Avery Dennison Corp (AVY) — Q1 2022 Earnings Call Transcript

Thank you, everyone. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled with GAAP on schedules A4 to A9 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. On the call today are Mitch Butier, Chairman and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Thanks, John, and hello everyone. We're off to a strong start to the year with revenue up 18% and earnings per share of $2.40, above our expectations from a quarter ago, driven largely by an acceleration in pricing actions in LGM and strong volume growth in RBIS. These strong results come at a time of increasing challenges from the continuing impact of COVID-19 and supply chain constraints to the highest levels of inflation we have seen in decades, and now Russia’s war in Ukraine. All of these challenges reinforce our determination to remain vigilant in protecting the health and welfare of our team and agile to ensure we continue to meet our customers’ needs. Our team continues to do a phenomenal job in managing a very dynamic environment and we remain confident in our ability to continue delivering superior value creation for all of our stakeholders across a wide variety of macro environments. Now, a quick update on the quarter by business. Label and Graphic Materials posted strong topline growth for the quarter in both Label and Packaging Materials, as well as our Graphic and Reflective Solutions Business, largely driven by higher pricing. In Labels, while demand for consumer packaged goods in e-commerce trends continue to drive strong orders, volumes were down as expected due primarily to tough comparisons. As you recall, volumes were particularly high last year due to the combined impact of pre-buys and the COVID-related order patterns that we discussed last year. For context, volume in the quarter was up approximately 20% versus 2019 or more than 6% annually, well ahead of GDP growth over that period. Tough comparisons aside, supply chain constraints hampered our ability to meet demand in the quarter, despite the tremendous job our team did to leverage our innovation capabilities and scale to offset a good portion of these raw material shortages. We expect that the recent resolution of the labor strike at a large global paper manufacturer will help ease supply chains across our industry beginning here in Q2. As for our own operations, they were minimally impacted by COVID restrictions in Q1. That said, the recent lockdowns in the greater Shanghai area constrained our materials business's ability to produce for much of April, reducing revenue by roughly $20 million for the month. Fortunately, these restrictions are now easing and we expect all plants will be operational imminently. LGM’s margin was strong in the quarter, though down from prior year as expected. Sequentially, margins expanded more than a point as we accelerated pricing actions to reduce the lead time between inflation and pricing. Importantly, we are on track to further increase our returns and EVA for this year in this already high return business. Retail branding information solutions delivered another exceptional quarter with significant top and bottom line growth. The strong revenue growth was broad-based, driven by both high value product categories, particularly Intelligent Labels and the core apparel business. Enterprise-wide, Intelligent Label sales were up more than 20% on an organic basis. The strong growth in the quarter was once again primarily driven by apparel. And while we continue to expect apparel to be the primary driver of dollar growth in the coming few years, we see even greater opportunity over the long-run outside of apparel. For example, in the food segment, a number of quick service restaurants are piloting and in the early stages of rolling out Intelligent Label solutions to improve supply chain traceability and inventory accuracy. In logistics, we continue to work with several shipping and logistics players seeking further automation to drive speed and productivity. We are seeing retailers that initially implemented RFID in apparel expand programs to other categories such as home goods, and our Vestcom acquisition is showing positive early signs in providing additional channel access to intelligent labels and grocery, while continuing to achieve its overall performance goals. At the leader in ultra-high frequency RFID, we are positioned extremely well to not only capture these new opportunities but create them. As for the bottom line, RBS’ EBITDA was up more than 60% in the quarter compared to the prior year due to the contributions of Vestcom and continued strong growth in the underlying business. Turning to Industrial and Healthcare Materials, the segment delivered modest sales growth in the quarter as margins declined. This group of businesses continues to be impacted by soft automotive end markets, as well as similar supply chain constraints and inflationary pressures, as discussed in LGM. Turning to our outlook for the year. Given our strong performance in Q1 and our revised expectations for the rest of the year, we have raised our full-year outlook and now anticipate top line growth of 15% to 17% excluding currency and EPS of $9.45 to $9.85. I'm pleased with the continued progress we are making towards the success of all of our stakeholders. Our consistent performance reflects the strength of our markets, our industry-leading positions, the strategic foundations we've laid, and our agile and talented team. We remain focused on the consistent execution of our five key strategies: to drive outsized growth in high-value categories; grow profitably in our base businesses; focus relentlessly on productivity; effectively allocate capital; and lead in an environmentally and socially responsible manner. We are confident that the consistent execution of these strategies will enable us to achieve our long-term goals, including consistently delivering GDP plus growth and top quartile returns. I once again want to thank our entire team for their tireless efforts to keep one another safe while continuing to deliver for our customers during this challenging period. The team continues to raise their game each quarter to address the unique challenges at hand. Thank you. Now, before turning the call over to Greg, as I'm sure you all saw, we recently appointed Deon Stander as our President and Chief Operating Officer. Deon has done a tremendous job leading RBS over the last seven years, and the team and I are excited to partner with him in this new capacity. Over to you, Greg?

