Q4 2019 Earnings Call
For your please press star zero.
Welcome to Avery Dennisons earnings conference call for the fourth quarter ended December 22019. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time February 1st to access the replay. Please dial 806 338 to wait for four plus one for the.
To 9779 140 for international callers the conference I'd number is 2193 0677 I.
I'd now like to turn the conference I would just any gunther.
Avery Dennison, Vice President Investor Relations and finance. Please go ahead manner.
Thank you Jennifer.
I will discuss our preliminary unaudited fourth quarter and full year results. Please know that throughout today's discussion will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined qualified and reconciled with GAAP on schedules eight four to eight of the financial statements accompanying today's earnings release, and the appendix of our supplemental presentation mature.
Yeah.
We remind you that will make certain predictive statements that reflect our current views and estimates about or future performance and financial results.
Forward looking statements are made subject to the safe Harbor statement included in todays earnings release.
On the call today are Mitch Butier, Chairman, President and Chief Executive Officer, and Greg Sullivan, Senior Vice President and Chief Financial Officer.
On the call over to Mitch, Thanks, Cindy and good day everyone.
I'm pleased to report another year of strong adjusted earnings growth with EPS up 9% or 15% on a constant currency basis, despite lower than usual organic growth of 2% due to challenging market conditions.
As you know our focus in the slower top line growth environment. It on protecting our margins in the base business, while driving faster than average growth in high value categories like or if I D.
We are executing well on both fronts, while investing to drive future growth and further strengthen our competitive position.
We're largely on track to achieve our long term financial targets that we communicated three years ago, Greg will walk you through their scorecard in a moment.
Our consistent performance reflects the resilience of our industry, leading market positions the strategic foundations, we blade under agile and talented workforce.
Our mission is to create value for all of our stakeholders through innovation operational excellence and highly disciplined capital allocation.
These fundamentals drive the successful execution of our core strategies in particular, achieving outsized growth in high value categories.
Right and profitable growth in our base business and attaining our ambitious 2025 sustainability goals.
In 2019, we made good progress on all of our strategic priorities.
Hi, Mike categories in emerging markets remain or two key catalyst for GDP plus growth across our entire portfolio with over half of our total sales went to one or both of these.
In 2019 high value categories in emerging markets again grew faster than the average I valley categories were up mid single digits with Arf idea alone contributing nearly a full point to total company sales growth.
Our base business declined modestly, reflecting LG on market share that we see that the tail end of the last inflationary cycle that we discussed previously importantly, l. James volume trend improved in the back half of the year as we recovered that share.
We expect this volume improvement trend to continue into 2020.
Our continued focus on operational excellence, which has long fueled our industry, leading service and quality was again, a key enabler of significant productivity gains.
The combination of product reengineering restructuring and the deployment of lean operating principles enabled us to again expand margins further enhance our competitiveness and continue providing a funding source for reinvestment.
Equally important we continue to make solid progress towards our 2025 sustainability goals.
You'll be able to read more about this in our new integrated and report that will come out in March.
Just a few highlights.
As of yearend 2019, we'd reduced greenhouse gas emissions by more than 30% since 2015.
Over 85% of our papers no certified to be sustainably sourced.
Close to 95% of our operation or landfill free.
And we further improved our already top notch employee engagement scores.
Now looking at how our strategy is played out in each of our segments.
Labeling graphic materials delivered modest organic growth under challenging market conditions.
The base business was flat overall for the year, which as I mentioned reflect reflects that share loss that we largely recovered by year end.
I believe categories. Once again grew faster than the base, albeit a slower pace than we're used to due to softer end market demand.
Likewise emerging markets also grew faster than average, though slower than usual with strength in India, and South America offsetting weak demand in North Asia.
At the same time LG EMS adjusted operating margin expanded another 30 basis points to 13.3% and this already high return business as we completed the restructuring of the businesses European footprint mid year.
Over the past couple of years LG M. has successfully navigated through a significant inflationary cycle as well as the subsequent transition to the modestly deflationary cycle that we've been seeing more recently.
Demonstrating the resilience of our business model.
Given our strong leadership position in the industry, we're willing to take some near term shared risk through these cycles, knowing that our superior product quality service and cost position will ultimately went out.
So well 2019 proved more challenging reflecting both market driven headwinds in some missteps on her own part we are well positioned for profitable growth in 2020 and beyond with excellent returns in this business.
Retail branding and information solution sales increased by more than 5% on an organic basis, driven by over 20% growth in high value categories that is our if I'd an external embellishments.
The base, a bear apparel business declined modestly reflecting market demand that was impacted by trade related uncertainty.
