of what's happening across the businesses, we do have a little bit of a mix impact as we grow faster in the high-value categories, where typically, those categories are a bit more working capital intensive. And similar in emerging markets where we have a little bit higher working capital percent as well than we do in the U.S. businesses, for instance. So typically, we're seeing a little bit of upward pressure on working capital driven by the growth in those areas.

Now we're driving a lot of productivity elsewhere to help offset that as we've gone across the years. And that's been a focus, and we saw that even from the middle of this year. I think we talked about our working capital being a bit high and driving that down by the end of the year. And I think we did a good job delivering that. So we've got some kind of mix pressure that we're offsetting through a number of initiatives there.

I think when we look at CapEx, as you said, in 2025, it was $200 million. I will say there's another about $30 million of cloud technology-related investments that shows up in the operating section of the cash flow statement. So it's about $230 million when you add that to the rest of the CapEx for 2025. We pulled that down from our original guidance for 2025 as we saw the softer volumes. So we're increasing that a bit in 2026. Still, I think, below where it was a couple of years prior to that. But continuing to drive productivity initiatives as well as continue to prepare for capacity for the future as well.

Our next question comes from George Staphos from Bank of America Securities Inc.

Deon, you mentioned, I think in answering Mike's question, in trying to accelerate innovation that you're trying to spend more, if you will, capital at acquiring customers and getting them to try the products. Obviously, that's -- there's a mix benefit from HVC. But do you see the customer acquisition cost being at such a rate over the next couple of years where it sort of dilutes the impact of HVC on your margin and mix on a going-forward basis? How should we think about that as a way to parse that at all?

Separate question, just in general, paper supply. Any concerns on that for this year relative to the materials business as capacity has been coming out of the market? Or do you feel relatively comfortable with your supply position for 2026?

Thanks, George. Yes, just on the sort of the customer acquisition costs, I don't anticipate -- I'm not expecting any increase in customer acquisition costs as we move forward. We already have go-to-market teams are prepared and ready, and I could argue that they've been somewhat underutilized as we went through the last year relative to volume. So as we step up in some of the learnings that we've taken, they've helped sharpen our mechanisms for customer acquisition, shorten the cycles for both proving our benefits, shorten the cycle of how we position and print. And then on the back of that, we continue to leverage a little bit of automation to help improve that as well, George. So I'm not anticipating an increase in customer acquisition costs moving forward. It should have no real impact on margins.

Second piece is to paper supply. We've continued to make progress in making sure, following that significant supply chain disruption that we had a couple of years ago, that we are as appropriately balanced from a risk perspective in terms of paper supply overall. And so we have made sure that our supply, particularly as it relates to paper glassine and [ free ] stock, we have multiple sources that we can use. Largely geographically centered, but not exclusively. And we continue to make sure that what we've done in that regard with our procurement team, which has been -- we've put a lot of focus over the last couple of years is making sure we've driven from somewhat transactional approach of the smaller suppliers to much more strategic, where we now have much more certainty about the capacity we have available to us that we can call them as we need as well, George.

Our final question today comes from the line of John McNulty from BMO Capital Markets.

In the past, it seems historically that pricing was pretty much used to offset raw material-related inflation. It seems like right now, your employee costs are kind of a new level of inflation that we really haven't seen before. And I know in the past, you've largely tried to offset that with efficiency. Do we get to a point if the inflation around employee cost continues the way that it has where you start trying to work that through as part of your pricing ask as well? And how should we think about that in 2026?

Yes. Thanks, John. So to your point, typically, our pricing is following our raw material input cost. And obviously, as we've talked about, is we've seen some deflation in 2025. We've had price down to go with that, largely in sync with the deflation that we've seen there. And really, we're continuing -- or I guess, I should say as we've also talked about with our material reengineering in a period where we have an inflationary period, we used that to help offset the inflation in addition to price. In a deflationary period, we're typically looking at that productivity from material reengineering to help offset things like wage inflation, as an example. So I think we look at that material reengineering is a bucket that helps over a cycle, especially in a flatter or more deflationary period to help offset some of those costs like wage inflation that come into the business.

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

Thanks, Miriam. To wrap up, we navigated a dynamic 2025 to deliver solid results for the fourth quarter and full year. Our focus and execution on our strategic priorities drives our confidence in returning to stronger growth and underscores our ability to deliver superior value across the cycle. Thank you, all, for joining today. This now concludes the call.

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.

Ladies and gentlemen, welcome to Avery Dennison's earnings conference call for the second quarter ended on September 27, 2025. [Operator Instructions] As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website.

I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir.

Thanks, Karina, and welcome to Avery Dennison's Third Quarter 2025 Earnings Conference Call. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled from GAAP on schedules A-4 to A-8 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 [indiscernible] Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Deon.

Thanks, Willy, and hello, everyone. We delivered a solid third quarter with earnings up 2% year-over-year and above the midpoint of expectations, while continuing to execute in a dynamic environment. This outcome underscores the strength and durability of our franchise, demonstrating our ability to activate multiple levers in our portfolio to deliver across a range of macro scenarios. As expected, our business continues to be impacted by ongoing trade policy changes. Encouragingly, we fully mitigated direct cost increases through strategic sourcing adjustments and select pricing surcharges. Moreover, while base apparel volumes were still impacted in the third quarter, we did see improvement sequentially relative to the organic growth headwind in the second quarter.

In Materials Group, operational excellence was key to margin expansion during the quarter. Our sustained focus on productivity and benefits from modest volume mix growth drove margins up 50 basis points year-over-year. Modest revenue declines in high-value categories were primarily driven by low single-digit declines in graphics and performance tapes, which faced headwinds from isolated customer and distributor inventory management adjustments. This is partially mitigated by continued strong growth in specialty durable labels and adhesives. We expect the inventory adjustment impact to be short-lived and to see high-value categories return to growth in the fourth quarter.

Overall Materials Group and base label materials volumes were up slightly compared to prior year. Importantly, we continue to see growth in our differentiated films volumes, which is a positive mix driver for the business. Solutions Group delivered organic sales growth of 4%, driven by high single-digit growth in high-value categories. Vestcom continued its momentum, growing over 10% and Imbelix delivered more than 10% growth as well. Overall, apparel sales exceeded expectations, rising low single digits in the quarter.

As you can see on Slide 7, our apparel business is seeing divergent trends. High-value category apparel sales grew high single digits, benefiting from strength in Imbelix, with strong growth related to next year's World Cup and mid-single-digit apparel IL growth. While base apparel sequentially improved as expected, it remains down low single digits, reflecting soft retailer and brand demand as they continue to navigate the impacts of tariff policies. Solutions margins performed better than typically sequential declines, but were down 90 basis points compared to prior year. Profitability was impacted by higher employee costs, continued growth investments and network inefficiencies stemming from tariff policy changes.

Turning to enterprise-wide Intelligent Labels. Sales grew approximately 3% compared to prior year, in line with our expectations. We are encouraged by the sequential improvement in the business, which was driven by key growth market segments. Specifically, apparel and food, logistics and industrial grew at mid-single digits rate. In apparel and general retail, both market segments are still being impacted by tariff policy changes. However, apparel partially recovered in the quarter, while general retail remains soft. Strong growth continued in food is our strategic collaboration with Kroger ramps up as expected.

Longer term, our conviction in this large addressable market continues to grow. This morning, we jointly announced a major partnership with Walmart to leverage Avery Dennison's RFID innovation and solutions in their fresh grocery categories of bakery, meat and deli, this adoption of IL and fresh food in the second large grocer is a key industry milestone and reinforces our conviction in the growth potential of this large addressable market.

