Q2 2020 Avery Dennison Corp Earnings Call
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Ladies and gentlemen, thank you for standing by during the presentation, all participants will be in listen only mode and afterwards, we will have a question didn't answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at any time during the conference we need to reach an operator, Please press star zero.
Welcome to every Denison's earnings conference call for the second quarter ended June 27th 2020. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time July Thirtyth.
To access the replay please dial 806 338 to eight four or plus 140 to 9779 140 for international callers. The conference I'd number is 2193 0679.
I'd now like to turn the call over to Cindy Gunther Avery Dennisons, Vice President of Investor Relations and Finance. Please go ahead.
Thank you Madam.
No that throughout today's discussion will be making references to non-GAAP financial measures. The non-GAAP measures that we use our define qualified and reconciled with GAAP on schedule eight four to 89 of the financial statements accompanying today's earnings release.
We remind you that will make certain predictive statements that reflect our current use an estimate 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 reflect subsequent events or circumstances other than as may be required by law.
On 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 now I'll turn the call over to Mitch.
Thanks, Andy Hello, everyone.
Our teams have come together extraordinarily well and navigating one of the most challenging periods, we've experienced as a company.
The compounding effects of the health economic and societal crises or having a significant impact in our teams are markets and our communities.
Our focus continues to be on ensuring the health and welfare of our employees delivering for our customers supporting our communities.
And minimizing the impact of the recession for shareholders and I'm pleased to report that we are making solid progress on all fronts.
Since the early days of the pandemic, we quickly adopted and then adopted best practices to keep our employee safe and our plants operational while also taking steps to reduce the financial impact employees affected by necessary furloughs and lay offs.
Despite our best efforts to protect employee health. Unfortunately, we have identified roughly 225 confirmed cases over the virus with in our 30000 plus workforce with the majority of cases, apparently reflecting community spread rather than a work based source of infection.
Now before shift to our operating results I'd like to take a moment to comment on one other critical issue.
In response to heightened awareness of the profound societal issues of racial and other sources of an equity we are sharpening our focus on diversity and inclusion starting with significant efforts to listen to and learn from the experiences of employees, who represent racial minorities and other marginally as groups. We are incorporating these learnings in concrete plans to further support.
Our organizational values.
Now turning the business results.
While both top and bottom lines were down in Q2 compared to prior year results came in better than we expected just a quarter ago.
Following a sharp decline in April total company sales improved sequentially May and June.
A key focus of ours and this lower growth environment is on protecting our overall profitability, which we accomplished in the first half of the year.
Year to date adjusted EBITDA margin was up 30 basis points and in the second quarter. We've reported an adjusted EBITDA margin of 14%. Despite the significant overall volume decline.
This relatively strong margin performance reflects the successful execution of our strategies over recent years and the teams fast actions and implementing temporary cost saving measures as well as lower costs from incentive compensation.
Now drilling a little deeper into our trends by business.
Both LG haven't RBS came in better than our expectations on both revenue and margin while I am revenue was a bit short of our forecast.
Our label and packaging materials business, the largest component of L., Jim which serves a critical role and package goods and supply chain globally remains substantially open to serve customers as the pandemic unfolded across the world.
Our sites in Europe, and North America experienced a significant surges in orders mid March through April driven by both increased consumption and inventory build resulting in backlog that carried us into early June.
In some cases, our lead times were longer than usual due to pockets of disruption in some of our plants located in Cobiz hot spots.
Overall, though by leveraging our strong operational excellence the team delivered record levels of output for the better part of two months, all while keeping their colleagues safe.
Then in June LPM sales slowed in both Europe, and North America with a portion of the slow down reflecting inventory de stocking.
In China, LPM sales improved sequentially phone relatively steep declines in January and February while the balance of emerging markets, particularly India deteriorated as lockdown spread across the globe and continued through much of Q2.
That said demand across most emerging market countries countries improved sequentially in June as a lockdowns east.
In contrast to the surge we saw an LTM in the early stages of the pandemic, we experienced a significant drop in demand for RBS and the graphics portion of L., Jim with April sales down more than 50% organically for both businesses.
These businesses, then improve sequentially faster than expected in both May and June.
Enterprise wide, our if I'd was up over 10% in the quarter on a constant currency basis, reflecting the contribution of the recent Smarttrack acquisition was more than offset a 20% organic sales decline related to cobas impact on apparel demand.
With 75% of the RF I'd business still tied to apparel, we expect our if I'd sales in 2020 will grow more than 30% ex currency and will be roughly comparable to prior year on an organic basis.
Our project pipeline continues to expand with customer engagements now up more than 35% since just the started this year.
As these projects continue to move through the pipeline, we continue to expect 15% to 20% growth of our intelligent label platform over the long term.
As you know we've been continuing to invest to expand our intelligent label business, including through acquisition.
The integration of Smarttrack is on track to accelerate the growth in value generation of this now 500 million dollar revenue business.
