Avery Dennison Corp (AVY) — Q2 2025 Earnings Call Transcript

Thank you, Tiffany. 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 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; Greg Lovins, Senior Vice President and Chief Financial Officer; and William Gilchrist, our new Vice President of Investor Relations. I'll now turn the call over to Deon.

Thanks, John, and hello, everyone. We delivered a solid second quarter with earnings above the midpoint of expectations and strong free cash flow in a dynamic environment. This result again demonstrates the strength and resilience of our franchise with multiple levers in our portfolio to deliver in a range of scenarios. As anticipated, changes in trade policy throughout the quarter had both direct and indirect impacts on our business. We successfully continued to leverage our proven playbook to mitigate the direct cost increases through strategic sourcing adjustments and select pricing surcharges, and to minimize the impact of sourcing demand reduction, particularly in apparel and general retail categories in the Solutions Group. The Materials Group delivered strong productivity and margins on modest volume growth in the quarter. Strong product mix bolstered margins, underscoring the effectiveness and importance of our strategy to continue expanding our position in high-value, more differentiated categories. High-value categories constitute over one-third of our Materials Group sales, and these products continue to outpace the base in the second quarter with particular strength in graphics and reflective solutions. For overall volume, growth in North America was strong, particularly in film categories, while Europe was down and emerging market growth was solid. Softer growth in Europe and Asia was partly attributable to a strong second quarter last year in which customers pulled orders forward in anticipation of a price increase. Volume in both regions was slightly below expectations, particularly in paper categories, including a modest impact from lower demand for U.S. exports. Solutions Group delivered solid margins in the quarter, up compared to prior year despite a decline in apparel and general retail categories, which was partially offset by low double-digit growth in other categories resulting in a modest decrease in overall sales. Overall apparel sales were down 6% in the quarter. As you can see on Slide 7, orders are down high single digits in April and improved in May and June, exiting the quarter down low single digits. Despite the reduction in sourcing demand during this period, consumer demand for apparel continues to exhibit resilience to date. Within high-value solutions, Embelex, a high-growth platform driven by performance athletic categories, and fan engagement in Team Sports, was down in the quarter on lower sourcing demand and slower orders from prominent U.S. performance brands. We anticipate a strengthening of Embelex's growth trajectory later this year, partially driven by the 2026 World Cup. Vestcom, our suite of productivity and media solutions for the retail shelf edge was up roughly 10% in the quarter on the successful rollout of our productivity solutions at CVS Health, which was completed earlier in the quarter. Turning to enterprise-wide Intelligent Labels. Sales were comparable to prior year and up mid-single digits sequentially. Apparel and general retail categories were down mid-single digits, while food, logistics, and other categories were up mid-teens collectively. In apparel and general retail, customers reduced orders and inventory levels as they reevaluate their sourcing timing and strategy. We anticipate growth in these categories will normalize over time. In food, we delivered strong growth in the quarter as our strategic collaboration with Kroger continues to ramp as expected, and we continue to see strong momentum in our pipeline with other grocery customers. In logistics, we delivered strong growth compared to prior year and sequentially. Our share in this segment remains strong and we continue to actively pursue new projects with other customers. From an overall operational perspective, this business has had to make adjustments to our global network due to shifts in trade policies. To counter this, we activated initiatives to reduce network inefficiencies and associated costs. With more than 70% of our intelligent label platform linked to apparel and general retail categories, near-term growth is likely to be impacted by trade policy. We expect growth in these categories will normalize over the cycle and are focused on accelerating controllable growth. Key rollouts planned for this year remain largely on track and the performance of our recent launches and pilots, particularly within food and logistics, where ROIs are exceeding expectations, instills confidence in the long-term growth trajectory of this platform. Shifting back to the total company. Given the near-term uncertainty, we are taking a cautious approach to forward expectations, and expect third quarter earnings per share to be comparable to prior year. We are prepared for a range of scenarios, and we'll continue to leverage our proven playbook to safeguard earnings while driving key initiatives to deliver strong profitable growth, given the strength of the overall franchise. We are industry leaders in more than 80% of our portfolio in large, growing and diverse markets. We are competitively advantaged, including our global scale, footprint, innovation, and go-to-market strategy. We have catalysts for strong growth over cycle, in multiple high-value categories that provide differentiated growth potential, and in emerging markets. Our strong franchise and agile global team provides us multiple levers to deliver in a broad range of scenarios. Materials Group has demonstrated strong resilience through and across cycles and has limited direct tariff exposure due to the regional nature of the business. Solutions Group is less cyclical than it was historically, evident by the second quarter results. Lastly, we have a strong balance sheet with ample capacity and a disciplined approach to capital allocation that provides significant flexibility, including organic and M&A investments, to accelerate our strategic objectives and expand EVA over cycles. Taken together, these elements will enable us to navigate the dynamic environment and deliver superior earnings growth over the cycle. While I'm confident in our long-term earnings progression, I'm not satisfied with our current growth and earnings trajectory, particularly within our IL platform. Here, we are taking action to improve network efficiency as well as expand innovation to help accelerate growth. I want to thank our entire team for their continued resilience, focus on excellence, and commitment to addressing the unique challenges at hand. Over to you, Greg.

