Q1 2020 Earnings Call
Welcome to Avery Dennisons earnings Conference call for the first quarter ended March 28, 2020. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time may 2nd.
To access to replay. Please dial 806 338 to eight four or one of four to 97791 0.40 for international callers The conference I'd number is.
To 1.30678.
I'd now like to turn the conference over to sit need unfair Avery Dennisons, Vice President of Investor Relations and Finance. Please go ahead.
Thank you break and USANA materials, we released this morning depend demick is changing how we operate and myriad ways, including how we communicate with our buried stakeholders. We hope that you found or more extensive news release and supplemental materials, which are available at the investor section of our website helpful. In understanding both our results is.
Last quarter as well as recent developments associated with the virus. Please note that throughout today's discussion will be making references to non-GAAP financial measures. The non-GAAP measures that we use our defined qualified and reconciled with GAAP on schedule April four to eight of the financial statements accompanying today.
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We remind you that will 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.
We undertake no obligation to update these statements to reflect subsequent events or circumstances other than as may be required by law.
The call today dialing in from different locations are Mitch Butier, Chairman, President and Chief Executive Officer, and Greg Sullivan, Senior Vice President and Chief Financial Officer, and I'll now turn the call over to Mitch.
Thanks, Andy Hello, everyone.
Clearly the pandemic is having a huge impact on all of our stakeholders.
Situation has been evolving and unpredictable ways and the team is doing a tremendous job adapting to the new reality anticipating and planning for various scenarios.
Our first priority and this crisis has been and we'll continue to be protecting the health and welfare of our teams followed immediately by continuing to deliver industry, leading product quality and service to our customers.
We took aggressive in decisive measures early on to protect the health of our team.
And the crisis first developed in China, we provided and required face masks temperature checks and social different thing among other things within our operations.
We then implemented these best practices, another sites modifying them where appropriate at the virus rolled across other countries.
As a result, we've had fewer than 10 confirmed cases of the virus among the team to date.
I'm proud to be actions, we've been taking to help keep ARPU people safe.
In addition to protecting their health. We also took measures to soften the initial economic shock to employees. When we were required to close operations or where we experienced a precipitous drop in volume.
We delayed some of the restructuring actions, we had planned for the year.
We have extended salary continuation, particularly in jurisdictions with weaker social safety net and the identity and foundation has stepped forward to provide grants for employee assistance.
I'd like to say, thank you again to our team and especially the those in our plans for their tireless efforts to maintain our industry, leading quality and service through this crisis you were keeping each other safe meeting, our customers' needs and bringing a whole new level of agility and dedication to meet the unique challenges I.
Thank you.
Turning now to the impact on our businesses.
How did you saw in are published materials Q1 earnings came in higher than our expectations.
We'll provide a few quick highlights on the quarter and address any additional questions you haven't accuvant <unk>.
In L., Jim we delivered strong volume growth both from the anticipated recovery of prior year share loss as well as the demand surge late in the quarter related to the pandemic.
As you know we entered this year with a focus on protecting our margins in a period of lower growth and we beat our expectations on that front.
In RBL, Yes continued strong growth in high value categories was offset by roughly 7% decline in volumes in the base, reflecting shutdowns early in the quarter in China and then late in the quarter in other countries at the endemic spread.
These pandemic related headwinds in the base as well as a tough prior year comp drove the margin decline in this business.
The high value categories were up mid teens on an organic basis within RBS.
Enterprise wide or if I'd was up mid teens in the quarter.
As you know we have been continuing to invest in growth in these categories and that concludes our recent acquisition of Smarttrack.
This acquisition accelerates our strategy to build our intelligent labels platform that now spans both RV I SNL Jim.
Just a couple of months into our integration with Smarttrack, we're confident our combined capabilities position us extremely well to capture the long term growth opportunity.
Increasingly digitized world.
And lastly on the quarter. The H.M. team successfully delivered their plan margin expansion. Despite a drop in sales from lower industrial demand, especially for automotive.
[noise] focusing on more recent trends, it's clear that the early stages of this downturn or playing out differently than past recessions.
Label and packaging materials, our largest business serves essential categories that are experiencing higher demand during the pandemic.
In particular, our operations in Europe, and North America experienced a significant surge in demand in March and thus far in Q2, driven by food hygiene and pharmaceutical product labeling as well as variable information labeling related ecommerce.
Contrast, Barbie is which primarily served apparel market is seeing a significant decline in demand, reflecting widespread retail and store and apparel manufacturing closures.
Overall, we anticipate a decline in organic growth in earnings for the company. This year as anticipated strong volumes and essential label categories is more than offset by declines in category, serving apparel and industrial end markets.
We saw the beginnings of these trends in March, we which accelerated through April pointing to a substantially more pronounced impact to our second quarter results, particularly for our B. I guess.
It's still early days in the downturn, we expect that these trends will improve sequentially in the back half the year as retail and manufacturing reopens.
Due to our longstanding focused on innovation productivity and capital discipline. We entered this crisis from a position of financial operational and commercial shrink.
So the nature of the macro challenges is different than in past recessions, our businesses resilient across economic cycles. Historically, our businesses have rebounded quickly in the year following a recession.
