Executive Summary / Key Takeaways

• Avery Dennison is strategically transforming its portfolio towards high-value categories and digital identification solutions, particularly Intelligent Labels (IL), leveraging its core materials science and process technology strengths to capture growth in large, underpenetrated markets like food and logistics.
• Despite a dynamic macro environment and specific headwinds like raw material deflation-related price reductions and unfavorable FX, the company demonstrated resilience in Q1 2025, delivering organic sales growth driven by volume/mix and expanding Solutions Group margins through productivity and higher volume.
• Intelligent Labels continues its organic growth trajectory (mid-single digits in Q1 2025), propelled by strong performance in apparel and food, with key strategic collaborations like the Kroger rollout on track, underpinning confidence in the long-term potential of connecting physical items to digital identities.
• Near-term outlook is subject to elevated uncertainty, particularly concerning the indirect impact of evolving trade policies and tariffs on discretionary markets like apparel, leading the company to shift to quarterly guidance ($2.30-$2.50 adjusted EPS for Q2 2025) while activating a proven playbook to manage various scenarios.
• The company maintains a strong balance sheet and disciplined capital allocation approach, supporting strategic investments, consistent dividend growth (recently increased to $0.94/share), and opportunistic share repurchases ($261.6M in Q1 2025), reflecting confidence in intrinsic value despite market volatility.

Setting the Stage: A Materials Science Leader Embraces Digital Identity

Avery Dennison Corporation stands as a global leader in materials science and manufacturing, primarily operating through two core segments: the Materials Group and the Solutions Group. Historically rooted in pressure-sensitive materials and labeling, the company has strategically evolved, embarking on a transformation journey that began over a decade ago to strengthen its foundation and enhance profitability. This evolution has increasingly focused on shifting its portfolio towards higher-value products and solutions, leveraging its deep expertise in material science and process technology to differentiate itself in competitive global markets.

The Materials Group, the company's highest-returns business, provides a wide array of labeling and packaging materials, graphics, and reflective solutions, as well as industrial tapes. Its strength lies in its global scale, manufacturing efficiency, and ability to innovate in areas like sustainable materials and material re-engineering. The Solutions Group offers a suite of solutions ranging from apparel branding and labeling to retail shelf-edge solutions and, increasingly, digital identification technologies. This segment is strategically focused on high-value solutions that command higher margins and offer differentiated growth potential.

Central to Avery Dennison's forward-looking strategy is its leadership at the intersection of the physical and digital worlds, primarily through its Intelligent Labels platform. This technology, heavily reliant on UHF RFID, enables the connection of physical items to digital identities, unlocking significant value across various industries. The core technology involves embedding small, smart labels into products or packaging, allowing for automated identification, tracking, and data management throughout the supply chain and beyond. The tangible benefits are numerous and quantifiable: improved inventory accuracy, enhanced labor efficiency, reduced waste, increased supply chain transparency, and better consumer engagement. While specific, universally applicable quantitative metrics across all use cases are complex, the company highlights benefits like increased routing accuracy and labor efficiency in logistics pilots and maximizing freshness and reducing waste in food collaborations. Avery Dennison leverages its world-leading roll-to-roll process manufacturing capability to produce billions of these inlays at a low cost, providing a competitive advantage in scale and efficiency. The company's R&D efforts focus on material science, process innovation, and solutions development to continuously improve performance, reduce costs, and expand the applicability of IL technology into new segments. The strategic intent is clear: to drive industry adoption and capture a leading share in vast addressable markets estimated at over 350 billion units.

In the competitive landscape, Avery Dennison operates against a diverse set of players. Direct competitors like 3M Company (MMM) and CCL Industries Inc. (CCL) compete in overlapping areas of adhesives, materials, and labeling. Berry Global Group Inc. (BERY) and Packaging Corporation of America (PKG) are rivals in various packaging segments. Avery Dennison positions itself by emphasizing its innovation leadership, particularly in sustainable materials and digital identification, and its comprehensive global network. While competitors like 3M may possess broader R&D portfolios or CCL may pursue aggressive acquisition strategies, Avery Dennison's unique value proposition lies in its specialized solutions, integrated ecosystem approach (from materials to data management), and its focus on driving adoption in nascent, high-growth digital identification markets. Its competitive advantages include its proprietary technology, sustainability focus, and extensive global distribution network. However, vulnerabilities exist, such as dependency on raw material costs and the need to continuously invest in technology to maintain its edge against both direct and indirect competitors (like providers of alternative digital tracking methods). The company's strategic response involves leveraging its strengths to command pricing power in differentiated areas and driving operational productivity to mitigate cost pressures.