While there are signs of potential resolution of this uncertainty some customers may further rebalance their supply chains.
Our global footprint, along with our differentiated pump product and service capabilities.
Gives us a significant competitive advantage to win over the long term as we partner with our customers to support their evolving sourcing strategies.
Enterprise wide or if I'd products and solutions grew by more than 20% generating roughly 360, <unk> $5 million of sales, reflecting ongoing penetration of apparel as well as expansion in relatively new verticals, including food beauty and logistics.
Our total pipeline of customer engagements continues to expand.
Compared to this time last year, our number of customer engagement from business case to rollout is up 50% driven primarily by categories outside of apparel.
At the leader and ultra high frequency or if I'd, we're positioned extremely well to capture these opportunities with industry, leading leading innovation and manufacturing capabilities and the best most experienced team in the space.
And we continue to build out this platform, increasing our levels of investment to drive growth, both organically and through acquisitions and external partnerships.
To that end, our purchase of Smarttrack seemingly business, which we expect to close late this quarter.
Represents an excellent strategic fit for us.
Combined horrified he becomes a more than 500 million dollar business expected to grow 15% to 20% annually over the long term.
Smart trucks capabilities complement our existing product offerings and process technologies, while expanding our intelligent labels platform to better serve industrial and retail segments.
And their global manufacturing footprint, likewise complimentary to our own strengthens our in lean manufacturing capacity and capabilities.
Turning to profitability.
It is adjusted operating margin expanded another 120 basis points for the year.
The team has done a tremendous job transforming RV I asked him to simpler faster and more competitive business over the past four years and we're pleased with the performance we're seeing here.
Shifting now to industrial and healthcare materials.
Although sales growth was modest for the segment, we believe we outpaced the market across most categories.
And importantly, we made substantial progress toward or 2021 profitability target driving 140 basis points of a joke adjusted margin expansion.
We've strengthened our management team here and fine tuned our strategies, we remain confident that this segment will deliver significant value over the medium to longer term.
All in all 2019 was another solid year.
As we reflect back on the last few years, we're pleased with how we have leveraged our foundational strength in operational excellence and innovation to consistently make progress towards our long term goals to deliver GDP plus growth and top quartile returns on capital.
We have driven outsized growth in high value segments, while also growing profitably in our base businesses.
We have substantially reduce the environmental impact of our operations, while focusing increasingly on the development of innovative more environmentally friendly products.
We've continually driven productivity that has enabled us to ramp up our pace of investments in high value segments, particularly our if I'd, while also expanding margins.
And importantly, this progress has been made possible by our amazing team that's dedicated to delivering for all of our stakeholders in a dynamic environment, while upholding our longstanding commitments to integrity and excellence.
As we looked at 2020, we're confident we will continue to make progress in our strategic fronts, including the next evolution of our leadership structure and wave of productivity initiatives.
As you know we've had a theme over the last few years to move more and more decision, making closer to our markets, both the increase speed and lower costs.
Along these lines, we're now consolidating or corporate and group functions for LG M&A Jim.
In addition to making the leadership structure Nimbler this and other productivity initiatives. We've recently launched will yield significant savings through 2021, enabling us to continue to increase our pace of organic investments while also expanding margins.
So once again, we're pleased with the progress we've made toward our long term goals over the last few years and in 2019, specifically and we expect to make continued progress in 2020.
That's for guidance, we expect adjusted EPS of $6, a 90 cents to $7 in 15 cents with our outlook, reflecting improved volume growth and continued productivity gains, partially offset by incremental investments and transition costs associated with our next wave of restructuring actions I'll now turn the call over to Greg.
Thanks, Mitch and Hello, everyone.
Provide an update on our performance against our long term goals and then walk you through fourth quarter performance and our outlook for 2020.
Slide seven of our supplemental presentation materials provides an update on our progress against the five year targets that we communicated in 2017.
Recall that this represents our third set of long term goals after meeting or beating our previous two sets of long term targets.
As you can see we're largely on track specifically over the past three years sales growth on a constant currency basis is inline with our target up 5.7% annually.
While organic growth was close to 4% just slightly below our target due to the generally slower demand environment in 2019.
Reported operating margin hit nearly 11% in 2019 or 11.7% on an adjusted basis up from roughly 10% and 2016.
And due largely to that combination of strong topline growth and margin expansion adjusted earnings per share was up 18% annually.
Return on total capital adjusting for the distortion related to the termination of our U.S. pension plan came in close to 20% for 2019.
Well above our 17% target the reflects top quartile performance relative to capital market peers.