By leveraging the combined channel access global footprint and innovation club capabilities of the two organizations in terms of product portfolio process technology, and larger R&D and business development teams. We are positioned extremely well to develop solutions that meet rapidly expanding customer needs with a particular focus on apparel and beauty.
Food and grocery and logistics.
In Cobot 19 has served to further strengthen the key drivers of our if I'd adoption with new supply chain models, demanding better speed and visibility the need to reduce staffing levels increased demand for food product sourcing and handling trace ability and increase importance of reduced contact at checkout not to mention an acceleration of omni channel retail.
Selling for apparel.
Now returning to the total company.
As we've said before we've entered this crisis from a position of financial operational and commercial shrinks.
Our business is resilient across economic cycles. So the nature of the macro challenges as different today than in past recessions historically, our businesses have continued to deliver solid free cash flow in periods of economic downturn and sales and earnings have rebounded quickly in the 12 months following.
We're doing more than just weathering the storm.
Our teams are adapting quickly to new commercial and operational norms responding decisively with best practice safety measures and prudent cost reduction protecting our profitability in a lower growth environment.
And our positioned well to capture demand as conditions improve.
Our strategic priorities are unchanged, we're preserving our investments and to expand in high value categories, particularly our intelligent label platform, 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.
I'll now hand, it over to Greg.
Thanks, Mitch and Hello, everybody.
No. This past quarter was one of the most challenging ever for the company, we are executing extremely well.
We delivered adjusted earnings per share of $1.27 cents for the quarter, which was better than our expectations.
As a pandemic driven decline in sales was not as severe as our April outlook assumed.
Specifically sales declined by 12% ex currency or 13.7% on inorganic basis.
And currency translation reduced reported sales by 2.9 points in the quarter.
As mentioned noted despite the drop in revenue, we reported and adjusted EBITDA margin of 14%.
Down 60 basis points, and adjusted operating margin of 10.7% down 140 basis points.
And we realize $15 million of net restructuring savings in the quarter with close to half of that representing carryover from prior year projects.
And we recorded approximate approximately $39 million of restructuring charges.
These charges relate to the acceleration of accents. The teams are taking this year in the businesses most impacted by covert 19.
And we're now targeting between 60 and $70 million have incremental net savings from restructuring this year with roughly half of that and RV is.
We also delivered roughly $75 million in net temporary savings in the quarter.
Made up of belt tightening actions such as travel reductions.
Reductions in overtime, and temporary labor and furloughs as well as lower incentive compensation accruals.
Turning to cash generation and allocation year to date, we realise $109 million our free cash flow.
With $144 million generated in the second quarter.
And we expect free cash flow to accelerate and the second half, reflecting normal seasonality as well as higher net income and a continued focus on working capital productivity.
With regard to the ladder. Our main focus this year has been the management of receivables and collections in the quarter were inline with our expectations.
We're also now turning our attention to reducing inventory levels, which have ticked up reflecting the timing of sales at the ended the quarter some strategic sourcing decisions.
As well as a little less focus given other priorities in the quarter.
We expect to inventory ratios to be back in line with our normal levels in the second half.
Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 2.1.
Below our long term target range of 2.3 to 2.6.
And we have ample liquidity.
With $800 million available under our revolving credit facility and more than $250 million in cash at quarter end.
And you may recall that we had drawn $500 million while were from our revolver back in March in light of the uncertainty of commercial paper markets at the time.
In June as it became clear that CP markets. It stabilize we repaid those loans.
As you know our long term priorities for capital allocation support our primary objectives of delivering faster growth in high value categories alongside profitable growth of our base businesses.
These priorities are unchanged in the current environment.
In particular, we continue to protect our investments in high value categories, while curtailing our original capital spending plans for the year by approximately $55 million and the other areas of the business.
And as noted last quarter, we are maintaining our dividend rate during this period of uncertain global demand.
And we have not yet resumed share repurchase activity. Following our decision in March deposits program as the crisis unfolded.
Turning to segment results for the quarter label and graphic materials sales were down 4.9% on inorganic basis, driven largely by volume and mix.
Sales were unchanged organically and label and packaging materials as modest growth in the base label and specialty label categories was offset by mid teens decline for durable label categories, reflecting the general slowdown and durable goods production.
Looking at Lpms organic sales trends by month in region.
North America in Europe, when from low double digit growth in a combined in March and April the high single digit growth in May and then declined in June as Mitch indicated earlier.
The trend in China was a bit choppy with a low single digit decline overall for the quarter.
In South Asia saw mid.
Team declines in both April and May reflecting the widespread closures, particularly in India with a significant sequential improvement in June which came in nearly even with prior year.
And finally results in Latin America were down low single digits overall for the quarter.
As Mitch mentioned in the combined graphics and reflective solutions business sales declined by approximately 30% organically, but improved through the quarter.
LG EMS adjusted operating margin increased 100 basis points to 14.8%.
As the benefits of productivity, including material re engineering and net restructuring savings as well as raw material deflation net of pricing more than offset unfavorable volume and mix.
And shifting now to retail branding and information solutions.
RBS sales were down 28% ex currency.