Thanks, Deon, and hello, everybody. In the second quarter, we delivered adjusted earnings per share of $2.42, up 5% sequentially and comparable to prior year. As productivity offset lower volume in apparel and the net impact of pricing and raw material costs. As Deon mentioned, trade policy uncertainty during the quarter impacted our results, largely due to lower sourcing volume in apparel and general retail categories. We estimate the indirect effect of tariffs lowered our earnings per share by more than $0.10 in the quarter. Compared to prior year, sales were down 1% on an organic basis, as positive volume mix was more than offset by deflation related price reductions. Adjusted EBITDA margin was strong at 16.6% in the quarter, up 20 basis points compared to prior year. And we generated strong adjusted free cash flow of nearly $190 million in the quarter. Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 2.3, and we continue to execute our disciplined capital allocation strategy, including returning cash to shareholders. In the first 6 months of the year, we returned roughly $500 million to shareholders through the combination of share repurchases and dividends. Early in the quarter, we announced a 7% increase to the company's quarterly dividend, up to $0.94 per share, a dividend we've consistently grown annually for more than a decade. Turning to segment results for the quarter. Materials Group sales were down 1% on an organic basis as modest volume mix growth was more than offset by low single-digit, deflation related price reductions. Organically, high-value categories were up low single digits and the base business was down low single digits. Looking at regional label materials, organic volume/mix trends versus prior year in the quarter. North America was up low to mid-single digits. Europe was down low to mid-single digits, as we lapped the strong prior year that included customer pull forward ahead of price increases. Asia Pacific was up low to mid-single digits and Latin America was up low single digits. Compared to prior year, Graphics and Reflective sales were up high single digits and Performance Tapes and Medical were up low single digits organically. Materials Group continued to deliver strong margins with an adjusted EBITDA margin of 17.8% in the quarter, down slightly compared to prior year and up slightly sequentially. Regarding raw material costs, excluding the direct impact of tariffs, we experienced modest sequential global raw material cost deflation in the second quarter as expected. However, higher tariffs, primarily between the U.S. and Europe, began affecting us in the middle of Q2. We substantially mitigated the increased costs through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including our tariffs, our outlook sequentially in Q3 is for low single-digit inflation versus prior year. Shifting to Solutions Group. Sales were down 1% organically. Outside of apparel and general retail categories, sales were up low double digits. With overall high-value categories up low single digits and Base Solutions down mid-single digits. Within high-value categories, Vestcom was up roughly 10%, driven by new program rollouts, and Embelex was down in the quarter as Deon noted. Enterprise-wide Intelligent Label sales were comparable to prior year and up mid-single digits sequentially in the second quarter. Food, logistics, and other categories combined were up mid-teens, offset by a mid-single-digit decline in apparel and general retail categories. Solutions Group achieved a solid adjusted EBITDA margin of 17.1%, up 30 basis points compared to prior year, as benefits from productivity were partially offset by lower volume in apparel and growth investments. Now shifting to our outlook. For the third quarter, we expect adjusted earnings per share in the range of $2.24 to $2.40. Comparable to prior year at the midpoint as benefits from productivity and sales growth in the majority of our businesses are offset by typical wage inflation, and a top line decline in apparel and general retail categories. Sequentially, historical seasonality trends have resulted in a mid-single-digit decrease in EPS, primarily attributable to the August holiday period in Europe and the seasonal nature of the apparel business. Our guidance for Q3 assumes this typical seasonality as well as a slight sequential benefit from currency translation. While we've seen some signs of apparel industry improvement exiting Q2, the outlook remains uncertain and customer feedback and sentiment remains muted. We're assuming a continuation of soft apparel volumes in the third quarter. We've also outlined some contributing factors to our full year results on Slide 14 of our supplemental presentation materials. To highlight a few of the key drivers, we now anticipate a $7 million currency translation benefit to operating income, compared to our previous projection of a $7 million headwind. We now expect restructuring savings net of transition costs of approximately $50 million as we continue to ramp up our productivity efforts. And while we're not giving guidance for the full year, we do anticipate returning to earnings growth compared to prior year in the fourth quarter, assuming no significant shift in the macro. And we continue to expect strong free cash flow across a wide range of scenarios, targeting roughly 100% conversion for the year. In summary, we delivered a solid second quarter with EPS above the midpoint of our expectations through a dynamic environment, and we're well prepared for a variety of macro scenarios and well positioned to continue to deliver exceptional value to our stakeholders through our strategies for long-term profitable growth and disciplined capital allocation. And now we'll open up the call for your questions.