In our balance sheet remains strong with our net debt to EBITDA ratio below the low end of our target range.
Our consistent progress towards achieving these long term goals reflects the diversity of our end markets.
Our strong competitive advantages.
Our resilience as an organization to adjust course when needed.
Together these give us confidence in our ability to deliver GDP plus growth in top cortile returns on capital over the long term.
Now at the same time that we communicated our financial goals through 2021, we also laid out a five year plan for capital allocation, which you can see on slide eight.
We're tracking well against this plan starting with strong cash flow generation and we've put a total of $2.4 billion to work over the first three years of this cycle allocating that largely inline with our long term plan.
And clearly our current leverage position gives us ample capacity to continue our pace of investments for organic growth in acquisitions, while also continuing to return cash to shareholders in a disciplined way.
Now, let's focus on the fourth quarter.
Overall financial results were solid with adjusted earnings per share of $1.73 cents up 14% versus prior year and about a nickel better than our expectations.
We grew sales by 2.1% on an organic basis and currency translation reduced reported sales growth by 1.9 points in the quarter.
Adjusted operating margin increased by 80 basis points to 11.9%.
We realized $18 million of restructuring savings net of transition cost in the quarter.
Due in part to LG EMS restructuring in Europe .
And our cash generation has been strong as we delivered $512 million or free cash flow for the year.
Up roughly $83 million compared to 2018.
And this increase reflects both profit growth and improved working capital efficiency.
The fixed Tonight, GE capital spending total fixed anite GE capital spending came in at $257 million in 2019, which was inline with prior year in a bit lighter than we had expected due to the delay of some spending related to project timing at year end.
Utilizing our strong cash flow, we returned $427 million in cash to shareholders through a combination of share repurchases into higher dividend.
In line with the average amount of cash distributed to shareholders over the preceding two year period.
Turning to segment results for the quarter.
Label and graphic materials sales increased by 1.5% on an organic basis.
Driven by the net effect of volume and mix, partially offset by pricing.
L. James bass business in high value categories were both up low single digits in Q4.
The base business sales trend improved from earlier this year, reflecting the easier comparisons due to the timing of share loss at the end of 2018 in early 2019 as discussed previously.
In high value category growth slowed in the quarter, reflecting the decline in graphics sales due to a challenging prior year comparison in North America as well as generally softer end market demand in the quarter.
Stepping back to look at LTM sales trends through the course of 2019 organic growth has been relatively stable between 1.0 and 1.5% each quarter.
And the first half, though volume and mix represented a net negative with price, adding roughly two and a half points.
On the second half volume and mix, where net positive with price, becoming a headwind by the fourth quarter.
Given the sequential deflation that came through in the third and fourth quarters, we do expect pricing to be a roughly one and a half point headwind to l. James organic growth in 2020.
With the toughest price comp impacting us here in the first quarter.
Breaking down L., James organic growth in the quarter by region North America declined at a low single digit rate.
Reflecting what we believe was a relatively flat market along with lower prices.
Western Europe grew at a low single digit rate driven by modest market growth and share gain partially offset by pricing.
Emerging markets were up low to mid single digits with relative strength in South Asia, Eastern Europe , and South America, partially offset by a modest decline in China.
An operating margin for the segment was strong up 40 basis points on an adjusted basis to 13.3%.
As the benefits of productivity initiatives and the net impact of raw material deflation in pricing were partially offset by unfavorable product mix.
Shifting now to retail branding and information solutions.
RBS delivered another quarter of strong topline growth.
Up 5.2% on inorganic basis.
Driven by continued strengthen our if I'd and external embellishments, which are up more than 20% on a combined basis.
Our base business adjusted for the migration of products to higher value. Our if I'd solutions was up slightly versus prior year.
A modest improvement compared to Q3 inline with our expectations.
Adjusted operating margin for the segment expanded by 140 basis points to 13.6%.
At the benefits from increased volume and productivity were partially offset by higher employee related costs and growth related investments.
Turning to the industrial in healthcare materials segment sales declined by 1.1% on an organic basis.
As a low single digit increase for industrial categories was more than offset by mid single digit decline in health care.
We continue to make solid progress on the margin front, NIH and beating our 10% margin goal for the full year.
For Q4, specifically adjusted operating margin increased by 60 basis points to 10.2%.
As the benefits of productivity gains and strategic pricing initiatives more than offset higher employee related costs.
So turning now to our outlook for 2020.
We anticipate adjusted earnings per share to be in the range of $6, a 90 cents to $7.15.
We've outlined some of the key contributing factors to this guidance on slide 14 of our supplemental presentation materials.