Now, it's too early to call, but if the depth and duration of the economic impact across the cycle a similar to what we experienced in the great recession, we would be targeting 2021 earnings and free cash flow above 2019 levels.
That's where our financial position past scenario planning has ensured that we have ample liquidity and the strong balance sheet and we're targeting free cash flow in 2020 of more than $500 million comparable to what we delivered last year.
Our years of relentless focus on productivity and capital discipline continue to serve us well.
We are continuing to execute our long term strategic restructuring initiatives to enhance our competitive position their base free up resources to invest in high value categories and support our margins.
Mission to these long term initiatives, we are implementing short term temporary actions to reduce costs in the face of this disruption to global demand.
That said our strategic priorities are unchanged, we're protecting our investments to expand and high value categories, including or if I D. While driving long term profitable growth of our base businesses and we remain confident in our ability to continue to create significant long term value for all of our stakeholders.
Over to you Greg.
Thanks, Mitch Hello, everybody I'll speak briefly to our financial condition and then our outlook.
As you know one of our key strategic pillars has been our dry for increased productivity.
As a result, our businesses are stronger and more agile today than ever before with the ability to generate additional productivity to help us manage through this crisis.
Another key strategic pillar of ours has been strong capital discipline.
This discipline reflects our focus on creating long term economic value in terms of both capital efficiency and allocation.
It has also been the frame we've used to build a strong balance sheet.
In short our long term scenario planning has prepared us for the downturn, we are now experiencing.
That planning, let us to terminate our U.S. pension plan last year and a highly opportune window.
Extend our revolver two years ahead of schedule, which we initiated before the pandemic and issue long term debt in advance of the recent market disruptions.
Today, our net debt to adjusted EBITDA ratio is 2.0.
Below our long term target of 2.3 to 2.6.
And we have ample liquidity.
We renewed our 800 million dollar revolving credit facility in February improving its terms and extending the maturity date to 2025.
We also completed a 500 million dollar debt offering in the quarter to fund both the Smarttrack acquisition as well as the repayment of debt maturing a couple of weeks ago.
In light of uncertainty regarding availability of commercial paper in this environment as well as relatively favorable terms under our revolver, we drew $500 million under this facility in March with the six month duration.
Our near term capital allocation priorities conserve cash while supporting our long term value creation goals of delivering faster growth in high value categories alongside profitable growth of our base businesses.
We're continuing to ring fence, our investments in high value categories, while curtailing our capital spending plans in other areas of the business.
Specifically, we are reducing capital investments by $55 million for the year, resulting in a spending plan in the range of $165 million to $175 million.
We're also heightening our focus on working capital.
Our efficiency on this front declined in the first quarter.
Selecting the late March closures that impacted many of our customers, resulting in delayed collections and higher inventory levels.
We're targeting significant improvement and working capital levels over the balance of the year.
And it's worth pointing out here that we increased our receivables reserves at the end of Q1.
Consistent with our standard relatively conservative accounting policies.
Well, we don't currently have significant concerns here, we do see some heightened risk in certain areas, particularly in areas, where you've seen extended industry shutdowns.
Turning to shareholder distributions at our April meeting the board voted to maintain the dividend at its current rates.
While we have taken a temporary pause on share repurchases.
Shifting to our outlook given all the uncertainty regarding global demand, we have suspended our annual guidance.
We plan to arrange to call it.
Update call sometime later in the quarter to let you know how things are playing out.
In the meantime, I can speak to some of the pieces of the equation that we can see now.
Based on April trends in which sales are down roughly 18% versus prior year.
We expected our second quarter sales will be down 15% to 20% on inorganic basis.
As continued strength in LPM is offset by declines in RBS and to a lesser extent graphics and HM.
In particular, we're assuming that RBS sales will be down roughly 40% in Q2.
Based on recent rates currency translation represents a roughly 3% headwind to reported sales growth for 2020, and a 28 million dollar headwind to operating income.
And we expected Smarttrack will add roughly one and a half points to the company's reported sales growth in 2020.
Note that the sales and earnings impact from this acquisition are split between LG and RV is based on the sales channel.
Sales through converters are captured LTM to leverage our strengths there while sales through RBS is traditional channels flow through the RBS segment.
And we anticipate that the 2020 sales split will be roughly 60% LG Chem and 40% RBL yes.
And we expect to generate restructuring savings net of transition cost $50 million to $60 million this year.
The actions, we're taking should generate carryover savings of approximately $60 million for 2021.
And we are targeting roughly $120 million of short term temporary saving some belt tightening and other actions such as reductions in travel and other discretionary spending.
Do you use of overtime intense and some furloughs.
And keep in mind that most of the temporary actions. We're taking are expected to be a headwind for us when markets recover.
And we are targeting to generate roughly $500 million a free cash flow this year.
In summary, we are very well positioned to navigate this challenging environment and we look forward to coming out even stronger when our markets recover.
Now we'd open up the call for your questions.
Thank you.
Ladies and gentlemen, if you will like to registry question. Please press star one fall by the four on your telephone.
You will hear three teleprompter acknowledge your request. If your question has been answered then you would like to withdraw your registration. Please press star one fall by the three if you're using a speaker phone. Please lift your handset before entering your request.