In logistics, the business expanded sequentially but was down slightly compared to prior year. Our share in this market segment remains strong, and we have a robust pipeline of opportunities. As we highlighted on the second quarter call, we're executing initiatives to reduce identified network inefficiencies and associated costs created by the tariff policy changes. These improvements will help drive profitable growth while maintaining high quality and reliability for our customers. Looking forward, we anticipate the fourth quarter will deliver an improved rate of year-over-year growth versus what we saw in the third quarter.

While growth will likely continue to remain constrained by trade policy uncertainty, particularly in apparel and general retail market segments, we view this as a temporary headwind. Our conviction in the long-term growth of this high-value category platform remains strong given the value we are creating for our customers and the adoption we see across new segments.

Turning back to the total company. Taking into account the continued dynamic environment, we are anticipating both overall sales and earnings per share growth in the fourth quarter. We remain prepared for a range of scenarios, leveraging our proven playbook to safeguard earnings in the near term while accelerating initiatives to drive differentiation and growth over the cycle.

Shifting to our core strategies. I am confident that we have the initiatives innovation, capital allocation framework and team in place to consistently deliver strong profitable growth and top quartile returns across the cycle. Progress in each of these strategies was evident in the fourth quarter further cementing our conviction. Our business is positioned for success with secular growth tailwinds that fundamentally outweigh cyclical events over the cycle. Key trends, including item-level digitization enhanced consumer engagement, product customization and business productivity needs are aligned with a growing portion of our business.

The drivers in our high-value categories are clear and our exposure to them continues to expand. These categories now represent 45% of our total business year-to-date, an increase compared to prior year, underscoring our strategic shift towards higher growth and higher-margin opportunities. Intelligent Labels adoption is accelerating with our largest addressable market segment in food, now gaining significant traction. Our focus on innovation outcomes and commercial excellence is creating differentiation across our businesses.

Examples include introducing new RF innovation in food, our stalling software in Vestcom and expanding our team flake adhesive adoption in filmic labels for recycling purposes. Finally, we continue to harness the power of our disciplined capital allocation approach and balance sheet strength to return capital to shareholders and strategically expand our presence in high-value categories where we hold competitive advantages. Year-to-date, we repurchased approximately $454 million in stock and have grown our dividend by 7%. Concurrently, we closed the $390 million tailored adhesive bolt-on immediately strengthening our Materials Group high-value category adhesives franchise with clear cost synergies and strong growth potential.

In summary, while the current backdrop has muted our overall growth in 2025, we have further strengthened the resilience of our franchise, deployed capital into attractive opportunities and advanced our strategic priorities. This underpins our confidence in returning to strong growth and maintaining top quartile returns for our business and shareholders. I want to extend my gratitude to our entire team for their unwavering focus on excellence, dedication to overcoming the challenges at hand and relentlessly focusing on executing our strategic priorities.

Over to you, Greg.

Thanks, Deon, and hello, everybody. We delivered adjusted earnings per share of $2.37, up 2% compared to prior year and above the midpoint of our expectations. Results were driven by productivity and higher volume mix, partially offset by higher employee-related costs and investments. While trade policy uncertainty continued to present a headwind to our results, the impact improved sequentially. Compared to prior year, reported sales were up 1.5% and sales were comparable to prior year on an organic basis as positive volume mix was offset by deflation related price reductions.

Adjusted EBITDA margin was strong at 16.5% in the quarter, up 10 basis points compared to prior year. And we again generated strong adjusted free cash flow of nearly $270 million in the quarter. Our balance sheet remains strong with quarter end net debt to adjusted EBITDA ratio of 2.2. During the quarter, we issued a EUR 500 million note to pay down some commercial paper and to fund the Tailored Adhesives acquisition, which closed earlier this week. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with strategic M&A. In the first 9 months of the year, we returned roughly $670 million to shareholders through the combination of share repurchases and dividends, and we allocated $390 million to the Tailored Adhesives acquisition.

Turning to segment results for the quarter. Materials Group sales were down 2% on an organic basis as modest volume mix growth was more than offset by low single-digit deflation related price reductions. Organically, both high-value categories and the base businesses were down low single digits.

Turning now to regional label materials organic volume mix trends versus prior year in the quarter, continued soft consumer product demand led to roughly comparable volume in both North America and Europe, offset by continued growth in emerging markets with Asia Pacific up low single digits and Latin America up mid-single digits. High-value categories declined at low single digits compared to prior year.

Graphics and Performance Tapes declined low single digits and were impacted by customer inventory adjustments, which we expect to normalize in Q4. The Materials Group once again delivered strong margins with an adjusted EBITDA margin of 17.5% in the quarter, up 50 basis points compared to prior year. Regarding raw material costs, including the cost of tariffs, we experienced modest sequential global raw material cost deflation in the third quarter. We mitigated tariff costs through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including tariffs or outlooks for relatively stable sequential material cost in Q4.

Shifting to Solutions Group. Sales were up 4% organically and high-value categories were up high single digits and base solutions were down low single digits, improving sequentially from down mid-single digits in the second quarter, but still impacted by tariff-related uncertainties. Within high-value categories, Vestcom was up more than 10%, driven by the continued benefit from new program rollouts. Embelex was also up more than 10%, and as we saw a ramp ahead of the World Cup next year, and apparel intelligent label sales recovered to mid-single-digit growth. Enterprise-wide Intelligent Label sales expanded approximately 3% compared to prior year.

In addition to apparel improving to mid-single-digit growth, food, logistics and industrial categories combined were also up mid-single digits. General retail categories continued to experience tariff-related softness with sales down mid-teens, which impacted both Solutions Group and Materials Group intelligent label sales. Solutions Group adjusted EBITDA margin was 17%, and relatively flat sequentially but down 90 basis points compared to prior year as benefits from productivity and volume were more than offset by higher employee-related costs, such as wage inflation and growth investments.

Shifting to our outlook. For the fourth quarter, we expect reported sales growth of 5% to 7%, with the following contributing factors. Sales growth, excluding currency of 1% to 3% with organic growth of 0% to 2%, with approximately 2% from currency translation, approximately 2% from extra days in the quarter due to the shift to the Gregorian calendar next year and approximately 1% from the Tailored Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.35 to $2.45, above prior year at the midpoint, as benefits from organic growth, productivity and share count are partially offset by wage inflation, investments and higher interest expense.

Our Q4 guidance incorporates typical seasonality and incremental productivity which is partially offset by higher interest expense and less favorable currency. We've outlined some contributing factors to our full year results on Slide 14 of our supplemental presentation materials. To highlight a few of the key drivers, we now anticipate a $5 million currency translation benefit to operating income, slightly below our previous projection of a $7 million tailwind. We now expect restructuring savings net of transition costs of approximately $60 million, up $10 million from our previous expectation as we continue to ramp our productivity efforts. And we continue to expect strong free cash flow, targeting roughly 100% conversion for the year. We now expect interest expense to be approximately $135 million an increase of our prior outlook, largely driven by interest expense from the EUR 500 million notes we issued in September.

And finally, we expect Taylor Adhesives will have an immaterial impact on Q4 earnings per share due to the timing of the close in the quarter and expected intangible amortization expense. In sorry, we delivered a solid third quarter achieving EPS above the midpoint of our expectations through a continuing dynamic environment. We expect slight improvements in our organic sales growth and continued year-over-year EPS growth in the fourth quarter. And we remain well prepared for a variety of macro scenarios. We're strongly positioned to execute our profitable growth and disciplined capital allocation strategies which we expect to deliver exceptional long-term value to all of our stakeholders.

And now we'll open up the call for your questions.

[Operator Instructions] Your first question comes from the line of Ghansham Panjabi from R.W. Baird.

Can you hear me okay?

Yes, we can Ghansham.