Performance and Operational Execution in a Dynamic Environment

Avery Dennison navigated a dynamic operating environment in the first quarter of 2025, marked by both strategic progress and external pressures. Net sales for the quarter were $2,148.3 million, comparable to $2,151.3 million in the prior-year period. On an organic basis, sales saw a modest increase, primarily driven by favorable volume and mix, which helped offset the impact of raw material deflation-related price reductions implemented in response to lower input costs.

Profitability metrics reflected these dynamics. Gross profit decreased slightly to $621.5 million from $632.2 million in Q1 2024, impacted by the net effect of pricing and raw material costs, as well as unfavorable foreign currency translation. This was partially mitigated by benefits derived from productivity initiatives, including material re-engineering and savings from restructuring actions. Marketing, general and administrative expenses decreased to $347.0 million from $365.2 million, benefiting from lower employee-related costs, favorable foreign currency translation, and productivity gains, though partially offset by continued investments aimed at future growth. Net income for the quarter was $166.3 million, down from $172.4 million in the prior year, primarily influenced by the net impact of pricing and raw material costs, losses on venture and other investments, and unfavorable FX, despite the positive contributions from productivity and volume/mix.

Segment performance highlighted the company's strategic focus areas. The Materials Group reported net sales of $1,480.1 million, a slight decrease from $1,496.5 million in Q1 2024. Organically, the segment grew 1.0%, driven by favorable volume/mix, particularly strong high single-digit growth in high-value categories like graphics and reflective solutions and industrial tapes. Regional performance varied, with low single-digit organic growth in North America and Asia Pacific, a low single-digit decrease in Europe, and a high single-digit increase in Latin America. Segment adjusted operating income decreased, mainly due to the net impact of pricing and raw material costs and unfavorable FX, partially offset by productivity and volume/mix benefits.

The Solutions Group delivered net sales of $668.2 million, up from $654.8 million in Q1 2024. Organic sales growth was a robust 5.0%, reflecting a high single-digit increase in the base business (including strong mid-single-digit overall apparel growth) and a low single-digit increase in high-value solutions. Within high-value solutions, VESCOM saw strong growth driven by existing customers and the ongoing CVS Health (CVS) rollout, while Embelex experienced a mid-single-digit decline, expected to recover later in the year. Enterprise-wide Intelligent Labels, a key growth engine, grew mid-single digits organically, propelled by strong performance in apparel and food categories, though partially offset by an expected decline in logistics. The segment's adjusted operating income increased significantly, benefiting from productivity initiatives and higher volume, despite growth investments. The reclassification of approximately $10 million in IL sales from Solutions to Materials Group in Q1 2025 reflects the strategic intent to leverage the Materials Group's converter network for broader IL adoption.

Operationally, the company initiated restructuring actions in 2025, recording $4.8 million in charges in Q1, primarily aimed at optimizing the Solutions Group's operational footprint through severance for approximately 130 positions and asset impairment. This aligns with the ongoing focus on productivity and cost management.

Liquidity and capital allocation remained disciplined. Net cash used in operating activities was $16.3 million in the first three months of 2025, compared to cash provided of $119.8 million in the prior-year period, influenced by the timing of incentive compensation and rebates, and changes in operational working capital. Adjusted free cash flow was negative $52.3 million, consistent with historical Q1 seasonality. The company successfully repaid $500 million of senior notes at maturity in March 2025, utilizing a combination of prior note proceeds, operating cash flow, and commercial paper. The balance sheet remains strong, with ample access to its $1.2 billion Revolver facility (undrawn in Q1).

Capital allocation included returning $331 million to shareholders in Q1 through dividends ($0.88/share paid, subsequently increased to $0.94/share quarterly) and significant share repurchases ($261.6 million, or approximately 1.4 million shares), reflecting management's confidence in the company's intrinsic value.

