Q3 2020 Avery Dennison Corp Earnings Call
[noise] welcome to Avery Dennisons earnings Conference call for the third quarter ended September 26 2020.
During the presentation, all participants will be in a listen only mode. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time October 24th two.
To access the replay please dial 800.
6338 to eight four.
Or one for road to 9779 140 for International callers. The conference I'd number is 2193 zero 680 I'd.
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 Frank Please note that throughout today's discussion will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined qualified and reconciled with GAAP on schedules 84 to 89 of the financial statements accompanying today's earnings release, we were.
We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward looking statements are made subject to the safe Harbor statement included in todays earnings release.
We undertake no obligation to update these statements to reflect subsequent events or circumstances other than as may be required by law.
All today are Mitch Butier, Chairman, President and Chief Executive Officer, and Greg Sullivan, Senior Vice President and Chief Financial Officer, I'll now turn the call over to Mitch.
Thanks, Andy and Hello, everyone.
Once again, we are proving our resilience across business cycles.
Revenue Canyon significantly better than we anticipated at the start of the quarter, which.
Find with our cost reduction actions enabled us to deliver 15% growth in adjusted earnings per share and strong free cash flow in the quarter Despite lower sales.
We said coming into this year that a key focus of ours in a lower growth environment was to protect our overall profitability, we're delivering on that promise.
Margins expanded significantly in the third quarter, reflecting the successful execution of our long term strategies as well as the team fast response, and implementing temporary cost saving actions in a better than expected volume environment.
Even with the sharp drop in volume in the second quarter, our year to date adjusted EBITDA margin is up 80 basis points to 14.9%.
Our strong performance reflects the agility of our teams, which have come together extraordinarily well navigate and one of the most challenging periods, we've experienced as a company.
In this environment, our focus continues to be on ensuring the health and well being of our employees delivering for our customers.
Supporting our communities and minimizing the impact of the recession for our shareholders and I'm pleased with the progress we're making on all fronts.
Now despite our best efforts to protect employee health. We've identified roughly 350 confirmed cases of the virus within our 30000 plus workforce with the majority of cases, apparently reflecting community spread rather than a work based source of infection.
Fortunately about three quarters of the employees impacted have already recovered.
Well all sites were operational throughout Q3, the recent surge and confirmed cases in a number of the regions in which we operate highlights the continued uncertainty of the current environment.
As well as the importance of remaining vigilant with respect to safety and agile in meeting customers needs.
Now a quick summary of the business trends.
All three segments came in better than we expected at the start of the quarter on both sales and margin.
LTM sales there was still down in the third quarter compared to prior year improved sequentially due to a faster than expected pickup in the global graphics business.
Overall, our label and packaging materials businesses moderated sequentially as expected.
North American emerging markets, having picked up a little faster than we expected well Europe came in a bit weaker.
From the start of the pandemic until now.
Volume trends for label and packaging materials had varied by region.
From March through September.
Only in North America were up mid single digits, while volumes in Europe were up low single digits in.
In both regions, we experienced significant volume surges during the early stages of the pandemic followed by a moderation of growth due principally to de stocking.
Now as we look across this period overall, our North America business has been trending faster than the long term average for the region, while Europe has been trending a bit below the region's long term average.
The emerging markets picture has been different Asia Pacific volumes have been flat overall from March through September with volumes of raising the mid single digit growth in the third quarter.
Well its good to see the recent pick up in demand here. This is still below the long term trend for the region.
As for RV I ask demand improved much faster than we anticipated back in July down only 5% organically for the quarter compared to the roughly 35% decline you saw in Q2.
Enterprise wide horrified he feels grew by 65% in the quarter on a constant currency basis, reflecting 20% organic growth and the contribution of the Smarttrack acquisition.
The strong growth of our RV business was primarily driven by apparel, particularly within the value segment of the market.
Outside of apparel, we continue to see increasing interest in new applications within logistics as well as food and grocery.
Specifically, we are working with logistics companies to assess the technology in light of the accelerated shift to ecommerce with many providers operating at holiday like peak volumes throughout the pandemic.
Given the stress that this is put on supply chain globally. We're now working with several companies to demonstrate how our part D and related solutions can drive an increase in both the throughput and accuracy of their operations were.
We're active on multiple pilots in this area and have some smaller deployments already underway.
The momentum in food related end markets. Likewise continues with increased pilot activity among quick service restaurants, as well as retail well from the U.S. and emerging markets.