Sorry, just getting use of the new system. First off, as it relates to the Materials segment, is it your sense that volumes are starting to -- how are volumes progressing on a sequential basis, just given the macro uncertainty and tariffs and so on and so forth. I know you called out the impact on apparel as you have over the last couple of quarters. But is it your sense that materials are starting to sequentially weaken as well?

No. Ghansham, in the third quarter, volumes while positive overall was less than our expectation and pretty much across all regions. I think there's a couple of factors playing into that, one of which is certainly -- we see -- we continue to see lower retail volumes overall, particularly in North America and Europe. And our scanner data also suggests that there's lower muted demand coming from CPGs overall and when they think about volume. And the second thing is, in our high-value categories, we also had a couple of episodic events that happened really run our Graphics and Reflective business, which we know will remediate as we get into the fourth quarter.

Our outlook for the fourth quarter is actually to see kind of similar growth as we move forward. I think the final thing I'll say is it's certainly clear in certain pockets that where emerging markets have had exposure to tariffs those economies and the consumers in those economies are more cautious as they look into the impact of what those tariffs don't mean for those countries. And so we're seeing slightly lower volume in those areas as well. I think fundamentally for us, as we look forward, I'll just remind everybody our materials business is really anchoring consumer staples. And so typically, over time, it's been a GDP-plus business. And I don't anticipate that changing once the trade environment, the trade policy normalizes.

Your next question comes from the line of George Staphos from Bank of America.

Getting used to the new technology here. Thanks for the time, the details. I guess, with 1 question at a time, I'll go with the Walmart news today. If you can talk a little bit about that and what it might mean for you over the next couple of 3 years, we were doing some quick searching over the last hour or 2. Would it be fair to say that the opportunity here. I recognize you're not going to get that next quarter or the following would be roughly maybe [ $1.5 billion ] packages when you think about the Walmart protein cabinet and other related end markets, how would you help us size that?

Yes. Thanks, George. I think it's -- for us, we see this as twofold. First of all, I think it's critical validation of the effectiveness of our technology and solutions to solve challenges that all grocers really have, which is around freshness of perishable products, labor effectiveness gross margin expansion and Net Promoter Score increases because consumers are getting the products that they want, which are the freshest they need. And we saw that start in Kroger and now it's been manifested in Walmart and our partnership announcement this morning. So we see it both strategically important because we believe it will further capitalize the largest growth segment there is which is in food, which we estimate to be about in that order of 200 billion units.

And the second large grocer going really sends a signal that the technology has application the returns are there and the rollout now will commence. In terms of Walmart, specifically, while we don't necessarily always comment on the exact details of the partnership, perhaps I can just frame the scale of what we think it could be -- our estimates are -- and this will be subject to typical rollout timing, what will happen intra-quarter, the number of stores that goes, the individual pieces of those departments of bakery, daily and protein -- sorry, meeting when they go. But we would typically see this across a 2-year period being in the order of sort of high single digit to low double digits growth on our total 25 enterprise IL revenue. And we typically would see that ramping as we go through the couple of years. One other point I'd make on this is we are driving this partnership because we continue to provide differentiation in the market.

A lot of our differentiation over here is anchored in what we've been able to do from an innovation perspective as it relates to activating proteins and meats, particularly for intelligent labels, something that had been very challenging in the past that we've been able to solve for. And so we look forward to seeing the results of that partnership and the results of our efforts that we've been leading for very long in the market to make sure that we continue to drive activation.

Your next question comes from the line of John McNulty, BML Capital Markets

Can you speak to what you're seeing in the IL pipeline right now? Obviously, there's been a lot of chaos around tariffs and delays in certain programs. And yet it seems like there may be some acceleration. So in other areas as people try to get better understanding supply chains, et cetera. So I guess can you speak to that? And also just given the size and scale of the Walmart program that's being added in, do you have to start thinking about putting new capital to work around intelligent label capacity, et cetera. I know you put some in a while ago. I guess, where do we stand on that need now?

Thanks, John. So in terms of pipeline, we continue to see our pipeline grow actually both by a number of opportunities and by dollar value across all of the key segments. I'm just once again reinforcing that when the benefits are obvious and they're implementable, then we tend to see good traction because it fundamentally solves a challenge about supply chain visibility, inventory accuracy. And then when you're into the store, specifically labor productivity, fresh produce, waste reduction and employee and associate experience is much better as well. So from a pipeline perspective, we continue to see good progress overall.

In terms of Walmart size and scale, yes, it's a substantial add to the adoption now within the overall food and more broadly, the IR market. I'll remind you that in terms of capital allocation, we typically, from a roof line perspective of added capacity from an infrastructure perspective. Typically, 3 to 5 years out. Hence, why we added our Korea facility in Mexico -- we started that 2 years ago. When it comes to individual assets for production, we tend to be investing 12 to 18 months ahead of the curve.

So in the initial phases of this, I don't anticipate us needing additional capacity as we get through to the end of the second year, we'll revisit that and adjust accordingly. And for us, that's much more of a modular approach. These are assets where we've improved reduced our capital intensity per 1 billion units produced over the last 5 years. And so I'm looking forward to that continuing to take advantage of the scale manufacturing that we have in this regard.

Your next question comes from the line of Jeff Zekauskas, JPMorgan.

In the press release that came out over the Walmart announcement, there was a phrase about joint sensor technology. Is there something about the technology that you're using with Walmart that's really unique to your relationship with them or maybe another way of saying this is what you're doing with them something that would constrain you in being able to use the same technology with other customers.

No. Jeff, what we've done with Walmart is we've really focused on the 3 areas that in much of our pilots and trials up until this point. And those are around bakery, which are very similar to what we do with some other customers as well. Protein specifically is where we've had to lean into our innovation capability, both on our material science side, think about adhesive technology required in cold environments and then cut the environment that ultimately will be defrosted and even migrated at that stage.

So from material science have put a lot more effort into solving some of those problems. And then more specifically from what we call the RF side of things, radio frequency side of things is how do we make sure that our uniquely designed antennas are capable of being able to sense within very, very densely packed items that are very high dielectrics met has those properties. And so how do you make sure that you're able to read everything even within a freezer container or a fridge container as well. Those have presented significant challenges in the past. So our ability to generate innovation in this area, I think, is going to help us unlock not just the Walmart partnership but also more broadly across the market as we look forward as well, Jeff.

Your next question comes from the line of Matt Roberts, Raymond James.

If I may, in regard to intelligent labels, so I understand you not going to give the 2026 guide here and understanding visibility is limited. '25 certainly had its unique headwinds from tariffs, but we're starting to see some momentum that you referenced for Walmart and others. So maybe more broadly in intelligent labels, how much of the initial 5 points that you expected in 2025 from new programs have shifted into '26? How many incremental points could you get from new program rollouts other than Walmart that you just gave. And given weak comps in apparel and general retail and some of the headwinds you've seen there, do you believe 2026 could support at or above the long-term growth rate? Or if you only want to give 1 quarter ahead, any color on 4Q could be helpful as well.

Yes, Matt, specifically, we talked to remember those are incrementally about those 5 basis points that we come through sort of program rollout largely, those actual rollouts are on track through this year. And they came really in a couple of buckets. One bucket was in apparel and sell some new rollouts, new technology deployments. The second bucket was really in some of our food rollouts, which we've talked about. And the third bucket was also in some of the additional general merchandise rollouts that were happening as part of the compliance programs for some of our customers. Across all 3 of those, if you exclude the impact of tariffs, we're actually roughly on track.