We estimate that organic sales growth will be approximately 2% to 3%.
With the midpoint of that range, reflecting the carryover effects of the share we recaptured in LTM.
Partially offset by expected price reductions associated with the deflation that we've been experiencing.
Our 2020 fiscal year contains 53 weeks ending on January 2nd 2021.
The extra week, which you pick up in the fourth quarter is expected to add about one point to reported sales growth with no impact on organic growth.
And note that the extra week crosses over the new year's holiday. So it's expected to be a low volume week with lower than average profitability.
And we expected to add an estimated 10 cents benefit to EPS.
And we expected the Smarttrack acquisition will add about one and a half points of growth for the year.
Assuming the deal closes late this quarter.
Given transition cost and interest expense, we expect the acquisition will be modestly dilutive to earnings in 2020.
Roughly offsetting the benefit of the extra week.
So the effects of the two will not be equally distributed through the year.
A recent rates currency translation is a 30 basis point headwind to reported sales growth with a headwind in the first half, particularly in the first quarter, becoming a slight tailwind in the fourth quarter.
And we estimate incremental pre tax savings from restructuring net of transition costs will contribute between 30 and $40 million in 2020.
And note that a meaningful portion of the savings associated with the restructuring charge charges. We've taken recently will not be realized until 2021 likely on the order of $30 million.
We expect that both GAAP and adjusted tax rates will be in the mid twentys for the full year, where the variability in the GAAP tax rate from quarter to quarter as usual.
And we anticipate anticipate spending $220 million to $230 million on fixed capital and I T projects down from the previous two years as we anticipated.
Cash payments associated with our restructuring initiatives are likely to come in around $35 million.
Roughly $20 million lower than the past year.
And we estimate average shares outstanding assuming dilution of roughly 84 million.
Finally.
Hello, Corona virus situation in China is very fluid in its early days to assess its full impact we factored in up to a nickel headwind to our EPS guidance.
Reflecting the mandated delays and starting back up following in or lunar new year, that's impacting many regions in China in which we operate.
And of course, our first priority is ensuring the health and safety of our employees and Thats the focus of our team right now.
So in summary, we're pleased with the strategic and financial progress we've made against our long term goals in 2019, and we're committed to delivering exceptional value through our strategies for long term profitable growth and disciplined capital allocation.
And then we'll open up the call for your questions.
Okay.
Jennifer.
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One moment please for the first question.
Our first question comes from the line of guys, Sean Punjabi with Robert W. Baird. Please proceed with your question.
Please go ahead your line is open.
Sorry about that hey, guys are you.
Okay.
I guess first off on the two and half percent core sales growth and you're guiding towards the midpoint can you sort of break out that construct further by segment I know you called out of 1.5% or so price headwind for algea, but what about volumes for each of the segments and for the Corona buyers the impact on the nickel that you have baked and will that impact do you think both segments L. Gms.
Our bias towards the specific to one.
Yes, the first gone so I'm on the growth our 2% to 3% as I talked about includes volume growth a bit higher than that with about a point in a half of price headwind in LG and which is about a point to the full company.
We expect a little more volume growth, particularly now Jim some of the carryover share gains that we had in 2019 and then within RBS. We expect to continue to see strong growth in RF I'd contributing similar level of growth for the company that we saw in 2018.
So I think that's the biggest drivers of growth between LG and RBS for the for the year.
We look at the current virus impact most of what we factored in that nickel is related to the materials businesses.
Since those are generally serving demand thats created in China, and Thats, the biggest impact and that nickel basically is based on about a week starting up later post Chinese new year within RV is factories, there generally serving demand in other regions. So we do foresee some potential delays of shipments from Q1 into Q2, depending on how this plays out.
Over the next couple of months.
But the demand we think wouldn't be as effective as it would be in the materials businesses and so just to add to that obviously a fluid situation. Our first priority as Greg noted earlier is ensuring the safety and health and wellbeing of our teams and second to ensuring we're supporting our customers as they work to support their overall end market demand as well to this environment.
So pretty fluid and our guidance and considers just one week basically lost sales and lost consumption for the direct for the consumption in region.
To shift from Q1 Q2 for.
In demand this service from China to outside of China.
And the confidence minutes on the volume improvement is that baked on visibility you have on share gains or are you seeing a better macroeconomic backdrop as you unfolds, what do you have embedded in there.
We used the base broad economic forecast that you would be looking at as well for 2020, but specific improved trends is reflects the improved trend. We saw in 2019, particularly l., Jim and if you recall its first half were comping lower share positions within LG EM.