To accommodate all participants we ask that you. Please limit yourself to one question and one follow up and then returned to the Q. If you have additional questions. One moment. Please first question.
Our first question comes from the line of Gosh, Punjabi with Robert W. Baird and company. Please proceed.
Hi, guys. Good afternoon hope everybody is doing well.
Yes, Hello, Jeff.
On slide six when you talk about backlogs within the LTM segment, any just give us some more.
Color on what exactly you're seeing historically I. Thank you business has been pretty has had pretty short lead times. So what do you think that's different now and then related and then sort of on the RV is side.
Greg I think you mentioned, 40% declined five units in Twoq, you would that imply that RF ideas also negative on the quarter.
Yes, I'll take the first part of that question, Greg can take the second part so as far as you normally you're right absolutely Reagan Tom as you know we do not normally have much in the way backlogs in the LG EM business, we fulfill.
The majority of our orders within 24 48 hours and so it's unusual for us to have the extended backlogs log extends into the weeks a couple of months at one point.
That was from two effects one was.
A surge in demand. So orders if you were to look at it particularly between weeks Twelves. The last week at March through the third week in April.
Both in North America in Europe orders were up in the 40% to 80% range, depending on which week you are referring to so orders were up tremendously related to increased and consumption as we've talked about as well as the inventory build both along the supply chain as well as pantry loading.
And then that combined with a with the.
Surge happened right at the same time.
He has particularly in Europe, where the backlogs are longer in North America little bit increasing backlogs, but not not too much in Europe, and the same time, where the pandemic was hitting particularly in France, and we have one of our largest plants in France. Another very large plant Luxembourg right in the border with France, and so we had.
Some employee absenteeism understandably so during that period. So we are now shipping record volumes out of our facilities and quickly chewing through that backlog.
Thanks, Mitch and then on your other question gone someone RBL, yes to your point as I said earlier, we expect RBS to be down around 40% in the quarter.
We're seeing the biggest impact that we think in April we were down closer to 50% around 50% in the month of April and that's really driven by the extended retail closures that we've seen and a number of areas in our factories are close so for instance in South Asia in Central America number of.
Factories that we serve as well as our own plants have been shut down pretty much the entire month of April. So we expect April to be the worst of it but continuing to be down about 40% for the whole quarter and of course, given that a large portion of our if I'd business is related to apparel, we would expect RF ideas and to be down commensurately, a bit as well given just the overall impact.
Next on the apparel industry here, particularly in April.
Got it and then on slide 13, where you have your outlook as it relates to the financial crisis. Your comments on RV I think graphics.
Don't expect them to experience steeper declines of demand relative to 2008 2000, I can you just give us more color on that thanks, so much.
Sure Ghansham, so we expect a deeper could decline initially.
Last recession, particularly focused on our be asset was down up to 20% for a couple of quarters in a row.
But in that situation, while there was a dramatic drop in demand and there was a lot of inventory in the system and inventories have since been much leaner.
We obviously did not experience all of retail being closed and apparel factories being shut down and Thats really what the big impact is right now within when China shut down early in the crisis, we wish our operations were largely not entirely but largely closed down for a couple of weeks.
Now more recently late April really started late March but really April it's essentially all of South Asia, and Latin America largely closed.
So that is having a big impact so clearly going to have a bigger immediate impact than what we saw in the last recession now.
Similar to the right last recession.
We would expect a bounce once the recovery begins people still need apparel, and we would expect that there'd be a.
Resurgence once things get back to back to quote unquote normal. So this is something that we are closely watching and managing through and I think one of the things that we've seen while the market has been obviously extremely challenging as far as our position our global footprint has been appointed advantage early on in the crisis, we were able to supply.
Products that we normally would supply out of out of China supply out of other countries such as Vietnam.
Later in the crisis.
Next that we would normally supply out of Honduras. For example, we were supplying from China. So this has been appointed.
Relatively strong position that we've been able to leverage but clearly can offset the what's going out to the marketplace.
Okay.
Our next question comes from the line up George Staphos with Bank of America. Please proceed.
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Hi, everyone. Good morning, Thanks for the details and.
Congratulations on your efforts with covenant with your employees guys. I guess first question I had I'll take you back a bit off of what Gotcha teed up in terms of Rvs can you comment on what you're seeing and how omnichannel.
May ultimately help or maybe is helping.
On the volume side, recognizing again lives are down significantly so far.
Then I guess kind of the parents medical is why are we not seeing that much benefit now suggests that theres less demand for apparel, given everybody's working from home and do you there for worry perhaps to snap back down the road won't be as strong because it will be much more of a work from home mode than we're used to given.
Past periods.
Yeah. So a couple of questions there, Georgia and so as far as what we're seeing right now I mean, RC revenues tied directly to our direct customers. Our the apparel factories, we and customers are the retailers and brands, where we get specked in but our direct revenues to the apparel factory. So if.
They are shut down and anything going through omni channel or the internet ordering would be of inventory, that's the retailers and brands already have largely in the western markets, because thats, where most of our bid and businesses.
So that's what we're seeing directly as related to what's happening within the apparel manufacturing.
Industries.
As far as Omnichannel, absolutely Omnichannel is picking up its just from a smaller base omni channel is a smaller portion of overall apparel sales retail still the biggest channel for apparel and so retail is shut down to that obviously is going to have an impact on overall demand as well.