These applications are focused on driving labor efficiency and improved availability of products.
Similar to the apparel that migration to E commerce for food delivery is strengthening the use case for our Friday in this market.
Overall, we continue to expand our Friday project pipeline.
Summer engagements are now up close to 45% since the start of this year.
As these projects continue to move through the pipeline. We continue to expect long term growth of 15% to 20% as we built our Friday into a broader intelligent label platform.
Which is now a more than $500 million business.
Returning to the total company we.
We entered this crisis from a position of financial operational and commercial strength.
And as I mentioned earlier, our businesses are once again proving their resilience across economic cycles are.
Our teams are adapting quickly to new commercial and operational norms responding decisively with best practice safety measures.
Checking our profitability and a lower growth environment, and positioning us well to capture demand as conditions improve.
So the nature of the macro challenges is different today than in past recessions.
Historically, our businesses have continued to deliver solid free cash flow in periods of economic downturn in sales and earnings have rebounded quickly in the 12 months following.
Our strategy remains clear, we're continuing to invest to expand in high value categories, particularly our intelligent label platform, while driving long term profitable growth of our base businesses.
I remain confident in our ability to continue to create significant long term value for all of our stakeholders.
I'll now turn it over to Greg.
Thanks, Mitch and Hello, everybody.
This year, certainly been very challenging we're executing extremely well as evidenced by our financial results this quarter.
We delivered adjusted earnings per share of $1.91 cents up 15% over prior year and significantly above our expectations at the end.
As the end market demand picked up faster than we had assumed in July.
Our tight near term cost controls in this environment combined with the flow through benefit that better than expected volume. In addition.
In addition to our ongoing structural productivity actions drove strong margin expansion in Q3.
Sales declined by 1.3% ex currency or 3.6% on an organic basis.
Currency translation reduced reported sales by half a point in the quarter.
Despite the drop in revenue, we reported an adjusted EBITDA margin of 16.1%.
Nearly two points in an adjusted operating margin of 13.1% up 140 basis points.
We realized $13 million of net restructuring savings in the quarter, most of which represent the benefit of projects initiated this year.
We recorded approximately $11 million of restructuring charges right.
Roughly half of which relates to noncash asset impairments.
And we continue to target between 60 and $70 million sort of incremental net savings from restructuring this year.
With roughly half of that in R&D, yes.
We're also on track to deliver roughly $150 million in temporary savings from short term cost reduction actions this year, which will be a headwind for us as markets recover.
Turning to cash generation and allocation year to date, we realized $342 million or free cash flow.
Up roughly 5%.
With strong growth in the quarter, driven by lower capital spending and higher net income.
And I'm pleased to report that we achieved our targeted sequential improvement in working capital productivity, particularly with respect to inventory turns.
Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 1.9 below our long term target range of 2.3 to 2.6.
As we've proven our ability to manage through the compound in global crises. We face. This year, we've begun to again put that leverage capacity to work, including increasing our level of distributions to shareholders in line with our long term capital allocation strategy.
And we announced today that the board approved a 7% increase to our dividend rate and we resumed our share repurchase program late in the third quarter.
Turning to segment results for the quarter label and graphic materials sales were down 2.6% on an organic basis, driven by volume and mix as well as deflation related price.
And sales were down roughly 2% organically and label and packaging materials.
Growth in specialty and durable label categories was more than offset by a decline in the base business.
While graphics and reflective sales were down about 8%.
As Mitch mentioned the graphics performance represented a strong sequential improvement compared to the roughly 30% decline we saw in Q2.
With steady improvements must be throughout the quarter.
As expected the overall trend for the label and packaging materials business moderated sequentially follow.
Following the Q2 demand surge in the mature markets with improvement over the course of the quarter in all regions.
And Mitch touched on the overall volume trends by region for the label and packaging materials business since the start of the pandemic.
Looking at the segments, the total segments sales trends by region in Q3.
In North America, Belgium sales were up low single digits organically for the quarter with a strong rebound in graphics and LPM inventory destocking largely behind us by the end of July.
In Europe, we're de stocking began about a month after we started to see it in North America LG Chem sales for the quarter were down high single digits on an organic basis.
With a fairly steady improvement in the trend as the quarter progressed.
In the Asia Pacific region, which grew modestly for the quarter on an organic basis, likewise sell a fairly steady improvement in the sales trend through the quarter.
Which was led by growth in China in India.