And 36% on inorganic basis.
Reflecting an approximately 40% decline in the base business driven by site closures and lower apparel demand.
As mentioned noted ex currency enterprise wide RF I'd sales were up more than 10%.
Driven by the Smarttrack acquisition and down 20% on organic basis.
And note that while LG and represents a separate and distinct channel have access to printers and converters purchasing our RF I'd inlays.
For simplicity during the integration in the second quarter, we decided to recognize the results associated with the Smarttrack acquisition solely and RV is.
Overall results in RBS reflects strong sequential improvement in demand every month since April.
Looking at the base apparel business the value channel held up best for the quarter, though still down close to 30% on an organic basis.
While premium fashion deteriorated the most.
Adjusted operating margin for the segment declined to roughly 1%, reflecting reduced fixed cost leverage in this high variable margin business, which was partially offset by aggressive cost control measures.
Turning to the industrial and healthcare materials segment sales fell 21% on an organic basis.
Reflecting an approximate 30% decline in industrial categories driven by automotive.
Adjusted operating margin decreased 370 basis points to 6.8% due to really reduced fixed cost leverage partially offset by productivity.
And now shifting to our outlook given the uncertainty regarding global demand, we're not resuming annual guidance at this time.
As we did in March and June we will arrange an update call in September to let you know how things are playing out.
In the meantime, I'll highlight some of the key pieces of the equation that we have reasonable visibility to now.
We expect that our third quarter sales will be down 5% to 7% on an ex currency basis, and 7% to 9% organically.
So far in July total company sales ex currency are down about 5%.
Or roughly 7% on an organic basis.
With LG Chem down about 6% RBS down about 5% and Sam down about 14%.
Our organic sales outlook for the third quarter assumes that LG and will be down mid single digits.
RBS will slow down relative to July and be down mid teens and item will show a modest sequential improvement compared to July.
As mentioned, we also expect to generate restructuring savings net of transition costs $60 million to $70 million. This year up $10 million from our view in April.
And we're targeting roughly $150 million of net temporary savings, which is noted includes reductions in accruals related to incentive plans.
And note that over half of the full year total for temporary savings has been realized in the first half of the year with much of that in the second quarter.
And keep in mind, the vast majority of the temporary actions. We're taking are expected to be a headwind for us when markets recover.
As Mitch said protecting our margins as a key focus for us during this period of slower growth.
Assuming we continue to see sequential improvement in demand trends through the second half, we're targeting to deliver and adjusted EBITDA margin for the full year inline with prior year.
And finally, we are targeting to generate roughly $500 million of free cash flow. This year roughly comparable to what we delivered last year with our targets, including an increase in cash restructuring costs associated with new initiatives.
And a higher cash tax rate related to repatriation of foreign earnings.
Our free cash flow target includes an expected $165 million to $175 million of spending on fixed and investments.
And another roughly $60 million in cash payments associated with restructuring actions.
In summary, we are very well positioned to navigate this challenging environment, we look forward to coming out even stronger when our markets recover.
And now we'll open up the call for your questions.
And thank you very much ladies and gentlemen, if you like to register a question. Please press star one followed by the four on your telephone you will hear Eightthree, Tom Tom Ford knowledge or request. If your question has been answered your like to withdraw. Your question. Please press star one three if you are using a speaker phone freeze lift your handset before and during your request.
And to accommodate all participants we ask that you. Please limit your questions to one and one follow up and then return to the Q. If you have additional questions. One moment. Please for the first question.
And our first question comes from line of George Staphos soon.
The Securities. Please go ahead.
Hi, everyone. Good morning, Thanks for all the details.
I guess my question to start is around.
Margin cadence to the extent that you can comment either quantified or qualitatively.
You know you've done a remarkable job so far.
Generating temporary cost save and restructuring.
Should we assume that you should be able to maintain.
The same level of year on year comparisons in profit dollars for the key segments and third quarter, assuming volume trends.
Don't deteriorate from what you saw in July or.
Would there be any reason why the year on year comparisons might be more negative in threeq versus twoq.
That's question number one question number two is on rvs.
Can you talk to what if any at this juncture conclusions you have on mix of the business as we look out into 21 and 22.
And as much as if we are working lessen formal settings in a more away from the office does that have any effect on from what your customers, saying premier apparel versus other types of apparel and then in turn the margin of price point that you are selling at with an RV I asked thank you guys.
Okay.
Thanks, George This is Greg I'll take the first part of that question release.
As I mentioned at the end there we expect our EBITDA margins, assuming obviously become in the range, we talked about for Q3 in and things continue to improve as we move through the back part of the year, we expect our EBITDA margin for the full year to be inline with prior year, so were slightly better than prior year in the first half.
And we started to see margins pick up last year in the second quarter. So largely for the second half are targeted to be roughly in line with margins that we had in the back half of last year.
Thank you asked about any comp differences versus prior year. The only the only major difference would be the European restructuring the really kicked in in the third quarter last year. So that was a benefit year over year still in Q2 that wouldn't be a year over year benefit in the third quarter.