So I wanted to dig into Solutions a little bit. I understand the tariff stuff created some noise. It does look like maybe the trends were improving. But I guess, admittedly back-to-school doesn't change. Holiday season doesn't necessarily change all that much. So I guess, can you speak to whether you see pent-up demand where we may see some kind of quicker turnarounds going forward as we get into the second half, and how the profitability of that might flow through? And then I guess the other question I had on Solutions was just, you sound optimistic about, in particular, some of the excitement around the food and grocery channel at this point. Is that something where you think we could see a conversion of new business, or a new account, before the end of the year?

Thanks, John, for the question. Let me just deal with the first one. What we've seen really in the macro environment, John, if you take a step back, is continued retail sales volume softness in Europe. And retail sales in the United States are still only projected to grow above 1%. I think the apparel industry specifically has been impacted by the whole tariff uncertainty. Not just the tariff rate itself, but also when and where they get applied and when they become more certain. Those two things, and when you add them together, have certainly had an impact on the way our customers have been thinking about their sourcing strategy. In the early days, you may recall, we said we saw some orders being held as apparel retailers and brands tried to determine where they're going to source and how they're going to price those when they landed in the United States, particularly. That has slowly improved as we've gone through the second quarter. But the sentiment from our customers still remains fairly muted, and the discussions we have with them, they're still saying they're waiting for more clarity to really understand exactly when they're going to be able to do that. Now overall, apparel consumption remains relatively robust to date. What I think we're going to see as we move forward, at least anecdotally, what I hear from customers is that they're going to continue to watch how inflationary pressures impact consumer demand, particularly in apparel, because likely we're going to see inflationary pricing in the apparel industry as we move forward in the second half. They're trying to judge how much sourcing volume they then anchor themselves on relative to support that demand. Those ranges that we get from customers tend to vary as well, John. So we're taking an approach we say that we're assuming in the third quarter continued low single-digit demand in our business for apparel and general retail overall. To your second question around food and grocery, I am very optimistic because while the impact that we've seen on apparel and general retail has been to have mid-single-digit declines in the second quarter, outside of that, food, logistics, and other categories are actually growing mid-teens and really good strong growth in food and logistics as well in both of those specific categories. What we do know, and what we believe at the moment, is that outside of the impact that tariffs have had largely on apparel and general retail, the rest of our business is largely on track with where we originally assumed. In particular, the rollout that we had assumed as we went through this year is on track. Some of those rollouts in food and logistics, or particularly in food, include also new customers as they go from pilot stage to rollout as well. The results that we're seeing, particularly in food, from an ROI perspective, are exceeding both the existing customers and some of our pilot customers' expectations. This gives us confidence in the fact that we're going to continue to see adoption as we go through the second half of the year into the start of 2026.