All right. Thanks, and hello everybody. As Mitch said, we delivered a strong start to the year with adjusted earnings per share of $2.40. Consistent with last year and up 5%, excluding currency, roughly a dime above our expectations. Sales were up 18% excluding currency and 13% on an organic basis, driven by higher prices and higher volume and mix. Despite the impact of inflation and supply chain disruptions, we delivered a strong adjusted EBITDA margin of 15.3%, up 40 basis points sequentially. Significant revenue growth and strong margins drove EBITDA growth of 6% compared to the prior year, up 10%, excluding the impact of currency. Turning to cash generation and allocation, we generated $73 million of free cash flow, down compared to last year, but well above our historical Q1 levels. Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter-end of 2.35. Our current leverage position gives us ample capacity to continue executing our disciplined capital allocation strategy, including investing in organic growth and acquisitions while continuing to return cash to shareholders. In the quarter, we paid $56 million in dividends and repurchased more than 800,000 shares at an aggregate cost of $152 million. Now, turning to the segment results. Label and Graphic Material sales were up 12% on an organic basis driven by higher prices, which more than offset a modest decline in volume and mix due to tough comparisons as Mitch mentioned. Label and Packaging Materials sales were up low double digits on an organic basis, with strong growth in both the high value product categories and the base business. Graphics and Reflective sales were up high single digits on an organic basis. Looking at the segment's organic sales growth in the quarter by region, North America and Western Europe sales were both up high teens, while emerging markets overall were up low to mid-teens. The Asia Pacific region was roughly flat with strong growth in India, offset by a decline in China due to tough comps related to the price increase-driven pre-buys, which we discussed last year. In Latin America, we grew low double digits. LGM’s adjusted EBITDA margin increased 110 basis points sequentially to 15.6%, largely driven by accelerated pricing actions to offset inflation. And as Mitch mentioned, while EBITDA margins were strong, they declined versus the prior year for three primary reasons. First, the mathematical impact of raising prices alone reduced the margin percentage by roughly 2 points. Second, the remaining gap from the price inflation lag reduced margins roughly half a point. And third, impacts from the Russian war in Ukraine reduced margins by roughly one-third of a point. Now, looking ahead, our input costs have continued to rise and supply chains remain tight. We now anticipate inflation will be roughly 20% for the year with a high single-digit increase expected sequentially in Q2. We continue to address the cost increases through a combination of product re-engineering and pricing actions. Shifting now to retail branding and Information Solutions, RBIS sales were up 43% excluding currency and 20% on an organic basis, as growth remains strong in both the high value categories and the base business. The apparel business saw broad-based strength across channels and continued double-digit growth in external embellishments. For the quarter, Intelligent Labels sales were up more than 20% organically. Adjusted EBITDA margin for the segment of 19% was up nearly 2.5 points with the positive benefits from higher organic volume and acquisitions more than offset growth investments and higher employee-related costs. Turning to the Industrial and Healthcare Materials segment, sales increased 1% on an organic basis, reflecting low double-digit growth in healthcare, largely offset by low single-digit decline in industrial categories as automotive markets weighed on the segment. Adjusted EBITDA margin decreased to 12% driven by lower volume and mix and the net impact of pricing freight and raw material costs. Now shifting to our outlook for 2022, while there continues to be a high level of macro uncertainty, we have raised our guidance for adjusted earnings per share to be between $9.45 and $9.85, a $0.10 increase to the range. The increase reflects a roughly $0.10 headwind from non-operational items such as currency and taxes, more than offset by roughly $0.20 operational increase, roughly half of which we realized in Q1. This outlook reflects a roughly 50% increase in EBITDA compared to 2019. And we now anticipate 15% to 17% ex-currency sales growth for the full-year, above our previous expectation, driven by higher prices to mitigate the increased pace of inflation. In summary, we delivered another strong quarter in a challenging environment, and we remain on track to deliver on our long-term objectives to achieve GDP plus growth in top quartile returns on capital, which together drive sustained growth in EVA. We will now open up the call for your questions.