Now in apparel, we haven't seen any to roll out delay, but what we've seen is some of the volume being a little bit more muted than we would have expected given as I'm sure, as you recognize the tariff implications. It's a little early for us to look at currently to 2026 as well. And I'd say that in the context, I think the environment remains highly uncertain. I just call every his attention to the fact that the tariff policy changes have only impacted India more recently by up to 50%. And as all you know, we're on the road currently with China being currently 100% again. And so I think that uncertainty certainly limits our near-term visibility. What I am confident in is our continued ability to drive not only innovation that secures our differentiation but drive adoption, particularly with things like Walmart, that will certainly help deliver growth as we go through next year. And we'll characterize and wrap it all together when we get to the January outlook as well, Matt, for you.

The other thing I would just add to Dan's earlier comments in his prepared remarks, Matt, is that we talked about Q4, expecting our growth rate in IL to be better than what we grew in Q3 versus prior year.

Your next question comes from the line of Anthony Pettinari, Citigroup.

Just another question on the Walmart partnership. During the quarter, they had a press release talking about deploying IoT technologies with Wiliot and Avery has a strategic partnership with Willett. And I'm just -- from a big picture perspective, can you talk about how RFID and maybe other IoT technologies coexist in an environment like Walmart? Are you kind of agnostic to what wins in the market? Or how do they interact with each other? Or how should investors think about those 2 sets of technologies?

Yes. Anthony. I think I've always said from the start, we fundamentally believe that UHF RFID is the most ubiquitous best-placed sensing technology for item-level identification visibility through supply chain and in a store environment. But we've also said that there are other sensing technologies, particularly when it relates to ambient issues, things you want to monitor temperature, pressure and so forth that will also have a specific use case.

Now Willett is a strong part of ours. We have strengthened our strategic partnership, we're going to be supporting them in their rollout that they have. In fact, we're going to be managing part of the rollout for them with Walmart as well overall. And that is really orientated around pallet and case level. So at a high level, think about UHF RFID being applied at an item level, most likely broader sensing devices like Willett technology we provide a pallet case level. and we're involved in both of those areas. I think they present a suite of solutions that in the long term are going to continue to drive to what I think will be the end outcome, which is digital identities on all physical objects in time.

Your next question comes from the line of Mike Roxland, Truist Securities.

Getting used to the new technology as well. And congrats on all the progress and the new Walmart deployment. Just 1 question for me in terms of logistics. Obviously, it was a little bit weaker in this quarter, as you mentioned. Any potential for new deployments in the near term? Any comments you may have potential like share gains, obviously, there was some share loss last year. Any insights as to whether maybe you're going to regain some share from that business. I think could help regard around logistics and what's happening with deployments and potential share gains on the horizon?

Yes. Sure, Mike. We continue to do really solid work in our partnership with UPS and that fact that partnership continues to grow. My sense is through the end of this year, we'll actually expand our share with UPS. It's a good performance by both our team, both on service, quality, delivery and some new innovation we've even brought to UPS as well in terms of how they can drive higher speed application to their packages relative using our technology as well. If I think more broadly about the logistics environment, I think we've been very clear.

We didn't anticipate another rollout during '25. And we're going to be assessing what the likelihood of that will be during '26. We'll give more color on that as we get to the start of January. But I'd say, overall, we continue to make really good progress with a number of the key logistics providers. Our pilots and trials have expanded with almost all of them. And we spent a lot of time engaging around all the various use cases that could come out of not just managing a mile fulfillment accuracy, but also how do you originate parcels. They go back to source at shipper and what role can we play in that.

So as always, I'm encouraged by what I see when I look across the business and our relationship we have with all the large logistics providers. And for me, it's just going to be a case of when we're able to get them to a drop at scale, and we'll be able to give a broader update, I think, by the time we get to January, Mike.

Your next question comes from the line of Josh Spector from UBS.

Can you hear me?

Yes, we can, Josh.

So I wanted to ask kind of a technical 1 around the quarter and the guide here. I think from a sales perspective, you're guiding sales up about $100 million, maybe a little bit more sequentially. But from an EPS perspective, you're close to flat. I think historically, there's some accretion in margins in the fourth quarter. So I know with the M&A piece of it, that maybe creates a little bit of noise as Meridian layers in, but are there other factors that we need to consider like some lagged price downs or some other costs that maybe mute the accretion Q-on-Q?

Yes. Thanks, Josh. So when we look at sequentially, there's a number of puts and takes, of course, seasonality, as you mentioned, historically, has been a little bit positive. I would say this quarter, we're probably expecting a little bit less than typical since we saw apparel have a bit of a catch-up in Q3 from the tariff impacts that we had in the second quarter. We'll still have some positive logistics volume improvement sequentially into Q4. Materials is usually a little bit of a headwind, Q3 to Q4 given the holiday periods on the biggest parts of that business in North America and Europe.

So sequentially, we'd expect seasonality to be relatively flat this year, I think. When we looked in, we have some slight positives from share buyback that we've been doing across the year and continuing to do as we entered the fourth quarter here. We've got some slight favorability from restructuring, and I talked about ramping that up as we're moving through the back half. And then we've got a little bit of a slight headwind quarter-over-quarter. I think Deon talked about our network inefficiencies we've had related to some of the tariff moves and our sourcing moves, our production moves accordingly with that. we've got a little bit higher inventories in the system over the last few quarters. And as we're bringing that down, we'll have a little bit of an inventory absorption impact on the P&L in the fourth quarter sequentially. Otherwise, price deflation somewhat a material sequential impact. So those are kind of the big puts and takes when we look Q3 to Q4.

Your next question comes from the line of John Dunigan from Jefferies.

I just want to ask a quick one on the Walmart collaboration and then I have one other here. So the collaboration, when will that start flowing through? Is that more of a 2026 event? And then just looking at Embelex, I mean, the inflection in volumes was pretty impressive, not something that you were necessarily expecting. I get that it's related to the World Cup, but is that kind of trend kind of high single digit, low double-digit expected going into 4Q 2026, kind of what your expectations are for that business would be helpful.

Sure, John. Yes, on the Walmart collaboration, we've been piloting a trial, as I'm sure you sense for a while now. And the full -- the rollout will start sequentially at a very small amount in the fourth quarter, really, and then we'll go from there as we go through '26 and '27. That's the current plan. Again, that may be subject to change into quarter shift depending on what stores roll out at what pace and which depart sequence in order.

In terms of Embelex, I'm being very pleased with our Embelex performance in the third quarter, largely on the performance that we have is related to the World Cup. So we do a lot of preparation for the key World Cup teams and the brands that support them in advance. And that typically happens a little bit in the second quarter, the majority in the third quarter and the smaller amount will happen in the fourth quarter. That's what we call happening at source, the garments are produced at source, the decorated at source.

And then as we get into next year when the actual World Cup happens, there will be a smaller opportunity for us to do what we call on in-stadium than new customization, the names and numbers that you can do when you go there. necessarily given a perspective on how that decides that, but it's an opportunity certainly for us as we get into next year. Aside from that, on our base Embelex business, we continue to see improvement, which is largely anchored in our performance brands as they start to ramp up as well. And then separately, in our Embelex business, we continue to make progress in what we call our in-venue and consumer customization applications.

I'll give you an example of that. We've recently launched an NFC connected device in a garment for a Turkish football club, we've done the same thing again for the San Francisco 49 and this really helps clubs and fans engage more directly on a one-to-one basis. So leveraging our technology with some of adhesive science into our Embelex business overall. And in the long term, we continue to see this as a kind of mid- to high single-digit growth segment for us as we move forward.

Your final question comes from a follow-up from Jeff Zekaukas from JPMorgan.

Another question about the Walmart arrangement. Different RFID tags have different prices in that apparel tags tend to be priced higher than logistics tags. Where do tags-on meat fall? Are they in the middle or higher or lower? And then for Greg, what calendar are you switching over to for next year?