But largely replaced with some of the new actions that we've talked about already.
And our next question is why don't you.
Sorry, I want to answer the second question [laughter] George you asked a few questions around RV I asked some conclusions on mix of business going into next year I would say right now we're not.
Conclusive on various general areas of mix other than the trend of continuing to improve the mix of RBS overall towards the high value segments. We expect that to continue as it has been maybe even accelerate so.
You look at with intelligent labels.
Within that business, we expect 15% to 20% growth over the long term external embellishments now $100 million business, we expect that to be growing well above average in that range as well so that would be one overall conclusion, we have a mix of business in general.
And then as far as impacts of mentioned, maybe less formal settings around clothing.
There are just.
Russians, obviously about maybe the casualization of the workplace and people working from home.
Could be a benefit to athleisure at the expense of more formal where for us should that hold true.
We're well positioned a good portion of our in sales is with performance Athletic business is now that's not hitting already theres quite a bit of inventory in the system.
In athleisure in general isn't to as seasonal into other categories. So thats down a good amount for us in Q2.
But we think that it's a very durable.
Segment of the market, where we are extremely well positioned and for US just overall, what we're seeing coded a lot of near term disruptions, but we think it actually plays to our strengths.
Both as far as market access global footprint and technological advantage, particularly around intelligent labels.
And our next question comes from line of Anthony Pettinari Citigroup Global markets. Please go ahead.
Good morning.
For for MGM is it possible to quantify or characterize any any benefit from lower raw materials net of price to Q and how you just generally would expect price cost to play out in the second half as you lap some pricing headwinds, but also pet chem prices are coming back up but other things like paper coming down.
Just how would you kind of characterize second half price cost.
Yes, any this is Greg again, so I think we've had a is I talked about last quarter low single digit benefits sequentially from where we ended last year through the first quarter.
Another I guess low single digit benefited from Q1 to where we were Q2 from a raw material basket perspective, and as you said started out earlier in the year in paper early Q2, some benefit from films and chemicals, and we are looking a little bit of pressure in the back half potentially depending on where where the macro goes in and we're all goes et cetera. So I think.
We may see given some of the sequential deflation we've had in the first couple of quarters, a little bit of a modest price Raul headwind in the second half sequentially from where we are at the end of the second quarter.
Okay. That's helpful.
And then do you think your LG Chem volumes into Q were consistent with what the industry was seeing or you may be picking up some share giving up any share.
I guess with negative volumes in to Q did you see any change in kind of competitive dynamics, maybe in terms of pricing rather behavior.
Yes, so overall if you look at.
We clearly think we started at the time that through some of the surge we saw speak specifically to the mature regions North American Europe. Some of surgery saw was inventory building and we think we're now seeing the industry and we are seeing inventory destocking.
If you look at our growth over really just going back marks through July.
The mature regions grew 6%.
Over the that period, so that's above what we've historically seen which we think is no not through the cycle. Yet obviously clearly that's above the average consumption within that business and I'm talking volumes right now.
As far as within the yes, a share question specifically, so we don't have all the share data in yet so we don't yet know the answer where we do see it. We do believe we did perhaps lose some very modest amounts of share early on in the cycle. We were our plants a couple of our plants were in position where the risk.
Little bit hot spots as I mentioned earlier.
So as we are ramping up.
Production and so forth and ultimately got to to the point of having record output, but not early part we think we didnt see a bit a share but overall within the range that we would.
We expect over time, we're confident it will be able to recapture anything that we did lose.
And the next question comes from one of Ghansham Punjabi from Robert W. Baird and company. Please go ahead.
Yes, thanks, everyone.
Oh no ghansham.
Hey, so Mitch just on its a follow up to Anthony's question on the you know LPM tail off if you will in terms of demand are there any specific verticals that you're seeing incremental demand weakness in LPM.
As it relates to your de stocking comment just asking because of the yeah. Most of the CPG companies that reported thus far have been pointing towards still healthy demand I.
I guess, which end markets are you seeing that destocking.
We're actually seeing it across the board. The surge we saw was an all product categories and we know we're further back in the supply chain and so you had the compounding factor effective.
Pantry loading which is what the end users would see but then you've got the with the end users and the consumer package goods companies have and then the converters as well into our converter customers are telling US yes. They did build inventory and they are now reducing inventory now that they all are comfortable across the network.
That there will be a continuity of supply we don't have a good read on exactly what it how much of it will be destocking versus end consumption as I mentioned over that five months horizon. There is a above average demand for our products.
That's what we're continuing to see and over the next month or two I think we'll be able to sort out exactly how much.
Destock and so forth and again the market data is not yet in a four particularly North America, yet so we don't have a good feeling that.
Within in General we believe the market for a film business in particular because of just the household and personal care, particularly household has done well from a market perspective, and we're continuing to see good growth in that category, just and that's where you probably see the big most exaggerated.
Increase in consumption.
Got it and then in terms of RF I'd I mean, obviously the apparel markets are quite challenged at current.