So.
Internet ordering is picking up we see this is a relative strength as we've talked about about our position, but we are to enable is faster supply chains shorter lead times.
In RF ideas related technology that we see as something that will in the past we've talked about at about providing higher quality more accurate visibility inventory and a greater velocity to velocity in the supply chain. We're also now interacting with customers about how it can get to touchless retail and reduce the amount of any interaction at the retail level. So.
So these are we continue to see ourselves extremely well positioned being the market leader in RF I'd and as we look to build out the intelligent label platform and with the additions of Smarttrack that we're going to continue invest here and we see tremendous opportunities all that we saw before and maybe more so for as people are focusing driving more efficiency automate.
And not just for the sake of speed and lower cost.
But also from a standpoint.
Cashless interactions.
Okay.
I'll come back in terms of my my Pearl question later, but the other question I had was just on the cost reductions.
The 50 to 60 million this year the carry over 60 million next year can you.
Give us.
Cadence if you will in terms of how that should flow through and similarly that 120 million of temporary savings how should we.
Feather that into our models and how would we recognize there's a lot of unpredictability here.
How do we then pull that out of a model so that were not double counting and creating two five a barrel a bar for you to reach at some point. Thank you.
Hi, Thanks, George on your first question on restructuring as we said we expect in this year somewhere between $50 million to $60 million of savings.
About half of that is still carry over from projects that we completed in 2019 with the biggest one being again the European footprint project that we've talked about quite a bit that.
The savings starting to kick in the middle part of last year, So really that the 50 to 60 million to be largely spread evenly throughout the year given about half of that as carryover. There's a number of projects that have been initiated around other parts of the company that are.
Being put into place here, especially around some of the businesses that have been heavily or more heavily impacted so.
That will start to pick up in the back half of this year and have some carryover effects into next year as well as we talked about earlier.
The temporary cost levers as you said about a $120 million much of that some of that we started already of course when it comes to things like travel reductions.
Head count freezes, reducing overtime temps in businesses that are more heavily impacted et cetera. So we've largely started much of that already.
Some of the other areas when you start getting into furloughs and some smaller pieces of that savings bucket really started more recently as we've seen more extended closures in a number of countries but.
For the most part we started that temporary cost savings already and will continue managing that depending on the length in depth of the downturn here.
Our next question comes from the line of Anthony Pettinari with Citigroup Global markets. Please proceed.
Good morning.
Although it looks like your hey, it looks like your provision for doubtful accounts doubled and one Q and many of your label converting customers are much smaller than you and presumably have less access to capital. Just wondering if you could kind of summarize the health of your you're converting customers and if there's any particular region or customer base sense potential.
One area of concern and just how do you think about the potential impact in risks to Avery this year and beyond.
Yes, Thanks, Anthony I think as I mentioned in my earlier comments that the bigger areas, where we increased reserves in the quarter were really around some of the business that are that are hit a little harder, so, particularly apparel as well as in some of our businesses like the graphics business within LG Chem and some of our customers there.
And overall.
Our collections generally and if we look at April our general crop collections have largely been inline with what we would have expected, but as I said, there's a couple of pockets here and that's some of these businesses that are had deeper as well as some of the areas, where we've seen complete industry closures as I mentioned for the last four or five weeks in South Asia Central America for instance, so those are areas that we've built up some.
Reserves.
From a converter perspective, we haven't seen.
Much or have an anticipated as much of a challenge from converters generally are converse Erin.
Better shape overall, so we haven't seen many issues or anticipate many issues on that front at this stage.
Okay that that's very helpful.
And then regarding the decision to pause repurchases I understand that thats that that's prudent, but given you're expecting to generate over 500 million in free cash flow. This year, you're you're below your leverage target you don't have any maturities until 2023.
Just what would you need to see from a demand perspective or kind of in the broader economy or in the market to maybe revisit that decision.
Yes, so anthony as far as what would we need to see I mean for me. The biggest thing is just show stability in footing on as far as what the markets and I'm talking about.
Our end markets that we sell to and that would be the first thing.
This is a not a.
Normal recession, if there is such a thing but that does not being triggered by any type of the normal activity. This is being triggered by a pandemic and so out of being cautious we have slowed that down or it's for US we have done our scenario planning, it's been the strength of ours overtime.
And for US our bias is to lean forward when others pull back and we were prepared and preparing for a recession.
To do just that on multiple fronts.
This is obviously unfolding the way that none of us could have foreseen. So we are out of caution spending that we've maintained the dividend we're committed to that.
And we're going to continue to look for opportunities and what but wait for a little bit more a stronger footing on what but to world how things are going unfold across the world.
Our next question comes from the line of Adam Josephson with Keybanc capital markets. Please proceed.
Good morning, everyone Hope you and your families are healthy.
Thank you. Thank you have same for you.
Thanks, Mitch Mitch or Greg.
By the way this presentations terrific. Thank you for putting all these details on slide six of it where you talked about your our fight the pipeline being up north of 20% since the beginning of the year, but that you've had some trials delays can you just talk about how you think this situation will affect retailers airlines other.