And finally, we've been very pleased with the resilience of Belgium's business in Latin America, which delivered mid single digit organic growth for the quarter.
Belgium's adjusted operating margin increased 170 basis points to 15.2%.
The benefits of productivity and raw material deflation net of pricing more than offset higher employee related costs and unfavorable volumes.
Shifting now to retail branding and information solutions RBS sales were up 5.2% ex currency.
And down 4.7% on an organic basis.
A strong growth in our high value categories was more than offset by roughly 12% decline in the base business.
Driven by overall lower apparel demand.
Looking at the total apparel business based in high value categories combined the value channel outperformed all other channels up nearly 50% for the quarter.
As Mitch indicated ex currency enterprise wide art, I'd sales were up 65% and up 20% on an organic basis.
Adjusted operating margin for the segment increased 60 basis points to 12.1% as it.
As the team's productivity and cost control actions more than offset unfavorable volumes.
Turning to the industrial and healthcare materials segment sales declined 7.6% on an organic basis.
Appeared to the 21% decline in Q2.
Reflecting sequential improvement in trends for automotive applications, particularly in China and North America.
And adjusted operating margin increased 110 basis points to 12.1%.
Due to favorable product mix productivity and deflation net of pricing, which more than offset the impact of lower volume.
Now shifting to our outlook given the continued uncertainty regarding global demand we are not resuming annual guidance at this time.
As we have done since the pandemic started we'll arrange an update call in December 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 underlying sales trend that is organic growth and the benefit of Smarttrack acquisition will be similar to or better than what we saw in the third quarter.
In addition, as announced back in January we benefit from an extra week in the fiscal year, which is expected to add roughly a point to our full year growth rate or about four points to the fourth quarter.
And this should add roughly 10 cents of EPS to the fourth quarter and full year.
Which obviously represents a comparably sized headwind to 2021 revenue and earnings.
The anticipated headwinds from currency translation have diminished as the year progressed the new.
The negative impact from currency now stand at roughly one point to sales growth and $9 million in operating income for the full year based on recent rates.
As mentioned, we expect to generate restructuring savings net of transition costs of $60 million to $70 million this year.
And we're targeting roughly $150 million of net temporary savings, which includes reductions in accruals related to incentive plans and.
And note that more than 80% of the full year estimate for temporary savings has been realized year to date.
And again, the vast majority of the temporary actions that we've taken are expected to be a headwind for us when markets recover.
As Mitch said protecting our margins a key focus for us during this period of slower growth.
Assuming we continue to see stability in our end markets. We are now targeting to deliver an adjusted EBITDA margin for 2020 that exceeds prior year.
You may have noticed also a modest benefit in the quarter from a lower tax rate, which reflects our current full year adjusted tax rate estimate of approximately 24% in line.
In line with our long term expectation for tax rate in the mid 20% branch.
And finally, given the strength of Q3 results, we're now targeting to generate over $500 million of free cash flow this year.
And this target includes an expected $165 million to $175 million in spending on fixed investments and and.
And another roughly $60 million in cash payments associated with restructuring actions.
In summary, we're very well positioned to navigate this challenging environment and we look forward to coming out even stronger when our markets fully recover.
And while there certainly continues to be macro economic uncertainty looking.
Looking ahead to next year, assuming a modest recovery in sales we are targeting to maintain our EBITDA margins. The once again generate over $500 million in free cash flow.
Now before we open the call to questions Ive, a special announcement to make some of.
Some of you already know Cinedigm under our head of Investor Relations for most of the last 20 plus years has decided to retire at the end of December.
After supporting nearly 100 earnings calls this will be her last.
Over 25 years with the company. She has been a valued partner in resource to me niche in the rest of the leadership team as well as the investment community.
We are very grateful for her so many contributions over the years.
Well of course will Ms., Cindy we're happy to welcome John heavily back to the corporate team to lead Investor Relations.
John has served in a variety of important finance roles over his time with the company.
Within the businesses and at corporate including a few years working with Cindy and Investor Relations. So we'll definitely hit the ground running.
I too want to thank Cindy for her years of partnership and support to me as well as to the organization at large so it's truly been a pleasure Cindy and I and the entire organization venture. The investment community are very thankful for a few years of Peter ship partnership and support so thank you again, thank you both.
And with that we'll open up the questions.
Thank you.
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To accommodate all participants we ask that you. Please limit yourself to one question and one follow up and then return to the queue. If you have additional questions. One moment. Please for the first question.