Jeff, let me address the atone then Greg can take on the calendar question. Yes. I mean, typically across our estate, we have -- I'd characterize our products as kind of good, better, best and arranging and differentiation from good all the way through to bet. There's also unique circumstances, which certain products or certain inlays are put into more complex tags or format. So an inlay that goes on to, let's say, a plan like label has less complexity and typically a lower price point than something that goes into a highly decorated graphic tag omega apparel. So you can see a range of ASPs across them.

As it relates to meet, given some of our proprietary innovation, we would see these as typically products that are in the best range and our ASPs, there will probably be a little higher. But there's also a mix in with the bakery products that we have and some of the deli products. And so overall, I'd anticipate our ASPs across that program to really reflect our portfolio largely at an aggregate level and with profitability to be in a similar aggregate range we currently see across our IL portfolio as well.

Yes. Thanks, Deon. And Jeff, on your question on the calendar, we are moving from our historical 44, 5 calendar to a fiscal calendar that aligns with the actual counter, the Gregorian calendar. So we're making that shift at the end of this year. So this year, we'll extend to the 31st of December. And then from now on, heading into 2026, we'll be following the Gregorian calendar. And if I go back to Josh's question a little bit earlier, that does add about 2 points of growth in our fourth quarter sequentially and versus prior year by adding those extra days into the fourth quarter.

There are not really high-quality days. We had 4 days to the calendar this year that includes a Sunday, and it includes New Year's Eve, so they're not really high-quality days, but nonetheless, we'll get some incremental revenue from that not a huge flow-through because we'll have 4 or so days of fixed cost with less than that of actual revenue given the softness of those typical days. But that's the impact we're shifting to the good goring counter next year.

Your final question comes from the line of George Staphos from Bank of America.

2-part one, and again, thanks for all the details. First of all, can you talk a bit about where you're seeing deflation in materials such that prices or a touch lower -- and kind of where you sit right now, how would you gauge what is normal deflation versus price competition given the macro related point, the last couple of quarters, again, third quarter was nice to see the improvement. But apparel's weakness in base was one of the reasons that IL is having some difficulty growing. This quarter, with apparel being up 3% on IL base is down. Why is it -- why are we getting a positive disconnect this quarter that we were not getting prior quarters with IL relative to apparel.

Thanks, George. I'll start with your deflation question. Overall, what we've been seeing, and we've talked about from a year-over-year perspective, I think the biggest drivers we've seen are in paper particularly in Europe and Asia, where overall, we've got low single-digit deflation year-over-year in the third quarter. Paper is a little bit more than that, specific to a couple of regions and we saw pulp kind of coming down through the quarter in those areas as well. And we've got a little bit of year-over-year benefit on chemicals and films as well, also primarily in Europe and Asia. And then in the U.S., we've got some tariff-related inflation that we've put surcharges through as we talked about. So we do have a little bit from a price perspective then. We've got a little bit of a low single-digit impact on pricing as well. And net-net, we've got a slight headwind between price inflation. And I think some of that is still over the cycle. When we look over a multiyear horizon, we had a lot of inflation a few years ago. That's been slightly deflationary for a couple of years now, and prices have come down to go with that. So that's something we expected as we've gone through the quarters this year. we'll probably have another quarter or so as that continues from a year-over-year perspective in Q4.

George, on your second question, even in the second quarter, our base apparel performance was lower than our apparel IL performance, both were down. And as you saw, our best apparel performance has improved. It's still low single digits the base apparel piece. And our IL performance is now sort of low single digits around. The difference there really is in rollouts, not necessarily relative to the absolute volume of the base apparel. It's new rollers. For example, we extended our rollout with the Inditex Group leveraging our new proprietary loss detection technology that [ Dave ] introduced -- and separately, we've also got continued rollout in new apparel customers, a couple of them small, one of them large that are rolled out through the third and then the fourth quarter increasingly as well.

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

Thank you, Carina. Just to recap, we delivered a solid third quarter in a dynamic environment. We are well prepared for a variety of macro scenarios and well positioned to deliver superior value through the cycle. We want to thank you for joining today's call. This now concludes our call.

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

All right. Well, thank you all very much for attending today. Last meeting of the day, so I appreciate you being here. We are lucky to have Deon Stander. Stander come with us from Avery Dennison, CEO and President. He's going to start off with a few minutes of slides and commentary to update us on the business. And then I will kick it off with some questions, but if anybody in the audience has anything that they would like to ask, please feel free to raise your hand, and I'll get you a mic. I appreciate it. Deon, over to you.

Thanks, John. Thank you, everybody, for being here. Looking forward to the session with everybody. Let me just give you a quick overview of our business for those of you who may not be completely familiar, and I'll spend maybe 5 or so minutes then we get to Q&A really. So Avery Dennison is an $8.8 billion business. And what we do is material science and digital identification. Those are the 2 focus areas for our business overall. The whole thrust of our business is really focused on how we help customers solve branding and information challenges they have, largely anchored in solving problems around supply chain efficiency and waste, connecting brands and consumer circularity and where necessary, optimizing labor as well.

Our 2 largest businesses are our materials business and our Solutions business. Materials is about 70% of our portfolio, and our solutions business is about 30% of the business overall. When you step back, you look at our business, it's really exposed to a very broad and growing set of end markets -- and as well -- geographies as well. And so as you can see, around about 60% of our business overall is anchored in consumer staples, less cyclical overall. And we have a wide range of applications we've provided to all these end markets.

We have 2 growth catalysts really at the macro level. One is -- and I'll talk about this a bit more later on, is what we call our high-value categories. These are businesses in our portfolio or product lines where they are higher than average growth, typically GDP plus-plus, and have very strong margin profiles representing they are more differentiated in their market spaces. And they're a key part of our portfolio mix moving forward.

The second growth catalyst we have is we have very large exposure to all emerging markets, and that gives us, particularly in our base business in some of our high-value categories, just the growth that typically comes with those higher than Western or North American GDP markets as well. Our overriding aim still remains the same. We're focused on driving GDP-plus growth and top quartile returns, which we believe is a recipe for superior value creation through cycles and across cycles as well.

Our 2 largest businesses are the market leaders in their space. One way to think about our materials business is that it is a very steady GDP plus business that grows earnings and free cash flow and strong EVA returns over cycles and through cycles. On the other side, we have the solutions business, which has a number of significant growth catalysts and opportunity for both growth acceleration and margin improvement as well.

And then because we fundamentally believe in a more digitized world that every physical item in time is likely to have a digital identity in life. So that you can track an item from its start to when it was born, made, procured. How it worked through the supply chain, through to retail and ultimately the consumer into end of life. And I think in that more digitized future, we believe that Avery Dennison has somewhat of a unique capability to continue to drive outside leadership in helping connect physical and digital items.

Think about it this way, in our materials business, we provide most of the labeling materials that decorate most of the world's items. Everything that you think of in a bottle or can or something like it that has got labeling around it, we provide those labeling materials. On the other side, in our solutions business, but now increasingly across both businesses, we are the world's leader in what I think is going to be the most ubiquitous sensing technology when it comes to digital identities, which is UHF RFID, and we have a market leadership position there that we've had for a long time.

So we're uniquely positioned for the secular trends in the industry that we move forward to take advantage of them. Let me just skip forward. One of the reasons for our success over time has not just been our market-leading positions and the vibrant markets and end markets that we serve, as well as our team, our team around the world of 30-plus thousand employees, but also the fact that we've been very consistent in the execution and application of our strategies. And you can see them up on screen over here.

I do want to touch on at least 1 of them because I think it makes the point around how we're able to make progression. When I think about high-value category business, these that grow outsized growth and higher margins and greater differentiation. We've been actively working to make sure we expand our position in those. And these are in our businesses that would be, for example, our Intelligent Labels platform. I touched on that already. It would be our Vestcom business, our Embelex business on the material side. These would be things like our graphics business, our tapes business, even some of our adhesive business, industrial and durable tapes businesses as well.