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

Sure, George, good morning. So, yes, as far as your first question on Intelligent Labels, we haven't disclosed specifically what our Intelligent Labels margins are. They are consistently above the average for the company and the average for RBIS. And what I’d say is, they have stayed, remained in a relatively tight band over time as we continue to drive growth, but also reinvest a portion of the growing profits into new growth opportunities for which you know are significant. As far as emerging markets margins, yes, I mean, the margins remain strong within the emerging markets. So, no big update from that perspective. We've talked about in the past that our margins have basically converged across the board over the last number of years. So, there's not a lot of variation of what you see on the global level for LGM versus the individual regions. And as far as the strike in Europe, yes, that's unfolding real time. It takes a little bit of time to restart paper mills and so forth, and the lead time between once the manufacturing starts happening to when we and the rest of the industry will be able to receive product, but our assumptions here are that we will start to see product here in mid to late Q2 and it won't really probably be a full run rate until late Q2.

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

Yeah. So, it's hard to predict what each shutdown if there are future ones or what the exact impact will be. We commented there was about $20 million lower revenue from the materials businesses that we have in the Shanghai area. We have an operation in the general Beijing area, but quite a bit smaller overall, as far as size and impact. And RBIS’ footprint in China is in South China. So, in the Pearl Delta region, so not in the Beijing area in general. So, that's where we are as far as what the impact is. I think the bigger question, everybody needs to make their assessment, what does it really do to end demand? Does end demand – everybody is obviously been depleting their inventories, bounce back and so forth or not. We feel well-positioned regardless of the situation. If it were to get to the South China, obviously, our RBIS plants would be impacted at that time, but just as we saw that Vietnam was shut down last year, which is a major hub for us as well, we’re able to leverage the rest of our global manufacturing capability to help offset that and quickly come back from. And there it's a little bit different because mostly end market is really linked to demand in both the U.S. and Europe. And so, we tend to see that there's a shortening of supply chains or adjustment of supply chain lead times in order to adjust for that. So, slightly different by business. Overall, I think there's, yes, positive of the fact that the Shanghai area is opening. As far as our direct interactions, we've gotten the green light to open up operations and everything else. Obviously, it takes a little while for the gears of industry to start moving, and all the customers need to be able to open up and suppliers. And we're hoping that from the high degree of lockdown, there are lessons learned from this more broadly and that with each new lockdown, should there be one, that will have less impact on industry in general.

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

Yeah. So, just to reiterate, I guess overall, we said about $0.20 operational be it for the year from our previous expectations, offset by about $0.10 with some headwinds, things like currency translation and a little bit on tax, for instance. In the first quarter, it’s driven by a couple of things: one, the RBS volume as Mitch mentioned earlier was pretty strong in the quarter, very strong on Intelligent Labels, good growth on external embellishments. And we continue to see strong apparel imports in the U.S., and that's continuing to see strong volumes in our overall apparel business even outside of IL. At the same time, as we talked about, we've been accelerating the pace of pricing to manage the increasing pace of inflation as well. And we closed a little bit more of that gap in the quarter than we had really expected at the beginning of the year. So, overall, we feel good with the pace of that. I think we still had a gap. I mentioned we had about a half point gap in LGM margins year-over-year, due to price inflation. We do see sequential inflation from Q1 to Q2 of high single digits and we're winning new pricing actions there. Our guidance assumes inflation in the back half is relatively stable. So, if that happens, we'll look as we enter the back half of the year to hopefully close that gap between price and inflation.