Our RF I'd customer's ability and willingness for that matter to trial and adopt this technology I'm just wondering if perhaps some of them are and such.
Dire financial Straits that they're just not going to be able or willing to.
Incur that cost.
Sure Adam So I'll take that so thanks, good affinity for the fine investor materials. So thanks Cindy.
Yes, so the.
His line is up more than 20% as as you highlighted since the beginning of the year and 60% from where it was last year and a lot of that traction is in logistics food and beauty.
As far as and there's obviously been a good amount, there's a 17% increase movement in the apparel category into rollout or full adoption as well within the pipeline.
So.
Pretty good movement overall continued building momentum now most of that activity was obviously before the pandemic hit across the globe. So what we're seeing right now is some of the pilots. So first of all anything that was in adopting or right on the customers adopting continue to move forward. So those are where people already done the work and everything.
Nelson that's all moving forward, we're not seeing any hesitation there.
Within as far as trials, we have seen a slowdown in some trials as you'd expect within food if you're working through to support a quick service restaurant and now the restaurants, our clothes are only doing drive through.
Now obviously some of those are being delayed.
This is in our conversations with customers.
They are overall seeing the need for greater automation and need for greater technology, which are if I do use a key factor that's in the areas of food.
Areas of logistics were seeing a huge ramp up within the logistics. If you think about the volume of packaging going through E Commerce, and Thats likely the only increase so overall the discussions with our customers mix just depending on some trials being put on hold just because there is not the ability to run the trials in the example, I shared where the.
Restaurant or the retail stores might actually be closed one.
Two companies need to take just a quick paused to manage through the crisis.
But we're seeing other customers say, we've been talking about us now, saying, it's paramount that we adopt this technology and they want to accelerate what there.
How they adopted so overall, our conversations and give us continue to reinforce the confidence we have in.
This.
Business this product to clarify D. The building out of intelligent labels platform as we get to a more digitized world.
Thanks, but just one on margins if I may that given the short term measures that you're implementing and that restructuring expanded restructuring program that you talked but I'm just trying to get a sense of what you think your margins sensitivity will be this year to significant sales in volume declines I just I ask this year.
Smarts as Youve done a phenomenal job with expanding margins over the past.
30, some odd quarters, there and there at all time highs now and I'm just wondering what your Incrementals are just in light of these restructuring program. So the other short term measures et cetera.
Yeah, I don't think so the question.
I think given that some of the areas that we're seeing more of the challenge. If we think about within our B. I asked as well as graphics are and some of our higher value areas that are typically higher variable margins were looking at I guess decremental margins I would say around 30% range inclusive of the actions that we're taking this year.
So I think that if we see a recession similar to the level of decline we saw in the last recession, we'd be targeting to try to maintain our EBITDA margins. This year.
And we'll continue of course, if it goes deeper than that to look for other other cost reduction opportunities, but that's how we've been thinking about a generally.
Our next question comes from Joshua Spector with Qbs Securities. Please proceed.
Yes, hi, thanks for taking my question.
Just a question on LNG and your guidance around the growth. There I mean, you made the comment that you expect LP and this one better.
Looking triangulating, where your guidance is you might have LTM down around 10% organic for.
The June quarter, which is pretty similar to last recession performance. So just curious about the dynamic in the divergence between LPM within that segment and specialty and graphics.
Yes, so actually we as I said right now and April Oh, we're down about 18% in total.
The biggest declines in RBS, where as I mentioned were down about 50% and that's pretty similar for our graphics business also down around 50% for Grafix within LG.
At the same time, we continue to see strengthen our label categories. So our label business is up.
Mid to mid to high single digits in the month of April still so we continue to see strong strong performance in our label business within LG him as a whole down a little bit in the month of April given the.
The sharper decline in the graphics business, but continues to strengthen labels offsetting most of that decline within algea.
And do you think that label strength continues after you work through the backlog or is this mostly the backlog benefit that we're seeing over the next.
A few weeks two a month.
Yes, if we continue to feel again this quarter will.
We will continue to have good volumes as we work through that backlog.
Well, we also just see increased consumption driving part of this as well as people are eating from home a more there obviously using more packaged goods that is requiring more use of labels in that I think is.
Not just a.
Surge or pantry hoarding that type of thing. It's also just increased consumption of label material. So we would expect it to come down a little bit from the pace at its been.
Particularly in North America in Europe in March and April up a 10% or more than 10% on the label side, we would expect that to come back down a little bit as we move through the quarter.
But right now largely expecting the label business too.
Stay relatively strong and stable as we move to this.
Our next question comes from Neel Kumar.
Morgan Stanley investment research. Please proceed.
Good afternoon <unk>, Thanks for taking my question.
You mentioned still expecting to deliver 2021, EPS and free cash flow greater than 2019 levels can you just talk about what level conviction you having that based on your scenario planning and the range of outcomes.
Just be helpful to get a sensitive and puts and takes and perhaps any incremental levers any disposal in meeting those targets. Thanks.
Yes. So overall the level of this is around scenario planning so the downturn look similar to what we saw in the last recession. That's what tells US we would expect to be able to recover that in 2021. So that's what's in that assumption now clearly, it's paying out where theres a bigger impact in the first quarter of.
This recession, that's unfolding right now.