And that's about 75% of RF ideas can you just touch on what you're seeing for the other end markets and then just related to that the 40% decremental you recorded for the <unk> S and the second quarter is at the right number to think about going forward. Thanks.
Yeah, So I'll, let Greg answer the decremental margin question in a moment, so specifically around RFMD, yes, 75% of the business now with the Smarttrack acquisition is linked to apparel. So obviously for existing programs when their volumes are down of our customers.
The existing programs will decline.
We expect the ultimately apparel as it has in the past to rebound people are still going to consume close.
And we think we're well positioned within that and then so that's really what the what the driver is overall of the RF I'd decline, what we're seeing as far as activities both in apparel and outside of apparel, those who knew they want to do drive more automation increase their speech.
Need and we're looking at our by de are accelerating their efforts and those where it was maybe more earlier in the pipeline discussions definitely a lot more interest so as I commented.
Our pipeline for intelligent label programs is up more than 35% just from the beginning of this year and it's up close to 60% since last year. So a significant increase in about half of the pipeline growth that we're seeing is in logistics, so that area in particular standing out apparel and food.
We're still seeing a 20% increase in both those categories in the pipeline since the beginning of the year. The one where we're obviously not getting much traction right now and it's slow down as aviation.
It hasn't been any growth really in the aviation pipeline over the last well since the beginning the year for obvious reasons. So generally a very excited about the opportunities not only in apparel lot of runway ahead of us on that but also particularly driving within food and logistics.
Greg you want to Atlanta incremental margin.
Sure Yeah in the second question there. So overall when we look at the full Pino for the company. Our decremental margin was around 20% if I break that down as we talked last quarter. We expected the volume impacts net of the short term actions to be around 30% for the year. There was about 40% in Q2, and and we were expected that to be a bit higher than.
In the normal just given the bigger decline in the quarter and then we offset part of that volume net of short term action.
40%, we offset part of that with the restructuring savings as well as incentive compensation adjustments. So from an RBS perspective, obviously, given the size of the sales decline there impact was bigger and given the fact that they generally have higher variable margins as well and they had.
An impact in the second quarter from of course, the incentive compensation accrual impact as well. So we wouldn't expect that the change too much for RBS as we move through the back half just given the higher variable margins there.
And not repeating the adjustment on incentive compensation as well.
Next question is from Adam Josephson with Keybanc capital markets. Please go ahead.
Hi metrics, Cindy good morning, and kudos on that monthly sales trends why bother I'd just add it really clarifies the monthly trends. So thank you for putting that in there.
[noise] along those lines question on July as you said July sales were down 7% organically.
Obviously from April to June It went from down 17 to down 11, and then a down just seven in July so just at a high level much could you talk about why you're not assuming further sequential improvement from July through based on your Threeq guidance of down seven to nine of if anything you're assuming modest.
Deterioration from that down seven I'm, just trying to get a better understanding as to why.
Yes, we're expecting continued improvement in L. Gemini H.M., but it's really around RBS and we don't if you look at July itself.
Doesnt fully reflects what we just think is going on within apparel and brands from our discussions with them.
There seems to be a good amount a catch up in July.
Particularly south Asia started the ramp back up.
And doing some catch up on maybe some late back to school early fall season.
For us the key thing to watch and by the way July is one of the lowest month seasonally in the year for the apparel business. So it's not a good good benchmark overall as what I'd say.
So we're being up look.
Basically expecting continued improvement L. GMH M, a but july not being a good.
Baseline for how to think about the entire quarter four RBS.
As you look through it the key next area so back to school in fall largely getting behind us and these are seasons, obviously overlap.
Holiday is a key season for us and that's really September October and maybe early November that will be a key test for us about just overall confidence in the retail sector and a conference going into the holiday season, So that'll be the key necessary to watch and we'll be giving updates as we go through that.
Thanks, Thats it just one other omni on the temporary cost savings of 150, I think you said in the presentation that you expect the vast majority of those to come back next year under the assumption that sales recover.
Do you expect that to be a case irrespective of the magnitude of sales recovery next year or in other words or sales don't come back.
Might hardly any of those sales or cause excuse me come back next year and then just related late you said in the last call that assuming this recession is comparable to the great recession that you would expect 21 earnings to be above 19, I'm just wondering how this temporary cost issue fits into that.
Outlook, if you can talk about that thanks very much.
Yes, Thanks, Adam So I think as you said on the temporary cost actions were looking at about a $150 million this year.
If I break that down a little more than a third of that are kind of the most volume impacted piece, so things like overtime temporary cost furlough type of benefits.
About a third of it is or little bit more as belt tightening.
And that's something that a volume doesn't come back we can continue to manage it volume comes back sorry on the on the more volume related pieces, obviously that part would go up and then somewhere around 25% to 30% of it is incentive compensation adjustments as well.
Both short term annual incentives as well as long term incentives that are this year, so that part wouldnt.
Repeat and 2021 as well.