And as you can see, over time, since 2014, we made significant progress in driving our high-value category penetration of our portfolio to where it is now roughly about 44%. You'll also note that during that time, high-value categories typically outgrow GDP by about 2 to 2.5x. And because of the higher margin mix we've been able to elevate not exclusively because of the high-value carriage, but also because our productivity margins by over 500 basis points since 2014. That is the recipe for continued creation as we move forward as well.

If I look forward, what's our growth algorithm as we look forward. The way we think about this is we're anticipating over this next cycle to grow in the order of 4.5% to 5%. Some of that will be M&A, and I'll talk a little bit about that just now. But largely, the algorithm is made up about 1 point from our base businesses across both divisions, 1.5 points from our largest single high-value category platform, which is intelligent labels, but actually 2 points from our other high-value categories. That's important because it shows that across our portfolio, we have multiple levers that we can pull in certain environments to continue to drive earnings and compound earnings as we move forward as well.

And then clearly, that we'll also see continued M&A opportunities. And I make this point very importantly because for us, the fact that we have such a resilient portfolio of products and solutions gives us the levers to be able to pull no matter what the environment is. That has allowed us to deliver on our 5-year targets that we set over the last 3 cycles and into the fourth 1 as well.

Finally, I'll say we have maintained a very strong balance sheet. Our leverage ratio is in the low 2s. We did that deliberately because we make sure that we have available capacity should we need to lean forward to take advantage of any market dislocations or where we see our share price is intrinsically below what we think it value. But our approach to capital allocation has been disciplined, is unchanged in the last decade and will not change moving forward. Roughly 25% to 30% of it is in internal growth or productivity and also restructuring, roughly 20% on dividends, which have been compounding at 10% over the last decade. And the last bucket is about 50%, which is a fungible bucket between share buyback and M&A. And we always think about that in terms of where we can create most value.

So I've spoken about share buybacks this year, we've already done in the first half of the year, $360 million. It's a fairly high run rate of share buyback because we saw an intrinsic difference in our valuation, but we also maintain an opportunity to, based on a -- particularly on a strategy to drive incremental M&A. And recently, during last week, we announced a small acquisition, a bolt-on acquisition. It is a high-value category business in the adhesive space. And I can speak a little bit about that. I suspect during some of the questions. But overall, for us, any acquisition has to be rooted in our strategies. This 1 happens to be -- it's a high-value category business. We have to be the logical high-value owner in a sense that we have to bring some core capability to that.

We're a very large adhesives manufacturer. We make our own adhesives ourselves. It has to be a business that can generate value over time. Post synergies, this business will be at a lower multiple than our current multiple and it also has to align with the approach we take, which is a highly application-led business that provides and solves problems for customers. In this instance, has to be in the liquid flooring adhesive space as well. So with that, I'm going to open up to questions, John. Maybe we can get some perspective from the audience as well.

Absolutely. And thank you for all the details there. So just to start off with that acquisition of the Meridian adhesive flooring business. Can you walk us through how that business fits within the materials segment, high-value categories -- what gets you comfortable increasing your exposure to the building and construction end markets? And maybe talk about some of the reasons why you feel that business is actually a little bit more defensive in its niche category?

Sure, so as I said, for all of our acquisitions that we look at, they have to be on strategy, in this instance, the high-value category business. This flooring adhesives business part of the Meridian business, which we will call tailored adhesives have been growing at roughly mid-single digits for the last 5 years and very high margins. That's in a segment and a sector that has not seen much growth. If you think about the broader building construction points to their differentiation. It has to leverage a core capability of ours. We make most of our -- we make almost all of our own adhesives, not just blend them, but we actually design polymers.

We take monomers, we crack them and we polymerize them, and we make our own adhesives, specifically for applications across all of our portfolio, all of our pressure centered products, tapes products, even our IL products where we have to attach chips to inlays. And this acquisition can leverage our -- particularly our acrylic adhesive technology for in-sourcing and significant synergies. We see real post-synergy values on that basis. The multiple post-synergy will be lower than our current multiple.

And then finally, this is a business which has a distinctive position in the market. It services the flooring industry and specifically, adhesives again to the flooring industry and their approach has been a couple of ways that they've generated real value and demonstrated that growth. So first of all, they focused much more on the repairs and renewal segment of flooring, which is typically less cyclical than you see in the building construction industry. More than 50% of their business is focused on what's called resilient flooring or luxury vinyl tiling which is the biggest growth trajectory you see in flooring.

And the third element is they spend most of their time focused on the actual flooring companies. So they engage directly with flooring companies like Mohawk and Shaw, and they work with them to say what is the particular resilient flooring you're trying to implement, what's the substrate that needs to go on, what the contract is looking to do? And they provide adhesive specifically formularized to make sure it stays down and doesn't lift. And then Shaw and Mohawk take those theses we provide or that a tailor provides, and own brand and own label them, it helps improve their warranty rates as well.

So overall, a very strong business. The only thing I'd say is, well, there's a couple of external references to adhesives. The one that I'd point to you at is probably one of the more external bodies where they've got engineered adhesives. That business is in the low 20% EBITDA margins. This business is above that. And on top of that, we will see mid-single-digit synergies.

So you can see how we get to the lower post-synergy multiple overall. I think it has significant resilience because not only is it exposed to the most growth-orientated part of flooring, which is resilient flooring, but it also has been able to maintain and grow share in a market relative to its competitors because it's focused on OEMs as well. So we feel good about that. We haven't factored in any change in the trajectory of the broader building construction industry. Should that happen and when that happens, I don't know, we will also see some upside to that as well.

That's great. And then you mentioned the mid-single-digit synergy capture. I believe that's all on the cost side. Can you talk to us about where that synergy is and how you're generating it? What gives you confidence in it? And then maybe what some of the upside is, if I remember correctly, it's U.S.-based companies. So maybe there's some opportunities given Avery's global footprint for taking that business on and expanding it to various international markets.

So the synergies we factored in are largely based on our ability to take the products that they buy before they blend them effectively, which is largely acrylic adhesives. We actually make and formulate acrylic adhesives. So we'll be able to in-source that. In addition our capability in that area to create specific acrylic adhesives that are really formularized to work very well in certain environments, we'll be able to add to their breadth of portfolio as well. So there's the both procurement and in-sourcing strategies. That's largely where that synergies are based on.

We also know because we have a small business in tapes that's focused on broader building and construction as well. We also know there's some cross-selling opportunities. Where we're able to provide either liquid adhesives in this or tapes. We've not factored those in, but there's a possible upside to that as we move forward as well.

Great. And then in 1 of our earlier meetings, you had mentioned that Avery also sells some of the adhesives that you make internally into the open market. I'm not sure if you've disclosed it before, but how much are you selling into the open market, maybe as a percentage? Or how does this internalize some of the adhesives that you were currently selling to the market?

We make a significant amount of adhesives across, acrylic adhesives, solvent adhesives, UV warm melt and even some hot melt adhesives. We use them across all our applications. The vast majority of which we use for ourselves and our products that go in our different businesses. We have a small trade adhesives business. This is largely focused on selling adhesives to the tapes business out in the markets. And for each 1 of those customers, we specifically work to say what's the application they're trying to address and we formularize that for it. We don't typically disclose that. It's relatively small, de minimis, but it's growing, and it has high margins. And that gives us the confidence that when we bring in another liquid adhesives business, we're able to be able to get cross fertilization of capability as well.