John, I would like to add to Deon's comments. In the second quarter, we noted that apparel was down about 6%. For the third quarter, we expect our apparel business to decline by low single digits compared to the previous year. We anticipate a slight improvement based on the graph and the trends we observed as we finished Q2, provided that we maintain our exiting trajectory from Q2.

Just following up on the last question and your comments, Greg, just in terms of the apparel improvement in 3Q. What are you baking in for RFID specifically in terms of volumes for the back half of the year? And then second, your confidence underpinning the expected improvement in 4Q earnings on a year-over-year basis, what are some of the drivers we should consider as it relates to that assumption?

Ghansham, let me deal with the first question. Just reiterating, we continue to see the impact of apparel and general merchandise, those two categories through the tariff environment. And as I said, outside of those, our business is largely on track in the way we thought it would be. We have two things that are going to happen in the second half of this year. I anticipate all things being equal, there's no further deterioration, we should see growth in IL in the third quarter. And then in the fourth quarter, we expect to see some of those new programs, or the rollouts that we're seeing take traction in the fourth quarter as well.

Sorry, Ghansham, I didn't get the second question. Didn't come through clearly.

As it relates to the 4Q earnings year-over-year.

Yes, I think when we look at our guidance for the third quarter at the midpoint of about $2.32, and then consider the fourth quarter and its trajectory moving forward. Typically, as we mentioned in Q3, there is some unfavorable seasonality from Q2, but we usually see some favorable seasonality from Q3 to Q4, which is generally in the low single-digit range from an earnings perspective. This provides us with a slight increase. We are also continuing to implement productivity measures, increase our restructuring, and drive ongoing productivity across the business. These factors combined position us at or above the prior year in terms of earnings, even without improvements in apparel or other portfolio segments. We expect to keep driving growth outside of apparel and IL, and achieve growth in Vestcom compared to the previous year. All of these elements together give us confidence that we will see earnings growth in the fourth quarter.

I guess I wanted to piggyback on IL as well. So did you see any kind of pickup specific to the setting of tariffs in Vietnam, and that being established and then current orders coming because customers at least knew what their sourcing and cost would be of that country? And just looking at the chart and trying to put your commentary together, are you still down year-on-year in apparel orders into July? Or are you actually now up modestly? I know you're saying down low single digits in the quarter, but July, where were you?

Thanks, George. As it relates to the question specifically on Vietnam, we did see during the quarter, as expected, some volume was being moved from China to other regions, notably particularly Vietnam and South Asia as well. This is during the time of the 10% tariff rate around the rest of the world, George. And so there was a slight pickup in Vietnam IL orders relative to a slight decrease in China, but that all was contained within the overall Q2 performance of apparel and general merchandise being more muted because of the broader tariff impact. I will say, though, that as we've seen some of the other tariff rates begin to be set or at least indicated the magnitude where they're going to be, we continue to see customers in the apparel side calibrate what they're going to do from a sourcing perspective moving forward. And of course, for our advantage, George, as you know, we have manufacturing facilities and support facilities in each one of these countries. So as customers choose to move volume, we have the ability to help them in that regard and move the volume, both core products, base products, and IL as needed. From an overall apparel perspective, our current apparel volumes and orders are roughly flat to prior year-to-date. That's the way I'd characterize it.

I'll shift gears just a little bit here, or probably. Share repurchases to date are near record annual levels, still trading at the valuation gap versus the S&P. So how should we think about free cash flow in '25, and potential for further repurchases? And should growth in IL or rollouts continue to be slower than expected. At what point do you think you would need to do inorganic growth? You seem to kind of call that out earlier. So at what point would you need to pivot there to start seeing a greater margin contribution from other high-value categories?