But if you look at the economic activity overall, and our growth relative to economic output over two year cycle follows what we saw in the last recession, we'd expect to be back in 2021, and this is just really reinforcing the point.
About.
How our topline has performed across cycles, we have what we've traditionally called the post recession bounce.
Part of that was in historically because of.
Restocking of inventories and so forth, where we saw destocking early on we're not seeing that so much in l., Jim, but just given where overall end demand isn't our outlook could follow that general pattern, we'd expect to be a north of 2019 levels again for both earnings as well as a free cash flows I laid out.
Great Thats helpful and then within LTM, you're talking about continuing to see it demand surge in Europe in North America in March and April, but a declining south Asia, because a lockdowns, what's causing the differential terms consumer behavior is there just.
Hey loading activity from those customers and perhaps different concerning the E commerce impact.
Sorry, it's out of your question.
Sorry go ahead.
Asset write downs in South Asia has really been to the extended shutdown. So for instance in India. Most of the month of April.
Our factories and much of the.
Factories, we serve have been shut down so it's just the longer.
Shutdown in some of these countries versus what we've seen in North America in Europe on how that's playing out across the different countries.
Our next question comes from the line of Jefferies Secaucus with JP Morgan Securities. Please proceed.
Hi, Thanks, very much I do have a question about the first quarter the margins and LCM were pretty terrific in that.
Thank you are operating profits were up I don't know 27 million on flat sales.
How did you do that are or if you had to look at the $27 million where did it come from and is there a very positive price raw material variance that continues.
Yes. So we did have strong margins as you said really driven by again the strong volumes that we had on the label side and we didn't really start to see the slowdown on.
Some of the businesses like graphics till the very end of the first quarter. That's that's now moved through the second quarter at the same time as you said we have seen.
I would say some low single digit sequential deflation as you move from Q4 to Q1.
And some low single digits price changes, we've moved across the last few quarters as well.
But overall net benefit between pricing deflation as well still year over year as well as sequentially. In addition to the strong volumes that we've talked about already in the the label side.
For my my follow up on your RF I'd revenues.
How much of revenues come from ongoing customers and how much of revenues tend to come from new business that you book each year.
So in other words, how much is the business dragged down by the poor retail environment and how much is it boosted by the new business that you're picking up this year or that you pickup in any year.
Yes, Jeff I think I know you're so.
Wouldn't characterize how much new customers versus existing customers. It's more of new programs are adoptions, because a lot of.
Particularly in apparel is adoptions of our if I'd for existing customers. So the way to look at it.
The vast majority of the growth that we've seen where we've seen 15% that we target 15% to 20% plus over time is from new adoptions of new Rollouts. So that is.
The growth the way to think about to is from new program Rollouts.
So.
Majority of the business 90% of.
Legacy RFMD business of the company and then with Smarttrack, 75%.
Of the combined businesses are in apparel.
And so good chunk that obviously is going to be linked Sophie's as you look at Q2, obviously given that the majority of that is existing roll program Rollouts and so forth, Italy, clearly be impacted by the downturn in apparel.
Our next question comes from the lineup John Mcnulty with BMO capital markets. Please proceed.
Yes, thanks for taking my question.
I can back maybe back to the raw material front I guess, how are you thinking about the kind of relief that you may get as the year progresses, and do you expect to give the bulk of it back on the pricing cider or can you retain it just given that you have seen such such strong demand and at least part of the markets. There that are going to be benefiting from the raw material decline.
Yes.
Yes, so our focus.
It's all a question about where the.
Where the commodity prices go and were largely linked also the specialty categories, which are linked as much to capacity upstream from us as it is to actually just underlying commodity costs. So we did see some deflation sequentially here, we came off of a pretty big inflationary cycle as you remember a year. So go.
And so these things will move near term.
Right now our focus is on getting the surge demand and our ability to continue to have industry, leading quality and service through this through the cycles, what we're focused on right now.
One thing I'd call a big part of the margin expansion within this business was what we invested in around the restructuring, particularly in Europe at Q1 of last year.
The margins that we had actually had lower than average margins within Europe.
And lower than they historically have been because if you recall, we had some transition cost there and so thats transition costs being pulled out going into the restructuring and now we have the savings of the restructuring baked in that was a key driver of the expansion as well. So overall if you look at just the impact of mix and.
Deflation in price that's already baked in.
That that's definitely been a benefit but a lot of its cycling off where we were a year ago and you've got to count in the restructuring as well so.
Not answering your question directly we don't have pass through contracts and so forth. This is a competitive industry. Our focus is really right now and making sure the essential categories get the quality of service levels that they need as we work through the crisis.
Got it fair enough and then maybe just a question on the RB is front.
As the factories come on they may come on a little bit faster than that actual retail consumption picks up at least at the on site or brick and mortar retail side can you remind us in terms of the average if there is such a thing piece of apparel.
How should we compare the value of tags on a piece of apparel that sitting in a brick and mortar store versus the value that you would get on an E. Commerce driven sale like is there a way to think about that just that we can think about how quickly the business comes back on some of these factories come up.
Yes, I think your question is what the value of the our solutions on garment thats going through E commerce versus the government thats in retail that right exactly that's right.
Okay.