Our first question comes from George Staphos.
With Bank of America. Please proceed.
Thank you hi, everyone a good day.
Cindy congratulations its a at the end of an era.
And John Congratulations to you as well.
Thanks George.
It's a it's been fun. So I guess the first question I had.
Go back to slide eight where you're showing the 2019 sales by product category.
And you show that 15% of revenue for last year.
Was roughly driven by logistics shifting and other variable information.
Given what we see in this year and obviously that the pickup in E. Commerce is there a way to.
Update us on how much that portion of the pie represents now for 2020 and if there's any incremental you can give us in terms of how you think E. Commerce is both benefiting our if I'd and variable information for that matter.
Yes, George I think you're asking about just what the new mix of revenue from slide eight for 2020, I mean, 2000, twentys actually not going to be a great base line, just given what happened within Q2 overall, but clearly you'd expect.
With the significant growth in RF ideas, we build up the intelligent label platform, both organically and with the Smarttrack acquisition as well as a big piece of that being towards logistics as well as other and you'd see those pieces of the various pie is across the slides increase.
So we will update all this at year end, but I will say that even 2020 will be a great baseline. So we'll give you probably a bit of a more rounded out view going forward that we expected to evolve similar to what we have in the past George I'd also point out if you're assuming that all of the RF ideas in that 15% that would not be correct, we've captured apparel related.
If I may be in the 21% on that chart. Thank you Sidney I was and I was just using it as a as a stepping off point for Ford credit discussion, but.
Is there a way to comment.
Maybe just a quick follow on here on how much growth you've seen in.
Variable information and how much of that you would attribute to E commerce.
We are growing faster than average move in volumes in the variable information categories within how GM and clearly within Harvey I guess, it's a big driver now within RBS is mostly apparel still so that is the largest category, but as far as the pipeline pipeline is still growing.
And quite significantly in other areas, such as food and logistics as I mentioned.
Okay and then my other question I'll turn it over a course number two is.
Obviously done a so far are very very good job on.
On the temporary cost saves certainly you've had really strong margins.
How should we expect that temporary cost save and that spending to be metered back into the business.
As volumes pick up do we have to worry about a quarter or sometime in 2021.
You're looking at a particularly negative earnings comparison, because you've got the cost saves coming in maybe more or to me that the spending coming in more quickly.
Volume ramps up how would you have us think about that reintroduction of spending into the mix 21, and ultimately I guess 22 as well. Thank you.
Yeah. Thanks, George its Greg So again as we've said that the $150 million of temporary cost savings made up largely of three buckets. So incentive comp in the smallest bucket there and in addition to volume related savings as well some belt tightening and is there.
And as we've said before we would expect as volumes come back for the majority of that cost to return now how fast that returns, particularly that volume related piece will depend on how fast the volume returns, but even here at the end of the third quarter of course, we started to see with volumes coming in better than we'd expected a little bit of increase in volume related costs and when we think of things like overtime are temporary.
Labor and those type of activities, we start to see that coming back with volume. So that's something we'll be we'll be managing with volume segment by segment as it returns.
From a overall cost perspective, while we will expect to see that headwind from that temporary cost savings will also continue to see the benefit of the more structural cost reduction actions. The restructuring that we've done this year of $60 million to $70 million and then a similar level of incremental restructuring benefit next year as well.
Our next question comes from Gosh.
Robby.
With Robert W. Baird and company. Please proceed.
Yes, Thank you and Cindy congrats.
Certainly, leaving on a high note.
[laughter] [laughter] Atlanta.
It seems like it very well, but so if we go.
So if we go back to slide seven we have the monthly sort of organic growth throughout the throughout the course of the pandemic. It looks like you exited.
Threeq, you down 2% or so.
Rick you average was down 3.5% roughly and it sounds like you're pointing towards that sort of average for the fourth quarter. So can you give us a sense as to how October has tracked whether western you whether your possession rebounded relative to what you saw in Threeq you and then.
And then is there something we should keep in mind apart from the.
Extra a week or so in the fourth quarter.
That would get us to that average for Threeq Fourq you.
Sure. So you know as we as we said earlier, we're looking at for Q being at or better than the pace of sales grew.
Growth or decline in the third quarter and we're only a few weeks here in October I think the last couple of quarters earnings call. It's been a little bit later, so we had a little bit broader view, but after only a few weeks we have seen.