Within that business, then hopefully on the RBS side outside of our if I'd, which we continue to exceed expect continued strong growth both there and external embellishments.
We had a.
Negative impacts from the volatility just around the.
If situation and so forth. So that's a we do expect an improvement overall, but lot of its just comping some weaker trends that we saw particularly in the first half in L. Jim.
Okay and then for my second question, an RF I'd legacy every RF ideas been growing pretty steadily at call it 20% or so a year.
How does that compare to us smarttrack in terms of their growth rates, what does it add from a technology standpoint to Avery.
And which particular end markets are you getting incremental exposure to I think you called out industrial and some and retailer believe so it just more clarity there. Thanks.
Yeah, So smarttrack.
With a leader in developer and manufacturer and our if I'd inlays, the new technology brings us in areas such as NFC, So near field communications as well as a sensors around moisture and temperature sensors sensors and so forth.
And a number of new applications I mean, they obviously serve the based apparel business like we do but they also bring a number of new applications such as interactive garments that provide enable people for for example in ski jackets to have real time interaction.
Through social media using connected and smart appliances toys, there's a number of various end applications and from an end market perspective increased expansion exposure within retail and then also in the automotive sector as well. So those are some of the new capabilities and technologies that it brings and as far as growth there.
Growth rate is below ours. So you we've talked about our long term growth objective being 15% to 20% plus organically.
We've been delivering around 20 as you suggested ghansham I were announcing the combined entity, we expect to be 15% to 20%, beating their growth was a slower was just they were growing slower in retail with every organically taking a bit a share each year in this space have been too just automotive saw a little bit of a slow down.
Particularly in 2019 for all the other reasons that we've been talking through so.
Very strategic acquisition brings us great capabilities, and we're confident and we're going to be able to deliver.
15% to 20% growth with the combined entity with margins above the average profile consistent with what we've been delivering so far.
Our next question comes from the line of George Staphos with <unk> Securities. Please proceed with your question.
Hi, everyone. Good morning, Thanks for taking the question.
First question I had was on the restructuring Mitch and Greg If you could provide a little bit more detail to extent possible I recognize it you can share everything obviously, but what's involved with the next restructuring action you mentioned I think combining.
Yes back office or organizational structure is between LG, Chem, and NIH and what else it involves down the road.
No might we see some further production capacity.
Melded together or.
Folded in given the investments that you've made and what did you say is your actual net benefit from productivity and restructuring actions. This year I know theres. Some that'll trail into 21 of beyond but what do you get this year net of transition costs.
Yes, I'll answer the first part of the question Greg can cover the.
Outlook for the savings.
So specifically George I mean again next wave of.
Structuring actions that Weve.
Recently unfolding.
The biggest single one there.
The charge in Q4.
Relates to the consolidation of the functions between higher Chen corporate and LG and so it's exactly what you called out we see an opportunity to move faster and reduce cost by better integrating and removing that extra functional level to be able to deploy more those resources locally.
For driving growth. So that's that's the largest.
Harry the restructuring there's a number of other initiatives that will comment on those in due time.
Yeah. Thanks, Mitch I think from the savings perspective in 2019, we had about 50 million of a restructuring savings net of transition costs in the year.
As we said earlier expect us to be about 30 to 40 million in 2020 with about 20 to 25 million of that being carryover from the actions that we did in 2019.
The largest part of that carry of of course coming in in the first half from that European footprint action.
Our next question comes from the line of Anthony Pettinari with Citigroup market Global markets. Please proceed with your question.
Hi, good morning.
HM.
LTM it sounds like high value products for a really strong for the year, but graphics and reflect his or down low single digits in for Q. I think you talked about a tough comp, but I think you also mentioned demand maybe being a little bit softer and I was wondering if you could tease out the impact of those two factors and kind of any thoughts on what you're seeing in graphics and reflect is in one Q.
What you expect.
Yeah, so not much of you yet and one can you just given the early start to the year and.
Where we are right now I think in the fourth quarter.
We did have pumping even split between the challenging comps, particularly in North America from prior year, and a little bit of slowness across the other regions from a graphics perspective.
So last year, we grew in the I think low to mid single digit range for Grafix overall for the year.
So we'd expect to get closer to that level for full year 2020 as well.
Okay. That's helpful. And then just on our if I'd the Japanese producer that made an announcement about printable I see that can maybe reduce tag prices to two cents or less and I guess without talking about any particular competitor do you think principal IC technology is something that.
His could potentially be impactful to the our if I'd business is it really something that's new just any just general thoughts about that in RF ideas.
Yeah that development, specifically relatively early stage I'm not going to talk too much about the specific development, but overall, we're quite close to the developments in the industry.