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

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

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

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

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

Yes. So, we grew more than 20% within the quarter and that was broad based. And yes, as I said, apparel was most of the dollar growth, but percentage wise, the food and logistics categories and now home goods are from a percentage wise off a very small base growing even faster. So, continue to build momentum. What we did say, and I think you might be referring to John, is, given where the supply chain constraints specifically around microchips that would be challenging to go above the long-term growth range that we have of 15% to 20% this year, and we do see that there should be some easing and change a little bit depending what you're talking about as we go into 2023. And an important part of this is we've been able to leverage. We're a bit unique in being able to drive this level of growth and certain for the new market development, just leveraging our scale and our partnerships that we have up the supply chain as the chips of manufacturers and so forth work through this challenging time they have on constrained supply, but we're all aligned on what the opportunity is around RFID and Intelligent Labels more broadly.

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

Yes. So, I think there's a lot of moving parts here between, as you said, the strike of our paper supplier starts to get better later here in the second quarter as Mitch talked about. It doesn't have a huge impact on Q2 given that that just ended pretty much here at the end of April. But we talked about at the same time, we got a little bit of a China headwind in the month of April at least from there that we didn't have in the first quarter. And then we exited or see shipping to the Russia market, which we had shipped for much of Q1 at least. So, there's a number of impacts there when you look from where we're in Q1 to where it will be for the rest of the year.

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

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

Okay. And do you expect your volumes to decrease in LGM year-over-year for the next two quarters and then to begin to grow? Is that your best case?

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

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

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

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

Well, I mean what we're talking about there is really the direct inflation whether that being raw materials, freight utilities, all those areas really. So, it's really about the direct inflation. The cost of substitute materials isn't as significant, but that wouldn't be included in that bucket as well at least from a Q1 to Q2 perspective.

And the way we tend to look at that is that's a different product, if you're substituting having a film liner versus a paper liner, it's a different product at a different price point. So…

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

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

Thanks. Mitch, Greg, John, congrats on a good quarter. Given the label paper of lease line or supply tightness, can you just give a sense of how you're able to manage supply this quarter? Was it just a matter of procuring tons wherever you could get them and passing along the higher cost to customers? Did you work through inventories? I'm just trying to understand your performance relative to the issues experienced at the end.

Yeah. I think it's a combination of things, really. I mean, I think we started the year with a little bit of inventory, so we were able to manage the early part of the quarter, at least from that perspective, but as Mitch was just talking about a minute ago, we shifted some materials to filmic liners away from paper liners where possible, again leveraging our capabilities in our plans and our R&D to make that change easily for customers. The same time leveraging our scale with our suppliers and looking for other sources of materials. And really, we talked about the strength of our teams overall over the years, and a lot of people say that, but really clearly we have the strongest teams in the industry and they've shown time and time again the resilience of managing through these things and helping us find ways to mitigate the impacts of challenges like this, and work through it and still deliver for our customers. So, for me, I think there's a number of factors there, but our teams really came through in the quarter overall.

Got you. And then just quickly, just following on John's question regarding chip availability. Obviously, Mitch mentioned, I think that's going to improve in 2023. What type of growth do you expect to see in Intelligent Labels once, if and when that chip availability improves? If you want to comment about 2023, let's look at it this way: if you had the chips available today, what type of growth would you see in Intelligent Labels versus the 15% to 20% you have seen? Thank you.