Great. And then just switching over to more of a macro view, trade policy. Apparel is 1 of your biggest end markets. And we've had a lot of trade policy uncertainty. Inflation has created a lot of headwinds here in '25 and apparel being one of those end markets that was down kind of mid-single digits here in the last quarter. Maybe you can give us an update about how the apparel market is doing for Avery quarter-to-date and what actions you've taken to optimize your Intelligent Labels business in the wake of some of these disruptions?

Sure. Apparel being a discretionary purchase was significantly affected by the tariff environment. And it's not necessarily the tariffs per se, it's more the uncertainty that tariffs has generated. So in the second quarter, we saw the start of the second quarter, apparel volumes being down for us, at least in our apparel business, high single digits. And as the quarter progressed, getting slightly better. We ended the -- exit the quarter, with still low single-digit run rate. I would say the environment for apparel overall still remains highly uncertain.

Although there is general alignment that most of the sourcing countries that were apparel sourced now have a similar tariff rate, somewhere in the 20s to 30s, depending on where it is. There is still no certainty about what the impact of that's going to be as most of our apparel retail customers and brands are looking to decide how they manage that net pricing impact particularly as they look towards the holiday season. So some of them are choosing to raise prices, some of them are choosing to raise prices in certain categories.

Some of them are choosing not to do so. The biggest challenge all of them debating as we think towards holiday, which is sourcing, while it starts really for us and the brands September and October is if they are going to raise prices no matter what they are on a discretionary item, what's the volume impact going to be at the consumer level. And there's, I think, going to be more caution in that regard overall.

So that's what we see. In terms of our IL impact to that, clearly, more than 60% of our Intelligent Labels business is still anchored in apparel, which as a consequence has been affected by that. Some of the actions we're taking relate to some of the other segments. We continue to double down and driving pilots and trials towards rollouts in food and logistics. And at the same time, we're step changing some innovation to make sure we're bringing new innovation to the market quicker so we can help customers get to that adoption very quick. And I can talk about that a bit just now.

Yes, that would be great.

Okay. So the way I think about our ability overall from an intelligent label perspective is we want to make sure we are the market leader, more than 50% of the share we've had in both apparel and these new segments. And our job is to maintain that share moving forward. These are segments both in food and logistics outside of apparel with significant growth runway. By comparison, I'll give you an example. Apparel's total market is in the order of 45 billion to 50 billion units, and we're only 40% penetrated. Logistics is 65 billion to 70 billion, and we have one customer that's just gone, UPS.

Food is 200 billion units, and we have 1 customer in Kroger that's gone. So we have high conviction in the likely adoption in these segments. Our focus has been how do we accelerate new customers now that the first 2 have gone in those segments, and at the same time, bring new technology -- innovation to technology level to bear. Some of these new categories, particularly in food, require some innovation things around more difficult to read items like proteins, those are following what will happen in bakery.

Some of it is innovation at the manufacturing level and the rest of it is how we continue to lean forward in making sure we're having market-leading teams, which we're the go-to-market leader in to help customers as they adopt that. And our view is, if we maintain our share through innovation and our service and value proposition, as these markets grow, then we will disproportionately benefit. And that's the reason we can continue to lean forward and invest in them.

Great. And maybe, I guess, just kind of on that point, can you give some examples on how you're accelerating the adoption. I mean I don't think a lot of people who are new to the story necessarily understand some of the complexities of adding an RFID label onto something with -- like produce that has some wet applications or like the microwavable capabilities. Maybe just if you could explain like why there needs to be innovation that continues the adoption?

Yes. Let me just say, at the end of the day, driving a new technology like RFID to adopt in new segments is really only anchored in the fact that it can generally deliver return on investment for those customers. Otherwise, it's just technology for technology sake. And that's not what we're about. For each 1 of these segments, we've looked at, we have a view, initially hypothesis now backed up by data that there is real demonstrable benefit from a retailer perspective or the brand perspective.

So in apparel that was clearly around inventory visibility and accuracy, which led to greater sales lift and gross margin expansion. That's proven, it's out there in multiple cases. In logistics, it was solving for labor in the last mile fulfillment centers and making them more accurate. This is also public knowledge, UPS. We're shipping 1 in 400 parcels, will be mis-shipped at the last mile fulfillment center to the wrong destination. Each one to correct is north of $15 to correct that. So we've helped them move that through accuracy down to 1 in 800 or 1 in 1,000. The scale of that is significant. Again, applicable across the logistics industry.

In food, it's all around labor productivity, freshness, so less waste because these are perishable categories and ultimately sales lift. And with Kroger, we're currently 700 stores in the rollout with them. It's on track. It's actually showing for them better results than they had anticipated. We have a number of pilots and trials going on with other grocers, where we've been able to demonstrate similar returns for them. Typically across almost all these segments, the return on investment is within a year, and now it's really down to how do we accelerate the adoption of these customers as we move forward.

Great. And then as you approach some of these new markets for intelligent label like food and logistics, where the margins may be a little bit lower relative to some of the other higher-margin apparel categories. How do you maintain the margin profile in these markets?

Yes. I think 1 of the things that we've learned over time, I think it's a bit of a misnomer, but the belief that you have to have a high-priced item to afford an RFID tag that was historically true 10 years ago. That's no longer true. If you go into a Walmart store right now where they're rolling out RFID use across many categories, they're tagging items as less than $1.

If you go to a customer of ours called Decathlon in Europe, they're tagging protein bars in their stores at $0.50, not because that item economically made sense to tag. But because when you tag the whole store, you then have 1 standard operating mechanism for running a store. It's highly automated. You can also allow for self-checkout and you ultimately get into theft detection and loss prevention as well.

So for us, as I think forward in these segments, we're going to continue to bring innovation to bear in this regard because I think that is what helps differentiate us and drives greater value for these customers in these segments. Even in apparel, where we've been doing this for more than 10 years, we recently launched some new innovation last year. That takes the RFID device and embeds it in the garment or in the woven label, which then acts as a loss detection device for Inditex, the largest fast fashion retailer in the world, they own the ZARA group. And that allows them to do 2 things. It allows them to not only identify when things have left the store through theft and replace them, but also allows for customer checkout and fraud prevention, return fraud prevention as well.

Great. And then in some of the lower penetration categories for Intelligent Labels, how can Avery maintain its share, its leadership share, which you pointed out is one of the shares? And just to be quite open, I mean, that is something that has been pretty impressive as when I covered the company 5, 7 years ago, same amount of size, above the nearest competitor as it is today. So how are you able to continue to take that leadership and opportunity and not necessarily have to worry about other new technologies that may come into the market or other competitors. What gives you that advantage?

I think first and foremost, we remain, and I remain as a leader paranoid about both competition and innovation because that's what keeps us agile and moving forward. How we stay ahead of competition is really threefold. Number one, it is really around innovation. The new innovation, I've spoken about a couple of examples that we bring to bear. We've actually got in food, some new innovation coming out in the second half of this year that's proprietary. Gives us more pricing advantage as well and greater margins as we move forward. These are products that will help make more complex products to tag and read, things like proteins more visible, easier to do.

So innovation is key for us. That's innovation at the product level, but it's also innovation in the process and how we manufacture. We're the world's largest manufacturer, the world's largest inlay designer in that regard in that piece. And maintaining our low-cost leadership is critically important because it brings scale when volume comes that very few other people have.

The final 1 is kind of innovation. When I think about how we go to market and our teams. We are typically the single company that people go to when they want to adopt the technology, not just because we do one element, but across the nodes, outside of chip manufacturing. That's not us. We do almost everything else. We maintain and drive inlay production, design, integration into some form of label, data management, including and then on top of that software as well. We've invested a lot to make sure that whole node of solutions and services is possible, and that gives us often the position where people look to somebody with the global stature of Avery Dennison, with the capability of Avery Dennison to say, we need you to help us to drive the technology adoption first.