Thank you, Matt. As we discussed last quarter, we are maintaining our capital allocation strategy as we have in the past. We increased share buybacks in the first quarter. While I noted last quarter that we would continue this trend, it may not happen at the same pace as in Q1. We will keep this approach while the share price remains favorable compared to our expected intrinsic value. This is something we are continuing in the second quarter, albeit at a slower pace than in Q1. We are dedicated to executing our capital allocation strategy and feel confident about our balance sheet, which allows us to invest in the business and return cash through increased dividends, as we did last quarter, while also continuing share buybacks. Additionally, we have the capacity for mergers and acquisitions and are actively exploring opportunities not only in our Illinois market but also across our high-value categories to expand our portfolio in these areas.

And Matt, let me just add to Greg's comments. We've been very deliberate in managing our capital allocation consistently over a very long period in a very disciplined way as well. Our leverage ratio is at around 2.3 at the moment. We see that management leading us to have an ability, if we need to, to lean forward when we see market dislocations, or asset dislocations in terms of prices, always focused on how we think about executing the strategy. Our M&A pipeline remains very robust. And when we see the opportunities, and they're in line with our strategy, we'll continue to execute on them.

Your graphics and reflective volumes have been up high single digits for the first 2 quarters of the year. Do you expect a continuation in that trend? And what do you see as behind it? And then secondly, your SG&A expense has been lower year-over-year for the first 2 quarters and sort of nicely lower in the second quarter. When I look at your 10-K, it doesn't seem that your overall employee levels are so different. What's behind the decrease in SG&A? If you could answer those two questions.

Thanks, Jeff. Yes, we're pleased with our graphics and reflectives combined growth overall being sort of mid- to high single digits across the 2 quarters. It's largely driven actually on our graphics business with particular strength in Asia and North America. We continue to see some new customer acquisition in Asia, where we're getting more traction with what we call our paint protection films overall. Similarly, in North America, where our, what we call, our cast color change films are having stronger attraction as the auto market moves into more and more customization of colors and so forth as they look forward. We expect largely this trend to continue through the remaining part of this year. In line with our expectations that our high-value categories, particularly in Materials Group and also in Solutions Group will continue to deliver a greater share of our portfolio in time to come.

Yes, Jeff, and on your second question on SG&A. So when we look at it versus last year, of course, we've got continued restructuring actions that are benefiting both SG&A and cost of sales, but it's a mix between the two. So there is some benefit there, probably more so on the SG&A side from a headcount perspective proportionally. And then we're obviously, given the volume environment, particularly in apparel and general retail, as we talked about, we're continuing to do discretionary cost reductions, things like travel, etc., are continuing to manage very well. Then we look from a year-over-year perspective in the first half. Last year, in the first half, our performance was above our original target. So we had a higher-than-average incentive compensation accruals. And this year, we're performing a little bit below given our results below our original expectations. So there's an impact across those three buckets versus last year.

Deon, in your prepared remarks, you talked about not being satisfied with the growth trajectory in IL. And I think you talked about efforts to improve network efficiency and expand innovation. And I'm wondering if you could give a little bit more detail about sort of what activities you're pursuing there. And then just generally, in terms of IL, maybe competitive intensity, I mean do you feel that you're missing opportunities, or growth industry-wide has slowed? Or if you could just give us some kind of context for those comments and the activities that you're pursuing?

I'm not happy with the current growth of our IL platform. That's why we are focusing on executing our strategies and driving innovation. When tariffs changed, we adapted our manufacturing volume to take advantage of more favorable tariff conditions. However, that situation has shifted. While we have a robust network that allows us to move things around, it comes with costs. We've learned valuable lessons from this experience. Moving forward, we are taking steps to enhance the resilience of our network and optimize our working capital to ensure we deliver exceptional service and seize available opportunities. On the innovation front, it remains crucial for us to set ourselves apart in the market. We've accelerated innovation at both the product and solution levels. For instance, we've been pioneers in the food sector by introducing a microwavable tag for frozen items and the first recyclable tag from the Association of Plastic Recyclers for perishables in plastic containers. Additionally, we plan to launch proprietary technology for category expansion in food, particularly beyond bakery into protein and perishables, which will require specialized innovation. Regarding competition, I don't perceive any changes in the intensity overall. The market continues to attract investment, and we see balanced competition globally, but we still hold the leadership position with a majority share. I expect our market share to increase this year, especially with the rollout of our apparel loss detection mechanism and other new initiatives. Overall, I believe our share will continue to grow in the latter half of the year. In the broader industry context, since it mainly involves general merchandise, retail, and apparel, we are experiencing some effects similar to those across the industry. However, I still believe there are vast growth opportunities ahead. Our confidence in our growth trajectory is strong, as we see a sizable market opportunity. We have successfully onboarded our first food customer and have a robust pipeline for grocery retail. We've also begun active pilot programs with logistics customers. Although growth may be uneven over the years, I am firmly convinced in our potential for significant growth in this platform over the next decade.