And the other part of your question just about expecting things to come back yet we've seen in past recessions, we bounce back quickly a in the year following the recession and to said that again I just said in the 12 months following whenever the recession and couple of we're not the foreseeing and everybody has their own assumptions about when when the spirit.
We will will conclude but we still expect that bounce back that you mentioned Adam.
And our next question is from Neel Kumar Morgan Stanley investments. Please go ahead.
Great. Thanks for taking my question.
And I can it looks like decremental margins came in around 23% in the quarter.
Well, there's generally inline with expectations I mean, just to kind of slow through margin, we should think about for the third quarter as well.
Yes, similar to the rest of the company I think I mean, I CIMB overall, the bigger declines we saw were an industrial particularly in the automotive categories, just given the automotive productions in the quarter. So those are there areas. We had the biggest declines I think when we look forward, we would expect automotive to maybe get a little bit better as we move through Q.
Three still expecting to be down I think we talked about before were down kind of mid teens in July and expect that to get a little bit better as we move through the quarter or modestly better as we move through the quarter.
So why don't expect decremental margins to be at a similar level I think overall HM in the total company, we talked about last quarter volumes net or short term actions is roughly 30%.
Areas like our Viasat sham, a little bit higher than that in areas like LTM, a little bit lower than that.
Great. That's helpful. And then just one on your corporate expense it came down pretty significantly to $11 million this quarter versus the $19 million to $20 million level in the last few quarters.
Is that a reasonable basis, I think about 32nd half of the year and how much of that is coming from permanent versus temporary cost savings.
Yes, so a big big part of the decline sequentially is related to the incentive compensation adjustment that I talked about.
So we would expect the back half incentive compensation accruals remain low but not to have the catch up that we sell in the second quarter. So we would expect a corporate costs to go to go back up.
Closer to where they were I think maybe still slightly better than the where they were in Q1, but certainly higher than what they were in the second quarter.
Next question is from Josh Spector you'd be securities. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
Just on free cash flow I mean, you reiterated your target for 500 million for this year just curious when you feel like you could be comfortable deploying some of the cash since your balance sheet is relatively good shape here and assuming things get better through the second half will improve through the second half a year.
Yes, Thanks, Josh So as you said I'm, we're still expecting deliver roughly $500 million and free cash flow for the year at the same time, our debt position in our balance sheet remains strong. So we continue to feel comfortable about our ability to continue investing in the business organically continuing to look for M&A targets, which we.
We're continuing to do as well and then also continuing to return cash to shareholders.
Which we've done by maintaining the dividend.
Throughout this crisis period, so far and we have lost share buybacks as we've talked about and that's something that well continue to monitor and evaluate as we move through the back part of the year.
Okay. Thanks, and just on smart track I mean, you've now on that for a little bit more than a quarter and I know last quarter wasn't exactly normal but are there anything you could point towards in terms of incremental positive surprises since you've owned it or where we should see perhaps more upside versus what you were thinking when you acquire the business.
Overall, the a integration and just.
It's going extremely well and actually ahead of head of schedule for us.
Synergy opportunities in most of that's growth synergy opportunities.
Our are on track is what I'd say.
The business in the quarter was.
Down from prior year, you know, it's got to link tied into a apparel as well, but down less than the average overall and we're seeing quite a bit of opportunity both in the.
Apparel and logistics space, combining the two strengths of the two businesses. So overall pleased with what we're seeing from a capability standpoint, the link of their R&D capabilities with our process technology capabilities, the footprint and just the complimentary a channel access that we bring.
Okay. Thank you.
Our next question is from Jeff Zekauskas from JP Morgan. Please go ahead.
Hi, Thanks very much.
What was the rate of change.
Change and volume in your L.P.M. business in July versus your Krasik girls business.
Yeah from a sales perspective in July as we've talked about a minute ago overall, LG Ams down about 6%.
With the LPM business being down kind of in the low to mid single digit range in graphics being down roughly in the mid teens.
Okay.
You know Athree is is usually a company that has had a good luck on economic growth, it's sort of an early indicator of all kinds of trends.
But you know its little bit difficult for you I guess to see those trends because of some de stocking like do you have a feeling of your business in general is getting better exclusive of the de stock for.
Or is it just too hard to tell you know given the markets you sell too.
Yeah, Jeff it's tough to tell when you talk about being early indicator in the past it was awesome going into a downturn, we had a good feel for it before and we actually would experience to the quarter to before everything else.
No. Other reason other than I would just saves kinda collective wisdom across the value chain, if people are being having a little more uncertainty rationing down inventory levels, because because we're further back.
We'd have a compounded effect for us and then on the flip side to your point when things were starting to stabilize and get better and inventories are starting to rebuild Oh, we would see the exact opposite effect in the surging demand. This is obviously playing out differently, where the surge came first a and everybody was concerned about just what was their continuity of supply.
It looks like and even in our industrial categories with NIH M., we actually had pretty healthy growth still in March and April.
Which were just automotive supply chain, making sure they had enough product of all the various categories. Because people are worried about running out. So this is playing out different across the businesses, particularly with two materials businesses than we've seen in the past and there is a lack of clear visibility of what's happening.