We're a leader in the space and we look at anything that expands the product offering including lowering the cost even if it's got more reduced.
Storage capacity as being good for the industry and good for us so.
It's something we're we're close to and following but.
Okay, if too many specifics, but there's a number of developments going on just like we're developing within per our pragmatic venture investment that we have another routes to low cost basically circuitry. If you will integrated circuits. So.
Yeah, we're close to it we think it could be exciting for the overall industry an exciting for us.
Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yes, thanks for taking my question.
So with regard to the deflationary environment do you expect to give all raw material benefits at your that you should be seeing back in for in the former price or do you get to keep or capture some of it at this point I guess, how should we be thinking about that as we look at 2020.
Yes, I think from a 2020 perspective right now, we're expecting pricing raw material input costs to be relatively neutral year over year. So as we went through the back half to 2019, we saw sequential deflation start to pick up in Q3 and little bit little bit more than in Q4 really largely centered around paper coming down in the back.
For the year.
As you know typically when we have price separate price down as a quarter. So lags could probably kept a little bit of that in the back half of last year and it will pass that through more.
Ended the is we enter 2020, so I'd expect 2020 to be closer to neutral from a pricing raw material input cost perspective, and just to build on that we don't think of it is passing through necessarily endo for its basically each of the we're talking to the average and every single region. Every single product category is different so it depends on where the inflations half.
Opening as far as across the spectrum between our base and higher value segments as well as whether its paper or more chemicals base right now, it's more paper based which all of us and all of our competitors tend to be equally.
Exposed to from commodity standpoint so.
It varies for going to continue to manage it think we as I commented on the do it successfully through the last inflationary cycle and now we're in a modest deflationary our guidance assumes that.
As Greg said relatively net neutral.
Oh good.
Question comes from the line of Adam Josephson with Keybanc capital markets. Please proceed with your question.
Hey, guys section micro O'brien filling in for Adam.
Thanks for taking my question.
Just one I Jim quickly.
Obviously nice margin expansion. This year can you talk about sort of what your outlook is for 2020 and how far you think you can take that.
Yes, our expectations I know you Jim as you said, we had a margins up well over a point in 2019, and we'd set a more sitting here a year ago, we were targeting 10% margins in Belgium, and 19, we delivered a little bit better than that or expectation and 2020 is to continue improving our margins and we're targeting 11% or better in 2020.
On a path towards our long term target of 12.5% or higher so we're continuing to improve era or expect to continue improving 2020, and then further improvement again in 2021.
Okay. Thanks, and then just back to input cost for a second you mentioned paper has been deflationary probably the biggest.
Can you can you just give us a sense of how deflationary, it's been just on a percentage basis.
Yes, I think for the full year 19, we still had net inflation year over year, starting to see that deflation in the back half I would say kind of in the low low to mid single digit ranged from percentage perspective, what we're expecting into 2020 is kind of low single digit deflation.
Consistent with what we talked about before about appointed a half for so a price down as well in 2020.
And much of that carryover exactly on both fronts.
Our next question comes from the line of Jefferies. The caucus with JP Morgan Securities. Please proceed with your question.
Thanks very much.
He is smart trucks up a profitable business or can you talk about its profit characteristics in rough terms.
Yeah. So overall I mean, I'll just talk about the business and Jim So we talked about EPS, we expected to be a hit in 2020.
Related to integration cost and everything else that goes along with the first year of acquisition.
Next year, we already expected EBITDA margins.
Their EBITDA margins now or above our company average there'll be above the company average again next year, just like our if I'd business and we expect could be commensurate with our if I'd business as EBITDA margins in 2022, so thats a.
Whether profitability is now and we expected to be comparable to our existing horrified you business in a couple of years time.
Okay, great and.
In terms of raw material costs year over year in the fourth quarter, where they down about 10 million roughly.
Yeah. So in Q4, we were down as I said, a minute ago kind of low to mid single digit percentage from a deflation perspective.
Particularly in largely Enogen, because that's obviously, where we use the primary amount of our our paper. So item for instance doesn't use as much papers a percentage of its materials.
Our next question comes from the line of Paretosh Misra with member capital markets. Please proceed with your question.
Thanks for taking my question.
First on the on a Friday side is there any interest to grow.
Any other technological capability in that business for example.
Maybe scanners are sensors or maybe more printer, so maybe even some software.
Yes, so we overall, we've referred to as a building out leveraging our if I'd to build out our intelligent labels platform and one of the reasons for the shift in the languages to not limit ourselves to thinking just about the at the time, you HF RF I'd inlay technology.