Truist Securities, Inc., Research Division Congrats on good performance despite the backdrop. My question, I just wanted to follow up quickly on the growth in food. And you mentioned, Deon, you obviously, the significant growth in food, you have a strong pipeline. With respect to Kroger, though, the company did announce plans in late June to close 60 stores over the next 18 months. So can you just give us a sense of what that means for your IL deployments in baked goods and ultimately, for any protein deployment with Kroger?

Yes, Mike, I'm not going to specifically discuss why some of our customers make their choices. I believe it's just a normalization of how they view their real estate footprint. Our rollout with Kroger is progressing as anticipated. They have reached roughly 700 stores at this midpoint in the rollout. As we mentioned earlier, we expected it would take about 1.5 years to complete the full rollout just for the bakery items. The reduction in store numbers will not significantly affect this overall. We are currently in discussions with that customer regarding the strong returns they are experiencing. Given the strong ROI, we are exploring ways to accelerate our plans into other categories we had historically intended to include, such as proteins, as we move forward, Mike.

Congratulations as well on a good quarter in a tough environment. I wanted to switch to Embelex and Vestcom. Embelex, I'm a little bit less familiar with the business. It does seem like you have some good visibility on doing well in the back half of the year ahead of, I think it was a 2026 World Cup. But is this the type of business that will be pretty reliant on these larger, maybe global types of sporting events? It's been a bit of a rough first half, which may be just because of consumer discretionary spending. So maybe you could spend a little time kind of walking us through your expectations for growth in that business? And then with Vestcom, maybe just an update on how the rollout is going with CVS? Anything you've kind of learned or been surprised about either positively or negatively with that program?

Sure. Thanks for the question, John. Let me touch on Embelex first. You're right. Our performance this first half of the year hasn't been where we had hoped it to be, but in reflection of kind of where the overall apparel market is, we also see an impact of that as it's come through. Maybe if I break the Embelex business apart. Recall, this is a business in which we provide decoration to garments, largely in team sports. That's one area. Increasingly in-stadium customization where we actually run the hardware and the software for when you go to a stadium in professional sports in the United States and you want to embellish or customize the garment on there, we're actually the backbone of pretty much all of that. There's a second area where we continue to take the same technology, which is largely heat transfers, embroidered badges, and patches, and we actually provide those to the large performance brands around the world as they also do their own activity. Think about two largest performance brands in the world, one in Europe and one in the United States. And then the third one is we also provide that to ad hoc events where there's either team sports happening or they're trying to drive fan engagement. Increasingly, in that piece, we're actually adding digital triggers to those embellishments so that you can get greater fan engagement directly with the brand or with your favorite player. When I look at that overall, the biggest driver is actually our kind of what I'd call our large performance brand piece, which is still there. Some of those performance brands, I'm sure you know, haven't necessarily performed recently to their expectations as well, and that certainly had an impact on our volume. Part of that is also related then to the whole apparel tariff changes that we've seen as well. As I look forward, I think we're going to continue to see these three buckets: One bucket will be around how do our performance brands do? Call the legacy part of our business. How do team sports continue to invest? We have a high degree of confidence just largely because we continue to see customization and personalization being such a key driver. We anticipate the whole segment to be growing in sort of kind of high single digits over a long period. The final one is what we call these episodic events like the World Cup, they bring a unique sort of coalescing of volume and opportunity for us to leverage our technology when national teams are trying to do something specific in a sporting event. Let me just turn to Vestcom, John. We're very pleased with the rollout of us with CVS. Recall, in Vestcom, while we deliver analog price, shelf-edge pricing and media solution, it's largely actually a data composition engine. We take a lot of data in, pricing data, planogram data, promotional data, and we ingest that, and effectively then, in a proprietary fashion, put that out into shelf-edge labeling. Most of our growth in the second quarter was down to do with CVS. You also know in the macro environment that one of the other drugstore companies went into Chapter 11, so that had a small negative impact. We also saw growth in some of our other customers that we have in this environment, both in our grocery and dollar store customers as well, next to some sort of 10% growth. As we look forward, we're going to continue to see, I think, solid growth as we go to the back end of this year. I do think this is a business for us that has brought a lot of resilience to our Solutions Group. When things are cyclically challenged in retail, you either see two things happen: one, you see pricing changes, which benefits our business, or you see promotional changes, which, again, because we're leveraging that same real estate, we're able to sell more media solutions on the back of it.