[noise] around and inventory levels, obviously at the pantry level and everything else.
From everybody we speak too.
Senses consumption of packaged goods continues to remain strong on a relative basis, particularly consumption. If you think of packaged foods a ticket package household care personal care, it's kind of on the normal growth rate there was inventory stocking earlier on but people aren't shampooing their hair anymore in this environment than they were before but there.
Cleaning their counters, if you will more in this environment and they were before so we do see some clear signs of some a different paths for different end markets.
But a little bit tough for us to tell right now we've got to get through the next few months to have a clear view on that overall Jeff.
Great. Thank you so much.
And over next question comes from the line of.
[noise] Heritage miserable Baron were capital markets. Please go ahead.
Thanks, and Hello, Mitch, Greg and Cindy So a question on your I guess I'd business. So.
You're generating about half a billion dollar and sales currently.
And you mentioned customer engagement is up or I guess, I think 35%. So how should we think up their revenue opportunity from this pipeline.
I'm trying to see if what's the typical revenue per customer or per adoption and Oh, if these future.
Customers potential customers could represent even bigger opportunities. Then then what you currently have.
Yes, so overall its with the pipeline growth that gets to our 15 or 20%.
Average growth that we're expecting going forward and we've delivered at the high end of that organically in the past so that's.
That's what that comes from specifically as far size of programs. There's a lot all different sizes of programs, we have smaller specialty programs in some categories and then very large volume programs or in other so it actually run runs the gamut if you will.
Across so.
Our confidence in our ability to grow this business.
At the 15% to 20% level is reinforced by the pipeline and just the increased level of insights we have front by the investments we've made and business development market development teams over time, and just signed finding more and more use cases.
Got it and then maybe as a follow up on that so you're selling some of these R&D product through converters and some are directly to customer is that only a function of then it would the end market or the kind of customers you have or is there some different strategy out of valuation that you're providing customers.
Yes. So there is from a channel a standpoint, so roughly 75% of the business is direct to the end users and 25% goes through converters.
Most of that converter leverage is coming through Smarttrack, and that's where we're looking to combine it with the strength of LG EM, but most of the businesses direct to and and customers is where the sale happens.
Great. Thanks, guys.
You're welcome.
And our next question is from Chris catch with loop capital markets. Please go ahead.
Okay.
Yes, So I had a question about algea margin trends in experts the expectation for how that May metric may play out over the balance of 2020, and maybe setting up for next year. So in the quarter operating margin was up 100 bets you called out some of the variances that contributed there, but so some of the reengineering benefits.
Restructuring savings could be viewed as structural or or stickier at least and you were able to deliver that margin improvement in spite of.
Arguably adverse mix with your highest higher margin graphic reflective volumes being down pretty dramatically more then and the that strengthen in the.
The label business, which is now sort of you know not reversing but moderating. So I'm just wondering if that Nick inflect, how does that set up for the margin trend over the balance of.
Of the year and how do you think about the margin.
Potential for that segment on them in a more normalized basis.
I'm looking forward. Thanks.
Yes, thanks, Chris So so again overall I talked about our EBITDA margins, we expect to be roughly flat to prior year, assuming the topline plays out as we've talked about for the whole company, we haven't given or not giving EBITDA margin targets by business, but when we look across the trends as I mentioned earlier.
We have had some positive net price and raw materials in the first half and LG EM.
Well, we see raw materials generally stabilizing a bit right now in a little bit of a modest headwind as I mentioned earlier on net pricing roles as we move into the back half in LG and otherwise I don't really see significant changes I mean normally we have a seasonal Q2 to Q3 a bit of a margin decline each year and.
Jim So normally you would expect to continue seeing that type of a trend as well, but otherwise not any other major trends that I would see affecting margins or through the back half.
And just a follow up and that is.
The the.
Just wondering if the mix improvement if there's an inversion in terms of the negative sales variances tied to the demographic and reflective business.
I'm being less negatives over the balance of year is that enough to move the needle on from a mix standpoint in there for margin standpoint.
That would be that the label business. Thanks.
Yeah, I think I know I mean grandmothers up.
Yeah, Let me just.
Overall, there's a lot of factors going on and I think but you should as Greg commented on Oh, our overall total company EBITDA margins, what we expect for the second half in full year.
And what we would reasonably estimate is actually pickup in margins in our B. I asked and I am, particularly our gas is the revenue.
Begins rebound on the sequential basis from the trough in Q2 and that will be partially offset by a moderation of some of the margins and LG Chem within LG M. You have some mixed benefits potentially around graphics coming back as you highlight and there are obviously a number of other factors and we really moved quite quickly.
On these temporary cost savings, which impacted the Q2. So there's a number of factors going different directions, I think overall take away I feel confident with total company margins even in this lower demand environment, we're going to be able to maintain our EBITDA margins for the full year in the second half that we if you first half as a starting point a little bit a moderation.
Well Jim for various.
Particularly tempered cost savings timing of set by the benefits coming from RBS and I am particularly RBS.