Outlook and Risk Factors

Looking ahead, Avery Dennison's outlook is shaped by its strategic growth initiatives and the prevailing macro uncertainties. The company has opted to provide quarterly guidance for adjusted earnings per share, citing the elevated uncertainty in predicting full-year results due to the dynamic trade policy environment and reduced global GDP growth outlooks.

For the second quarter of 2025, the company anticipates adjusted EPS to be in the range of $2.30 to $2.50, representing a sequential increase from Q1. This expected improvement is attributed to traditional seasonality following the calendar and lunar new years, ongoing business momentum in high-value categories like VESCOM, and a sequential currency benefit. These positive factors are expected to be partially offset by the impact of the annual wage inflation cycle, which began in April, and the anticipated effects of tariffs on apparel revenue. Q2 sales are projected to be roughly comparable to the prior year, with expected growth in most businesses counterbalanced by a projected mid-single-digit decline in apparel sales.

For the full year 2025, while not providing a specific EPS range, the company has outlined key contributing factors. They now anticipate a roughly $7 million headwind to operating income from foreign currency translation, an improvement from the approximately $30 million headwind initially expected. Incremental restructuring savings, net of transition costs, are projected to exceed $45 million, an increase of $5 million from previous expectations, reflecting ongoing cost optimization efforts. The company continues to target strong free cash flow generation across a wide range of potential scenarios.

The investment thesis is subject to several pertinent risks. Elevated macro uncertainty, particularly concerning global economic conditions, tariffs, and geopolitical instability (including ongoing conflicts in Ukraine and the Middle East), could impact underlying demand for the company's products, especially in more discretionary end markets served by the Solutions Group. Changes in trade policy, such as the recent U.S. tariff announcements and potential reciprocal actions, pose risks. While the direct impact on material purchases is expected to be low and mitigable (less than 10% globally impacted, with low single-digit potential inflation), the indirect impact on demand, particularly for apparel exported from China (representing about 4% of total revenue), is more uncertain as retailers assess sourcing and pricing strategies. Fluctuations in the cost and availability of raw materials remain a factor, although the company aims to mitigate this through productivity and pricing actions. Competitive actions, including pricing and expansion in key markets, could pressure margins and market share. The successful execution and integration of acquisitions, while a strategic lever, also carry inherent risks. The timing and pace of adoption for new technologies and programs, particularly within the Intelligent Labels platform, could be uneven, impacting near-term growth trajectories despite strong long-term potential. The company's reliance on international operations (approximately 69% of Q1 2025 net sales) exposes it to foreign currency fluctuations and other risks associated with operating in diverse global markets.

Avery Dennison's response to these risks is grounded in its proven playbook, leveraging the durability of its portfolio (with a significant portion anchored in consumer staples and a Solutions Group less cyclical than in the past), the agility of its global team, and its disciplined approach to capital allocation. Actions include scenario planning, temporary cost controls, identifying share gain opportunities, and preparing for potential structural adjustments if a broad economic slowdown materializes.

Conclusion

Avery Dennison continues to execute a strategic transformation, building upon its foundation in materials science to become a leader in high-value categories and digital identification. The core investment thesis is centered on the company's ability to drive above-market growth and expand margins by leveraging its technological edge, particularly in Intelligent Labels, and capitalizing on significant opportunities in large, underpenetrated markets like food and logistics, while maintaining resilience in its core materials business.

Despite facing macro headwinds, including raw material price volatility and geopolitical uncertainties amplified by evolving trade policies, the company demonstrated operational strength in the first quarter of 2025. Performance was supported by volume growth, productivity gains, and strategic investments in high-value areas. While near-term visibility is constrained by external dynamics, leading to a shift to quarterly guidance, the underlying momentum in key growth platforms like Intelligent Labels and VESCOM remains intact, underpinned by strategic customer collaborations. The company's disciplined capital allocation, marked by consistent dividend increases and opportunistic share repurchases, signals confidence in its long-term value creation potential. Investors should monitor the pace of adoption in new Intelligent Labels segments, the impact of trade policy on global demand and supply chains, and the company's continued execution of productivity initiatives as key indicators of its ability to navigate the current environment and deliver on its strategic objectives.