Avery Dennison Corporation ($AVY)

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.