Great. And as an industry leader, I mean, Avery's historically done a good job showcasing its pricing power. A lot of volatility, as I mentioned in the market earlier, a lot of different trade policies, tariffs in and out of effect. How has Avery been able to -- or if you've been able to successfully push through pricing in the current environment and uncertainty, especially around tariff surcharges to cover some of the incremental costs that you've seen throughout the supply chain.

Most of the direct -- I'd segregate between indirect tariff impacts, which are largely apparel demand related from direct tariff impacts, which mostly are really on our materials business. Now we make buy and sell in every region around the world, in our materials business. So we have very little direct tariff exposure. In fact, in total, it's probably low single digits inflationary impact from our current procurement and manufacturing expense overall. And we've done 2 things. So 1 is we have implemented some pricing surcharges when we see that, and we've also leveraged our global scale and sourcing footprint to change sourcing routes if we need to.

And so as we do typically in our materials business, if we see an inflationary environment, we tend to pass that through to our customers. And then when there's a deflationary environment, we tend to withdraw that across the cycle. I always think about inflation being -- or net price inflation being sort of neutral across that time period, depending on where we are.

As it relates to tariff, we'll see how long they endure. We are using it as a surcharge at the moment. Should they endure longer, we'll have a different decision? Should they be withdrawn, we will withdraw them at that point.

And the tariff surcharges, that is something that doesn't have a pricing lag to it. That's something that...

Typically not. When we see the impact to us, we put that through in terms of pricing because there's a very large degree of immediacy. If we see an impact, our products on that part of our business typically go to our customers pretty quickly at that stage. So we tend to act with urgency. And there may be a small lag, but it's not very big at all.

Got it. So Intelligent Labels takes up a lot of time from a lot of your conversations, but I do want to touch on a lot of the other high-value categories that you have, particularly those that have been in focus as of late, Vestcom has had a rollout with CVS that's been relatively sizable. Can you just give us an update on Vestcom, how it's performing, maybe some of the things that you've learned with the CVS rollout?

For us, this has been a significantly good business to have, not only in itself, a high-value category business, really strong margins, uniquely positioned. It's a data composition engine. It takes pricing, planogram, point-of-sale promotional data from retailers, whether they be drug dollar or grocery. And the output of that into that data composition engine is a shelf-edge label, mostly for pricing, but that same real estate can also be sold as a media selling opportunity.

So if you're a CPG, wanting to advertise a national campaign, a regional campaign, you can use that shelf-edge label we produce to promote buy one, get one free, whatever the context be. So we have two parts. One is the productivity solution and one is the media solutions, a really strong business and highly proprietary as well. The rollout with CVS has been, as we expected, excellent and on time, has been really accretive. It's great to have them as a customer. And I think we've done a lot for them in terms of the value we brought to them. And I continue to see this business as a mid-single-digit growth potential moving forward with a very strong margin profile.

Great. Embelex is another high-value category and it's done very well over the past several years. Did slower this year. It's tied a lot to discretionary spending in apparel. But what's the growth outlook for this business? And where do you see the greatest opportunities for this business maybe going into 2026?

We see typically this business to be mid- to mid-single to high single-digit growth over the cycle. That mirrors where the market is growing. Think about this business as providing names, numbers and decoration on garments that are largely in the performance segment. So I think about the big performance brands, mostly in team sports. So we provide the names and numbers for most of the team sports that you see both in Europe started in football, soccer, depending on your vernacular, and now in the United States, we anchored in most of the professional sports as well. And what we see is the growth trajectory is really secular.

People want to decorate, when people want to engage as fans. That growth industry is going to continue to be the me and the product and then supporting the fans. And so we see a lot of opportunity for us to continue to live. It's highly fragmented. We're probably the largest player, so we see opportunities for further growth for us in that regard. And particularly outside of that, outside of performance sports, team sports, also have a small part of the laundry business, where you're using digital identities to manage laundry, and we added digital identities even to our team sports stuff.

And then finally, when we are in stadiums, so any professional stadium that you see or professional sports in the United States, we are actually often the hardware, software and consumables provider that will largely go and decorate that shirt, put your name and number on and so forth. That's also equally true. Most stadiums are used for, for example, live concerts, and there's a huge demand for that. And so we see opportunity there. It's not within our growth formula, but we can clearly see adjacent opportunities that will give us more growth if we needed to.

Great. I'll ask 1 more and then if anybody has any questions, please raise your hand. There are other high-value categories, obviously get less attention than the last 3 that we talked about. Are there any particular ones that you wanted to highlight that you're maybe most excited about or you see the greatest opportunities going forward for the business. I mean taking on Meridian is also now a high-value category. Is there anything else that you care to highlight?

We touched on a lot of the solutions group, high-value categories. But in our materials business, if you go back to that growth algorithm, I talked about 2 points of our growth will come from high-value categories outside of IL, one point is in solutions, one point is material. So they're significant. And those ones, we have a very strong specialty and durable label business, a high-value category growing mid-single digits. These are things that you'd imagine the labels that have to be really durable going into oil drums in harsh conditions, not -- scratch resistant, et cetera. That's 1 example.

Another example of that would be specialty labels when you buy fresh produce and sometimes in the clamshell with peel and reseal, we provide that peel and reseal capability, leveraging our technology for adhesives. And clearly, within that, we also have labels that are around wines and spirits, highly decorative, different substrates and so they stand on the shelf.

I'd say the area that I also continue to have, a lot of enthusiasm and beyond adhesives as well is our graphics business. We -- following again, a secular trend of personalization, we provide highly customized films that allow for paint protection in the auto industry or window protection or even color change. So as people choose to protect their cars, change the color on their cars, we provide cast films for those. And that has a lot of share opportunity for us as we look into that market as well.

Great. Are there any questions. If not, I can ask one last one before letting you go here. So admittedly, 1 of the areas that I'm less familiar with is the cloud platform that Avery has the -- I think you say atma.io. How does this differentiate your intelligent label offering? And can it be further monetized? What specific capabilities? Does the data management ecosystem provide sustainable competitive advantages as a physical and digital convergence accelerates?

I think if you think about if every physical item has a digital identity and you capture the first event during the supply chain when that item was made, born, grown, whatever the case may be. You need to capture that information somewhere. Typically, at the moment, it's captured largely on the chip, the semiconductor chip. That's part of the intelligent label device.

Moving forward, our view is that in time, that will all migrate to the cloud. And so as a consequence, what we deemed necessary 2 or 3 years ago is we thought we need a digital identity platform that could house each digital identity and all the episodic events that happened with it. And so we built atma.io from scratch because we saw nothing in the market. It forms the backbone of much of the solutions that we provide. It also is a key part of how we provide software, highly customized software for the apparel industry, for the food industry as it relates to tracking digital identity.

So we have a set of apparel solutions called Optica that we released at the end of last year. These allow brands, apparel brands, not only to understand what's happening in sourcing, but also to track each item that comes through their supply chain, even allows the [ garment ] manufacturers to track back to raw materials as well. We have a similar 1 coming out called Optica for food, which we're using in the food industry, similar dynamics as well.

So selectively, we will invest in building or acquiring specific pieces of software.

Our approach currently is to monetize those largely at the item level as we charge for the tag or the label, but we do have small pieces where we also have SaaS models that are running, and we're still understanding exactly how best to leverage that capability. At the end of the day, we're going to be able to generate significant amounts of data through all these items. And then that will allow us to be able to solve problems for customers, but also leverage that capability for further digital -- pure digital solutions as we move forward.

Fantastic. All right. Well, 1 minute to spare. Thank you very much.

Thank you very much, everybody. Appreciate it.