Next question is from George Staphos B of a securities. Please go ahead.
Hi, guys My last too I just wanted to first go back.
Partly to to cover Adam's question again, and then also your comments on to my question on ARPU I guess.
Now looking for guarantee we just want to make sure. So at this juncture. Your your view of Avery's ability to snap back post. This recession is no different it's all just a question of when the recession and that.
You know marks when that recovery starting on RV I guess.
Based on the growth that you're seeing in value added.
And the mix and after that you get there.
Looking forward at Argo, Yes should have at least the same type of growth and margin potential as it did prior to covered would you agree to both of those statements.
Yes, we expect this business is resilient it will bounce back the timing depends on what's going on in the macro and everything else.
And we are already I ask you know this.
Lot of questions around retail on apparel overall, when we look at the mix of that business.
It was below average how much was in high value segments. If you go back six years ago, five six years ago, even very recent more recently that a couple of years ago. It.
It is it's mix of high value segments, both intelligence labels and ex exterior embellishments.
We see being well above average as far as its mix. So some very strong long term secular growth I won't call and Tailwinds could just doing phenomenal job navigating the environment, but there are that's what we expect so absolutely and yes.
Thanks, Mitch and my other question on cash flow guidance.
Prior it was $500 million plus now it's approximately $500 million, which is noble given everything that's been going on you called out three things accelerated restructuring more taxes on repatriation and the inventory build early in the year is there anything else that would cause this.
Flight decrement and free cash flow outlook for the year, where did those three things capture thanks, guys and good luck on the quarter.
Yes, Thanks, George I mean, those are the drivers and when we just made I guess, a modest adjustment to our expectations on cash flow for the year again, as you said a little bit higher restructuring costs.
Cost.
Given the higher savings we expect this year end next year, a little bit higher cash tax rates and then.
Operationally were largely where we had expected a quarter ago, a little bit more work to do on working capital, particularly inventory as we talked about.
Thank you very much a good one.
And our next question is from Adam Josephson Keybanc capital markets. Please go ahead.
Thanks for taking my follow up just my last two questions. One on LG EM sales trend. So mr., Greg so into Q down five July down six and then for the quarter, you're saying down mid single some modest improvement it sounds like sequentially within that are you assuming the L.P.M. de stocking will be over or are you assuming it.
Continued drag from the LTL from the LP I'm, sorry, I'm just trying to do you have to disaggregate those two in Threeq you.
Yes, Adam as I think I said a minute ago Jeff's question on July we've seen an L.P.M. kind of low to mid single digits in July graphics down mid teens, and that's really our expectation right now for the quarter is low to mid single in L.P.M. and graphics down in the mid teens. So we're looking at mid single digit decline overall for.
Our LG M. We've already seen in North America.
An improvement in July versus what we had seen in June I think in Europe. It's a question as Mitch already talked about a number of factors just as well as the August holiday period, and how things return there or not so I think you know to be a few weeks or so until we really get a better view of the trends in Europe.
Okay.
I do think I do I do just think the thing focus on it is the just and consumption. What you think is going to be happening going in both Europe, and North America elsewhere as well of course, because that's where the inventory piece will will work its way through and we didn't expect that the permanently stabilize.
It's a bit higher inventory levels longer term, we're hearing a lot of the.
Anecdotes as well as hard evidence that some a lot number of categories with our labels do you have increased consumption on a relative basis, but what's going on in the broader economy, because a lot of our.
VI labels don't just go on ecommerce. They also just go on.
Regular supply chain goods might help with the restaurant industry and everything else.
I think thats the bigger area to impact probably the second half is what your own assumptions are both in consumption. We know we are well positioned or are we feel good that.
It's going on in the focus around more hygiene.
Enhancing the focus around eating packaging and eating more disinfectants, which are labels go on and so forth.
So on a relative basis, we feel that the markets positioned well, we're obviously extreme well extremely well positioned within that market.
Question, a little more just what your assumptions are around the macro and when do we when we come out of this.
Yes, and that's just one one on Europe. So I think you your primary competitor in Europe talked about the market being out and you guys are down mid single on I think Anthony asked about market share and you said you might have to see that.
A bit of market share early in a quarter was that in Europe, specifically match and.
And was that just related to the cobot cases, you had in and you or inability to to operate normally as a result.
Yeah and I are.
Yes, those referencing Europe, specifically and.
Our comments a reference point of mid single digits versus comments of up 10 works.
Talking revenue the market is evaluate in terms of volume primarily and so from a volume basis were up high single digits.
Almost 10% within the quarter within Europe.
[noise] and there are no further questions at this time I will now turn the call back over to you for any closing remarks.
All right well. Thank you everybody for joining S and a once again I want to thank our entire team for their tireless efforts to keep one another safe and continuing to deliver for our customers.
I look forward to speaking on the view later in this quarter when we provide an update until then stay safe everyone.
And ladies and gentlemen that does conclude our conference call for today. We thank you for your participation everyone have a great rest of your day and you may disconnect your lines.
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