In improving trend so far in the month, so we've seen slight improvements, particularly in developed regions within LG him in pretty favorable so far in RBS as well early on here in October and where we think we've seen in the back part of Q3 as well as the early part of Q4 here for RBS is really as brands and retailers have been.
Gearing up for somewhat earlier in potentially longer holiday season. So we started to see that ramp up a little bit earlier in September we've seen a little bit of that at the beginning of October here as well and I think what we see as we're going forward is not really sure how that play out as we enter the back half of the quarter. So when we look at our B. I guess, how retail sales flow through I think will help help shape how.
Picks up later this year at the same.
At the same time as we talked about last year when the pandemic kids is when the spring season, we're starting to get underway in much of retail shutdown.
So its uncertain yet exactly how that will play out and how those orders will play out for the spring season is it comes in later this year and at the beginning next year. So we started out stronger and RBS, but we see a little more uncertainty, especially as we go through the back part of this quarter.
Got it and then in terms of your comment on margins for 2021, I think you said EBITDA margins roughly comparable to or at least maintaining a 2020 levels can you give us some of the buckets of that because you know $150 million of temporary cost savings is a very very big draw in terms.
In terms of a headwind what would be the major offsets.
Yes. So like you said that is a big drop in if we see that that will be partially dependent on how volume goes right. So with volumes being still uncertain will layer that back end as we mentioned a minute ago as volumes come back we would start to see those costs come back at the same time, one of the bigger offsets as the incremental restructuring we've talked about as well, which we expect to be about $70 million and.
Sure.
Thats why in my comment and we look this year to next year with a little bit of modest volume growth, we'd expect to be able to maintain the strong margins that we're seeing in this year.
Part of the other way we're thinking about it is also comping to 2019, so kind of the pre pandemic target. So looking at where we were in 2019 to 2021 or beyond when markets recover we will have a significant benefit from the couple of years worth of restructuring savings that we've been doing in the structural cost reductions over that multiyear period now that would be offset over a couple.
For years of wage inflation of obviously investments in the business and things like that but when we look at 19 to 21 Thats why we expect to continue to see margin expansion over that multiyear period.
Our next question comes from Neel Kumar with Morgan Stanley. Please proceed.
Great. Thanks for taking my question question.
So in his car if I'd are you still seeing evidence that youre us I'd engagements are accelerating how much of it.
How much of this is driven by not in all markets versus apparel any.
And in General and you see this business as opposed to code and winner as companies pushed more omni channel sales strategies.
Yes overall, we continue to see momentum build within RF ideas and related solutions as part of our intelligent label platform.
And its appeal.
Apparel continues we see it in the numbers the results, but even from our pipeline apparel, we're actually saw a pretty big tick up in early stage pipeline development as well. So in addition to companies moving through the pipeline. There is a lot more jumping into the mouth of the funnel. If you will as a theme just case for horrified.
He is getting stronger and stronger because of cobot as you mentioned, but just everything else that's related to driving more and more omni channel and just the increased efficiency automation.
Lower labor content that retailers and E. Commerce players are looking for so seeing that within apparel, saying that within food same use cases as I mentioned before that.
That's more business case in pilot activity, what were seeing largely in food and then within logistics. We have a few early stage deployments as well as quite a bit of pipeline activity and.
And again quite a bit more even early stage engagements.
So cobot definitely reinforces the strength of our if I'd and you really just need to think through the why it's really around more automation more contact less not count contact for either contact less activity whether that be at retail whether that be in the restaurants, but let me just in accelerating I make my.
More efficient logistics and supply chain so.
We are seeing continue to reinforce and across the board apparel as we've said, we'll continue to be the main driver of growth over the coming couple of years, our focus over the last couple of years has been to continue to drive penetration within apparel, while seeming opportunities in other end markets as we've called out.
And that activity is progressing well.
Well.
Great that's helpful.
Can you just talk about what you're seeing right now in terms of your chemical and paper raw material costs, how do you see.
How do you see a price cost relationship playing out in the fourth quarter and then into 2021.
Yeah. So we still saw a a little bit of sequential deflation in the third quarter are really driven by paper and in the back part of the third quarter really starting to see some some inflation in a couple of areas. One is in chemicals, particularly in North America. When we look at chemicals in films and also we're starting to see some some pressure and freight particularly in North America.
As well, so we see that kind of moderating a little bit of a headwind as we go from Q3 to Q4 from the inflationary perspective hard to call. What that's going to look like I think for 2021 at this point will be somewhat dependent on on the macro and where volumes end up going.
