CCL read-through: Key takeaways from Avery Dennison's Q3 results
Our view: Avery Dennison reported Q3 results today, which provided several read-throughs for CCL (recall that Avery Dennison is a supplier of pressure sensitive materials to CCL and also competes with CCL in the RFID space). Most notably, Avery Dennison saw +LSD%-MSD% organic growth in its Label Materials business, driven by +MSD% volume/mix growth, partially offset by deflation-related price reductions. Additionally, Avery Dennison saw +20% growth in the General Retail and Apparel markets within its Intelligent Labels (i.e., RFID) business during the quarter. Taken together, we see Avery Dennison's Q3 results/commentary as directionally positive for CCL. For additional information on CCL, please see our recent assumption of coverage/deep dive report here. We outline our key takeaways below.
Label Materials revenue grew +LSD%-MSD% on an organic basis – Within Avery Dennison's Materials Group segment, Label Materials (which are sold worldwide to Label Converters, such as CCL, for labeling, decorating, and specialty applications) grew +LSD%-MSD% YoY on an organic basis. Digging deeper, volume/mix growth was +MSD% (North America and Europe were +MSD%, Asia Pacific was +LSD%, and Latin America was +MSD%-HSD%), which was partially offset by deflation-related price reductions. Overall, we view Avery Dennison's volume growth as providing a mixed read-through for CCL. Although the volume growth directionally indicates a continuation of inventory re-stocking/end-market growth, it represents a sequential deceleration from the +LDD% growth in Q1/Q2, with Avery Dennison noting that retail volumes remain soft compared to long-term trends (particularly in developed regions) due to the impact of inflationary pressures in recent years (i.e., a weaker consumer). Further, we view Avery Dennison's deflation-related price reductions as a directional positive as we expect CCL to hold onto (some) pricing across its customer base over the near-term (with the general exception of the company's largest customers; recall that CCL's top 25 customers contributed to ~34% of the company's revenue in 2023), which would benefit the company's margins.
Intelligent Labels (i.e., RFID) growth stepped down in Q3, but remained strong in Apparel and General Retail – Avery Dennison reported mid-teens growth YTD for Intelligent Labels in Q3, which compares to mid- to high-teens growth on a YTD basis as of Q2 reporting, indicating a sequential deceleration in Q3. Digging deeper, Avery Dennison saw +20% growth in General Retail and Apparel (which remains strong after normalizing mid-year, indicating that retailers are largely done with destocking), partially offset by Logistics (largely due to prior year customer inventory builds and a customer transition, which we view as specific to Avery Dennison). Given CCL is levered to the General Retail and Apparel markets, we view Avery Dennison's RFID commentary as providing a directionally positive read-through for CCL (for perspective, recall that CCL's Apparel Labeling Systems business saw +40% organic growth in Q2, which was primarily driven by RFID growth).
Looking ahead, Avery Dennison reiterated its +15% organic growth outlook for its Intelligent Labels business over the long-term, supported by continued RFID adoption within Apparel (currently only ~40% penetrated) and an acceleration in adoption across new markets, such as Food (for perspective, Avery Dennison announced a collaboration with Kroger's bakery department yesterday, which will be the first grocer to roll out item-level RFID tagging, according to management). Recall that Avery Dennison outlined at its recent Investor Day (see our note here) the RFID TAMs for the Food, Logistics, and General Retail markets are 200, 60, and 20 billion units, which compares to 45 billion units for Apparel.
Increasing the lower-end of the organic sales growth guide – Most relevant to CCL, Avery Dennison increased its 2024 organic sales growth outlook to +4.5%-5.0% (vs. +4.0%-5.0% previously), which is supported by the company's outlook for "strong" volume growth, partially offset by deflation-related price reductions (i.e., in line with trends observed YTD).