So yes, we are looking broadly beyond the specific technologies that weve look from a legacy standpoint had.
We already are in the printers business. So we do manufactured printer harvoni enabled printers.
We have we are investing more and more in the information solutions capabilities, which information solutions as a key aspect of RBS is core business as far as managing data between the retailers and brands and the their globally outsource apparel manufacturers so building on that.
And as I mentioned earlier.
Smarttrack actually does bring some sensor technology with it as well. So we're looking primarily around technology that link the physical to virtual worlds and enables the internet of things so heavy focus around the inlays capability and looking at other.
Other capabilities on the periphery do invest into enable further growth.
I say, thanks, and then on the the any LCM base business. If you could maybe just talk about the AD.
I'd inflation deflation, but just the supply demand balance that you're seeing.
And when do you think.
You might be an environment, where you might be able to raise prices.
Yes.
We.
Sorry, if your question about what the supply demand environment as I think we've talked about that overall, but what were outlook is going into two.
2020 on growth overall, the volume trends have been improving in second half 19, we expect continued improving the 2020.
And from a pricing standpoint, we're very disciplined look at ourselves being the market leader not just doing what's right for a business, but the industry and when I talk through managing successfully through the inflationary cycle raising prices.
Multiple times to move ourselves.
To where one of the business to be and adjusting courses, we started to get into deflationary cycle. So our pricing actions, we talk about a broad base here, but it's very specific targeted customer by customer product by product and so thats, what informs our decisions around pricing both up and down.
Our next question comes from the line of Neel Kumar with Morgan Stanley investments. Please proceed with your question.
Great. Thanks for taking my question I.
Can you just talk about you're keeping some volumes through the fourth quarter and what level. They had been that so far in January .
Sure. So again as we talked about a little bit earlier, our volumes, particularly in LG Chem were a little bit stronger in Q4, and they had been earlier in a year. So now Jim the first half as we said volume and mix was a net down year over year in Q4, we started or the back half we started to see improvement in volumes.
Including in the fourth quarter.
As we picked up some that share gain as we've talked about already.
Overall, the read in Q4 is difficult month to month because of timing of holiday shifts Thanksgiving Christmas moving a little bit earlier every week every period. So the overall trend macro that Greg laid out is right when the focus on.
As we go into January January is also very difficult to read into all of East Asia because of lunar new year is relatively meaningless as far as a trends.
Outside of that what we're seeing in January is consistent with the revenue guidance that we're giving.
With looks like again around timing of holidays, and so forth there might have been a little bit deferral of some shipments in North America from Q4 into Q1, a little bit maybe a much more shipments that we would expect in Europe in Q4 versus Q1, so the basically bounce out until it and when you look at organic growth in the first quarter that will be our for largest price headwind year over year.
So that I have an impact on on the quarter, certainly compared to the full year impact on price.
Okay, Great that that's helpful. And then you mentioned that 2019, Capex I was a bit later due to delays in the spending but in your 2020 capital spend guidance is still come down about 30 to 35 million can you talk about what's driving that and if it's going to any capex a decent run rate to think about going forward.
Well, we have our long term, we laid out a five year capital allocation plan, which basically had $250 million on average spend over that period I know that's a loose average we spend a little bit more than that the last couple of years.
I did say that we would have a bid to higher during those two periods, we've been able to spend a little bit less partially because of the delay as Greg commented on as well as weve found ways to.
Spend a little bit less on the existing projects that we had planned.
So we are five year average that we've laid out is $250 million, it's less than that in 2020 as weve as we walk through and if you.
Pull back from the numbers. We've also discussed we've gone through a period of recapitalization of our footprint in North America, Europe , which was a key driver of.
The greater investment in 2018, and 19, and obviously, that's now complete and that's not something that.
Happens all that frequently.
Our next question comes from the line of Christopher caps with Luna Loop capital markets. Please proceed with your clients.
Yeah. Thanks for taking my questions. So just a follow up on Smarttrack because the way you described the profitability of that business I'm trying to understand why you're suggesting there would be dilutive. It looks I think it you said, it's more profitable than your RV I asked segment or at least consistent with your.
Our if I'd portion of your segment and we know what we paid for the annualized sales rates. So just trying to understand or you're just not or if you're not excluding your integration costs as onetime in nature.
Ascribed to the dilutive as it looks like it should be accretive.
Yeah, Chris. So this is Greg so modest negative in 2020.
As you said include some of our integration project management cost for that integration as well some interest costs related to the funding of that acquisition and then of course related to amortization. So I think earlier, Mitch was referring to EBITDA margins.