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

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

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

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

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

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

Yes. So maybe just backing up, I think our overall capital allocation balance sheet approach is the same strategy has been for a number of years now. We have a very strong balance sheet right now. Our debt ratio is at a relatively low level despite a lot of the acquisitions that we've done very recently. And so, we have ample capacity to continue investing in the business, continue leveraging M&A to help strengthen our portfolio and shift the portfolio towards high-value categories, and capacity to continue increasing the rate of our dividend over time and continuing to drive share buybacks and return cash to shareholders. So, we've talked about over the years. Our approach there has been in periods where we're looking at share buybacks to generate a return and in periods where we see, if we pull back in shares, we'll have accelerators in our share buyback in the opposite if we see increases. So, it’s clearly in the first quarter, we saw the pullback in the shares and took advantage of that from a buyback perspective. Depending on how that plays out over the rest of the year would really determine how share buyback overall plays out. I think we ended the quarter with about 83 million shares and clearly we expect to be somewhere below that by the end of the year.

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

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

Yeah. Hey, it’s Chris Kapsch with Loop Capital. So, question on LGM. Good afternoon or good morning, I guess, where you guys are. So question focused on LGM, I didn't catch the detail by region. I think you said that basically all the segments sales growth was effectively pricing on passing through the inflation and volume flattening down. My question is, is to the extent that paper liner availability constrained your volume, how did your volume compare to the industry volume? Did this constraint cause you to lose share in any region?

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

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

Yeah, sure. So, as far as the backlog, we've talked about lead times are much longer than they've been over the past year, and particularly over the past quarter. Clearly, some of that, we’re not expecting that all are just incremental demand, what happens when, in a constrained environment, people get back in the queue for ordering future materials and so forth. So, it's clear to us when we look at underlying demand for consumer packaged goods and e-commerce trends that end demand remains strong. And as we, I think once the raw material environment stabilized a bit, you'll have less of that getting in the queue early effect, so lead times will reduce a bit, but we still expect relative to the macro, healthy growth profile. So as far as taking share and so forth, like I said, those things we expect would be settling out. We are the industry leader and so we expect to be able to leverage our capabilities to help continue investing in innovation to drive the disproportionate amount of the industry's growth over the long run as we've done since we invented the category eighty years ago.

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

Yes, we haven't quantified and we're not going to overall George. The net impact is relatively small, but still impactful. Because if you isolated on its own as one impact, but we've then been leveraging our other sourcing providers, materials of providers to help mitigate that as well as the material substitution to filmic liners and so forth. So, we haven't provided that, but let's say something that's in our guidance is basically a return to normal, if you will, by the second half.

Understood. And then another two, and I'll turn over, one, you had mentioned on the fourth-quarter call, some potential that there was, and I forget the precise phrasing, but inventory in the channel that might need to be worked down. From your volume discussion and from the results, it seems like you're seeing much or effect from that, but nonetheless are you seeing any signs of destocking specifically within Europe and in the States? And then with supply chains being so volatile over the last, seems like the last couple of years, are you seeing any shift from your customers in terms of where they're planning to produce and source from? I would imagine it to be more of an effect perhaps on your RBIS customers and then in turn what that means what the implications are for Avery’s production over the next couple of quarters, a couple of years? Thanks and good luck to the rest of the year guys.

Thanks, George. Yes. So, overall around the inventory comment, we had said that we had anecdotal evidence and believe there were some inventory building going this year, which by the way, I think is playing out well for the end markets, as far as when you're in a period of tight supply that people have some extra buffer to work through. From what we see, it looks like some of that was worked off. We think in Q1, and we commented that our volume mix within LGM was down low single digits. So, comps was one reason, but think that inventory levels could have been another. But we think there's also still continuing some inventory here in Q2, which is important given that the impact of the strike won't be fully worked through until we work our way through Q2 and get towards the end of it. Yes, George, I wasn't clear on the second part of your question overall. I mean, broadly speaking, what you've seen through this very dynamic environment is that we've been able to leverage our global scale, our strength, and innovation to basically ensure that we are able to provide for our end markets. We are seeing as the industry leader that we're not just trying to protect our own business, but also ensure the long-term health of our industries, and that's not just an LGM or a lot of discussion is, but also within RBIS and the branding information solutions we provide there, where with all the challenges that the apparel industry has seen that we've been able to show consistent robust growth through that cycle, especially relative to apparel and demand. Overall, very, yeah, good, very good with how we've performed. There's a lot of uncertainty on the horizon. We're confident in the team's ability to continue managing as we have over the past couple of years.

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