Equivalent the real thing here is it's mostly omni channel and so they don't have separate supply chains for garments that will be sold just.
Through the Internet versus.
Apparel garments that are going to be sold by retail so there are.
Warehouses, and they've got the retail stores, but virtually any buy online. The objective is that every garment is basically a part of the virtual warehouse. So they can pull from when you order on the Internet. So that is a there's not a real difference between the two it really just reinforces.
The desire for.
Better visibility because when you implement our if I'd you can reduce your safety stocks.
Order lead times, because it accelerates the velocity of the supply chain. So we really see again in the discussions we're having with our customers and just are are clear view on this businesses that BC. This is being a huge opportunity to help retailers and brands.
Managed through this challenging environment become out even healthier more successful at the end.
I think one to one additional point to add onto that I think as we see retailers as things start to open back up moving to more buying online and picking up in store to be able to do that you really have to have strong accurate inventory and thats for really arseighty continues to come in play as well.
So we feel good about being able to continue to drive our if I'd the more moves through these omnichannel type of.
Avenues.
Our next question is from Paretosh Misra with Birenberg capital markets. Please proceed.
Hi, Thank you.
And your I guess I'd business, so what's the biggest category all categories after apparel.
As the pricing for those taxes, similar to apparel or is that higher or lower.
Sorry, Greg was waving me on the on the on the screen that it was on mute sorry [laughter].
So the yes as far as the biggest category to after that if you look at logistics in food those would be some larger categories.
Thank you got to think about it both in terms of what are the end markets and then also the channels. So from end market apparel and retail are the is the largest category 75% combined of.
With Smarttrack.
So that's one angle and then followed by like I said food and industrial and so forth.
Smarttrack, we pick up an industry decent size industrial business, which includes automotive tags.
And then from a channel access we are going.
To market directly to end customers through our B.I.S., so that whether that be retailers or restaurants or actual logistic companies.
And then as Greg said some of the revenue of Smarttrack and previous legacy Avery Dennison was going through LG, Chem and thats more through converters, where the conversion will convert the tags in which so that that's the overall mix that we have as far as pricing.
There's there are some highly specialized tags, both legacy Avery Dennison and our smarttrack that.
Our very high price points, but they are low volumes and so I would say that.
Avery Dennisons legacy RF I'd business was focused more on the higher volume opportunities with lower approached price point, the high return and Smarttrack had more of a mix where half their business was in apparel and more of the volume focus and the other half was lower volume higher price point items.
Theres not a single answer to that question overall.
Got it got it and then just from our RF ideas from your customers viewpoint. So what is the ROI.
And.
That.
Hi, just for the apparel customer or.
How would you have how would you quantified I guess.
ROI from a the customers perspective, I think is your question so the ROI.
We don't share what we what the customers share with us and what we see but it's a it's a very strong return and the payback is very quick within a year. Once adopted. So this is its why you see the adoption happening across the full spectrum of types of retailers and brands I.
I think his question was across different end markets is the ROI higher for our customers across the different end markets.
The ROI is sufficiently high for return for every customer that we have interacted with.
Our next question comes from George Staphos with the Bank Bank of America. Please proceed.
Hi, guys. Thanks for taking the fall on.
I want to come back to apparel, Mitch so ultimately you're expecting a snap back when we come out a recession and history says that we should see that.
When we look though at the apparel business and how this.
Recession that were in the pandemic may affect apparel consumption and.
And.
Usage, what what are you baking and kind of a return to normal consumption or a change in mix or perhaps less consumption. What are you baking and right now.
Yeah, we've got a range of scenarios. So obviously the near term what we're talking about Q2 and so forth has is just about.
[noise] apparel, starting to ramp up a little bit later in the quarter, but not ramping up to a high degree. So let me say bake in if you think beyond that I think you're asking more of a longer term secular trend quite around.
That we've got a range of scenarios so for each of the businesses. We've traditionally you scenarios. We are very focused on what are the trends macros that are happening.
And what are the various disruptions and how do we.
Basically be part of that disruption to help.
That we're focusing on investing in intelligent labels is one where we are investing heavily we see that address corruptive technology and we've also been talking about investing in sustainability and that's an area, where we see an opportunity to lead.
And so specifically on this what would be the impact our assessment arse. If you recall our assumptions around apparel growth in general we were more conservative about what we thought apparel industry growth would be than a lot of the.
And the apparel industry itself assumed over the long run.
We think that continued focus around speed and velocity of supply chains will continue to reinforce our value proposition and thats, what weve been looking to.
Further invest in harden, particularly with our if I'd, but also an external embellishments, where we're getting more into the ability for late stage differentiation and personalization. So we've got a range of scenarios would you say baked in we've got arranged scenarios and plans accordingly to adjust to those ranges scenarios, but I would say our.
Plans and what we've communicated over long term.
Our assumption around the end markets were more conservative than what the actual apparel industry was using at the time for that so no tied directly answer I mean, George its arrangement.
Yes go ahead.
Yes, I mean, if you have visibility into that you might not are your customers assuming.
Back to normal whenever we reached normal in terms of the the demand curve.
Or they don't know where they assume a steeper increasing consumption or for whatever reason a lower rate of consumption on.