Being at or or above sorry, our company average and similar to our existing or if I'd business.
Obviously, we haven't closed the deal yet so we're still working through the exact amortization impacts, but that will have an impact at the EPS perspective, so right now with the integration costs and the incremental interest costs related to it we expect a modest negative in 20, and then as Mitch said earlier roughly breakeven to slightly positive in year two.
Okay and then.
Within your algae EM segment, you describe some of the.
Hi growth categories as sluggish I think graphics in particular can you just elaborate on what may have changed there because the the cadence of that business I think had been generally a pretty positive or sustain at decent growth trajectory. So just wondering if there was an inflection in the quarter or anything specific.
So.
So.
Contributing to the weakness and in that business. Thanks.
This is your question about graphics.
Yes, graphic specifically I am.
That's a Greg talked through the growth that we saw a all of 2019, specifically in Q4 there were headwinds.
Around tough some tough comps and so forth.
Aside from that the graphics within LG M.L., Jim vast majority their revenue is tied to consumer Nondiscretionary graphics is a little bit more cyclical given that it's tied to car wraps and other things that can win a period of uncertainty be deferred for a bit. So generally as you think across cycles. This one's a little.
A bit more cyclical than the rest of labels and graphics materials.
Overall, though we saw growth for 2019, specifically within Q4, as you'll see quarter to quarter Theres Some choppiness.
Our next question.
This is from the line of George Staphos be off any securities.
Thanks to follow on questions guys, thanks for taking them.
First of all Mitch can you talk a little bit further about.
How you view the strategy for I chairman, how it's been evolving.
Company I think has.
Considering for several years now that it's a core business and you view it as analogous to LG Chem in terms of what you can do to improve margins.
Certainly from the questions that we get from investors.
Clients don't necessarily always see it that way so how do you see the strategy, Nigeria evolving and with this restructuring.
How do you see the management structure, changing or or not within with NIH and Thats question number. One question number two can you just update us on sustainability trends as regards closing the loop on your products from our if I'd to tell GM.
Well material. Thank you and good luck in the quarter.
Thanks, George So from industrial healthcare material standpoint, just broadly and this is a near adjacent see two labels and graphics materials, it's a pressure sensitive material.
The leverage our adhesives capabilities, both innovation as well as just the capacities that we have as well as its the coating capability. So if you were looking the plants that will look similar to the specialty assets that we have within LG him differences there for used for functional materials.
They're not printed on so it's the adjacent he is very much from a backend perspective. They are separate markets. So we will continue to have separate leadership.
Running these businesses.
As we do today, so that is overall, what the link is to L. GM and the synergies what we've been talking about over the last couple of years is.
Creating more linkage and that backend manufacturing R&D and so forth as well as the support functions integrating that so that we can hide have very focused dedicated commercial and general management.
Leveraging that core capability across the two to attack the markets.
And then broadly those these are spaces that have secular tailwinds within the market Theres a migration of.
From mechanical fasteners, like nails, and screws to tapes and adhesives, and that's something that we see the broad market that we want to continue to invest in so.
So that's on I am on sustainability.
Weve, obviously have made tremendous progress in an industry leader on many fronts on this and we were out early with the drive towards committing to a 20 instead of 2025 goals back in 2015, making great progress on that both on reducing the environment the impact of our operations as well as innovative products and solutions you asked specifically about our if I'd and.
Jim.
So within our if I'd RF I'd is a great enabler to support our customer sustainability goals with increased tracking you can have read much much greater reduction of waste whether that be in apparel as well as of within food and so forth. So our if I do we see is a great enable.
Sure.
To reduce waste through the through the entire value chain and from LG M. perspective, if we here we've been focusing constantly longstanding tradition that we call. It think thin so reducing the material content of our materials, but on top of that we've really been focusing.
More of our R&D efforts around.
And with innovative prostitute products that are focused on recyclability, so enabling more efficient recyclability the end package, which includes.
Clean Blake and we're focusing on more nexgen innovations there.
As well as.
Using more recycled content in or actual products, we had some launches that labelexpo that came out with the first ever.
Recycled PE face some liner face to face material as well as we cycle PE products and so forth. So we're using our innovation prowess to be able to continue to be the innovation leader for the space in that meeting our customers' sustainability goals.
Mr. Today, there are no further questions at this time ill now turn the call back over to you for any closing remarks.
Alright, well, thank everybody for joining us the fourth quarter capped a very solid year and we're positioned well going in 2020. Thank you all again for joining us and we look forward to seeing many of you at our analyst meeting in May.
Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation enough that you kindly disconnect your lines.