I had a question on the tariff cost impact within 2Q and implied in 3Q. You made some comments about how you're taking some strategic pricing and also reallocating some of your sourcing to offset that. But I'd be curious to know if you think you're offsetting that cost within the quarter, or within 2Q and 3Q, if there's a lag to that, that you would potentially make up later in the year or maybe into next year?

Yes. So the inflationary impacts from the tariffs really started impacting us kind of midway through the second quarter, given that we had inventory on hand and things when the tariffs first went into effect. So I would say, overall, that was about a low, or very low single-digit impact from an inflationary perspective in Q2. Overall, we largely offset that in the quarter with tariff-related surcharges, as well as some sourcing shifts. We did both of those things. Obviously, we started that as soon as we found out about the tariffs on the sourcing shift piece. That allowed us to offset that within the quarter. We will see some sequential further inflation just given we'll have a full quarter of the tariff impacts in Q3 versus about half a quarter in the second quarter. But again, we'd expect to offset that with surcharges and sourcing shifts. Now that's still waiting to see what happens in the next couple of weeks with areas like Europe, Malaysia, et cetera, where we have some open tariff items for August 1. So we'll see what happens with those and if there's something further we need to do to manage that.

I have a couple of questions. First, what were the exit rates in your Materials businesses for the third quarter? Second, you provided some details about Embelex. When can we expect to see improvements in volumes there? The narrative this year has suggested we might see a pickup as we approach '26 ahead of the World Cup. When can we realistically expect that to happen? Do you foresee it being a positive factor in the fourth quarter, or will we have to wait until '26? Lastly, regarding all the innovation happening in food, logistics, and other areas, the 70% of your business that remains stagnant in general retail and apparel raises some concern. What steps are you taking from an innovation perspective to drive growth there, or are you feeling limited due to tariffs and current uncertainties?

Thanks, George. I'll address this in reverse order. Let me discuss innovation in apparel, particularly for IL. We are actively advancing in this area. A notable development is the enhancement of our loss detection product suite, which we've launched in partnership with Inditex, and there’s considerable interest from other apparel clients as well. We’re also focused on improving our inlay design capabilities to enhance variable read rates in denser stores and to reduce power consumption while increasing store activity readings. All these efforts aim to assist apparel retailers in moving towards self-checkout, a strategy we've already implemented for clients like Fast Retailing, known for UNIQLO, and Decathlon in Europe. Our commitment to innovation in apparel continues, leveraging our market leadership. At the customer level, we’re not stopping there; we are also innovating at our operational levels to ensure we maintain our low-cost leadership through better and faster assets and improved processes. We have several proprietary innovations in the pipeline for the next few years that will help accelerate this progress. Regarding Embelex, we anticipate growth in the fourth quarter, where we expect most of that growth to manifest. My belief is still reliant on whether we see significant deterioration in the broader apparel sector, as tariffs impact Embelex. In terms of our Materials group, we began the second quarter slower than expected in April but saw improvements in June, and our exit rates into July are similar to June, remaining relatively flat overall.

Thank you, Tiffany. To recap, we delivered a solid quarter in a dynamic environment. We are well prepared for a variety of macro scenarios and well positioned to deliver superior value through the cycle. On a personal note, I look forward to working closely with all of you in the Avery Dennison investment community in the months and years ahead. Thank you for joining today. This now concludes our call.