Apparel again, if were maybe working less from the Austin more from home, that's kind of where I was going with a question.
Yes, so I don't we're not hearing a lot of hypotheses about the big shift to about the macro trends other than.
Musings on loose hypotheses out there and if you remember the last recession, there was a lot of musings about.
Various things that we're going to macro change on the macro.
There were no longer couldn't be large trucks recipes in the U.S. and so forth and that'll change pretty quickly so.
I would think overall.
Fashion is something that people use for their own.
Way to identify and from a personalization standpoint.
That trend of personalization is been a long going trends and I think will continue and I think fashions a key element of it.
You read a lot about even on zooms people are trying to stand out and show that show their personality bit through what they're wearing so yes, it's mostly from the top up but.
That's a I think those trends, we will continue to be reinforced.
So we're not hearing any of our customers talking about a real shift your I think the bigger question.
It's really just.
And this is retailer by retailer brand by brand what is their strengths and ability to kind of manage through the challenging situation. So they can come out stronger on the other side and that's really where their area of focus is right now they're not thinking what will the market looks like in three years. There. They are really focused on the here now.
Our next question comes from Adam Josephson with Keybanc capital markets. Please proceed.
Thanks for taking my follow up mid just want sustainability.
It was obviously been it was a huge buzzword.
Over the past year, so in a big focus among packaging companies I'm. Just wondering if you could just recap what your customers had been telling you pre cove at about sustainability and the extent to which it was affecting their choice of packaging formats, and how that conversation has changed.
If there is any conversation.
You know in this coven environment we're in.
Yeah. So overall there with the discussions before.
The Craig Hoagland crisis.
Really around just the need to be for businesses to be more sustainable and reduce our environmental footprint and that's something that we have been a leader on we've embarked on our sustainability program broadly and back in 2015 and since then we've been reducing the environmental impact of our business.
30% reduction greenhouse gas.
And that's not relative thats on absolute basis, despite the growth.
More sustainably sourcing materials and now than it shifted more recently, which I think you're referring to Adam is to towards packaging in general and getting more sustainable packaging. So.
We had a number of discussions with them about and using our.
Innovation leadership to be able to make sure that we're meeting their needs.
I would say that there was out.
A lot of.
[noise] different.
Areas of focus and messaging about what that means.
And how that to accomplish that and the various packaging forms whether it be a paper or plastic or glass aluminum. So a lot of activity overall.
We continue to see opportunities to lead in that in that category that said this has.
Those are not the areas of focus right now that we're seeing I think everybody season is strategically important long term.
But that is not what's being focused on I think even.
With.
With what's happening I think the value of even plastic around hygiene and smaller packaging and so forth.
Seems to be more from a consumer level, something that's obviously valued and I think the.
One of the key values around packaging isn't just branding and imaging, but it's also to make sure products or sanitary and safe and that's a I think going to reinforce the value of packaging overall as we continue to think through how to do more sustainably as an industry.
Our next question comes from Jefferies Caucus with JP Morgan Securities. Please proceed.
Thanks.
Do you expect the price pattern to be and LG through the course of 2020.
Do you think prices will sequentially go up or down or you can.
We don't we don't have long term pricing contracts, Jeff So we.
Yes, so we don't have.
Contracts like that we don't have pass throughs and so forth. So we basically managed to the situation and it's a product bike product customer by customer.
Evaluation about where the price points a need to be.
So we don't have an outlook for that Jeff.
Thats why we often talk about it on a net basis.
Relative to deflation and mix and everything else so.
We'll take one last question.
Our next question is from George Staphos with Bank of America. Please proceed.
[music].
Hi, guys.
Hi, guys George Thanks for the time to follow up so last one from me.
One where do you think more the cost savings will be focused when we were looking at this 2021 and beyond is it more in all GM or more in RBS, obviously, given the volume effect and.
What proportion of the temporary saying that you called out could in fact become permanent savings neighbor is really good or productivity and on learned productivity. So perhaps some of these temporary savings become permanent how much would you say might be thank you. Good luck in the quarter and thanks for all the details.
George more of the stood.
The higher proportion of the cost saving initiatives are happening in the businesses that are seeing the biggest decline so where we've been seeing the biggest issues and RBS and graphics.
In the automotive areas with NIH and these are there areas that have we'll see a larger portion of the cost reduction initiatives.
Managing through that that volume environment that we have there from a overall perspective, and we will continue of course to always looking for new options for productivity.
We always continue to find new ways to drive productivity and thats been a strength of ours over many years. So some of these temporary cost levers will come back.
Well they come back at the same level of travel and things as they historically would be I don't know, yet and how long that Alaska, but we'll obviously continue to drive for productivity Thats a key strengths of the company something we'll continue to do as we move through the next next phase here.
Mr Boots, you're there no further questions at this time.
Okay, Great will thank everybody for joining us today. These are clearly a challenging times.
Extremely pleased and thankful to our team for again, the agility and the dedication they've been demonstrating to keep each other safe and serving our customers in this critical time in our as Weve kept I think the message work relaying here is while these will be more challenging times, we're well positioned for.
Our business is resilient and we're focused on continuing to deliver for long term success for all of our stakeholders. Thank you.
Ladies and gentleman that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day everyone.
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