But we had some still some favorability in Q3, we see that turning to a little bit of Unfavorability from a overall basket of raw materials and freight in the fourth quarter.
Our next question comes from Adam Josephson with Keybanc capital markets. Please proceed.
Thanks, Good morning, everyone and Cindy it's been a real pleasure working with you and I Hope you won't Miss us too too much in retirement.
Thanks, Ed and I will.
Mr., Greg just in the context of your comments about fourq organic sales being similar to or better than the three to pace are you surprised that sales trends are progressing as well as they are considering another wave of KOVA cases across.
Developed markets not to mention high unemployment and otherwise I'm just wondering what what exactly you think is going on I know I saw PNG reported.
Blockbuster volume growth yesterday, so I know CPG demand remains quite elevated but just talk about more broadly. What you think is happening why you think sales are holding up as well as they are just given everything going on.
Yeah, so specifically with talking about the components LG chem that tends to be a realm.
Relatively sticky bid stable business across the cycles and so it's not as sensitive as some of the big shifts that you see even coded.
One and two you'd expect it to actually to be growing faster.
Faster than overall consumption because of whats going on migration to more packaged goods as well as E commerce trends that we've been talking about in the past and if you look at what's going on with overall.
Just in general.
GDP growth trends personal consumption and non durable consumer goods, our revenue trends across the pandemic Thats why I step back and comment on the March the September timeframe have been better than some of those macro categories. As you would expect with.
Within the act if you look month to month, we clearly experienced something different than we've seen in past recessions because of the.
Health crisis, where we saw inventory building earlier than Destocking later, but across it we would expect our businesses our markets to grow faster with an l. Jim.
What you're seeing in consumption and consumption. So the key so overall as we look going forward what are your own individual assumptions are around that.
We do not expect with a new set of resurgence of chronic.
Cornerbacks cases in the regions in which we operate for to create the panic buying and the amount of surge activity that we saw early in the stage I think by and large hours and just in general supply chain proven resilient to be able to meet customer demand. So we wouldn't expect to kind of lumpiness.
Going into Q4 next year.
So that's basically what we attributed to overall within that business and within RBS clearly came back much quicker than anticipated and essentially.
After everything coming to a halt for a couple of months retail in apparel owner decided realized they needed to have goods in time for holiday.
Holiday and so there has been a big shift in ramping up orders dramatically to have goods for holiday.
And that's what we're seeing and they're looking to spread it out I think some of the uncertainty there's just some.
Some of it is having more sales before black traditional black Friday, starting earlier, because it will be a little slower burn if you will.
And then you still got to be seen what happened at the consumer level, but even the post holiday period.
Over the last 10 years has been a shift to more.
More and more gift cards, which actually has improved January sales as well and so that could play out. So you can see this going multiple different direction. Our view is on for RBS holiday is key.
Now the consumers come out what that does to retailers sentiments as they go into the phone seasons and then.
Last is what Greg mentioned earlier there were.
There's a lot of product manufactured.
Between December and February that ultimately the retail stores were closed for in the mature markets in the spring.
Some of that was ultimately sold through spring garments look a lot like summer were sold through just a few months later others may have been stored in warehouses were hearing stories of that and maybe pull back out so for us. There's a number of questions. Both about holiday with the retailers, but also just the spring season, some questions, but that's near term lumpiness.
I think overall, if you just look at our categories.
Tied to consumer goods, we expect the market to continue to be resilient over the long term and our position is very strong and to continue to win and capture significant value.
I appreciate that mentioned just one other one.
At the outset of the pandemic you talked about next year under the assumption that.
It just turned out to be a normal recession.
Or at least similar to the last one and obviously that hasn't been the case. This has played out much differently.
Such that you now expect full year earnings to be up from a year ago, I mean, what what lessons if any would you draw from this experience as it relates to looking out into next year or thereafter, I know you already said you expect your margins to be a cop.
Comparable next year, but any thoughts about next year just given how this year has played out and.
What you've been surprised by what you haven't been surprised by and how you think this may unfold.
Yes, so I think the biggest lesson is just the importance of and strength of our scenario planning we've talked about this in past earnings calls and so forth. This is something we do.
I think it's often looked at by investors from just a financial scenario planning, but we embed this within our businesses to be prepared for multiple environments and had we never predicted a human health crisis pandemic globally, and so while the root causes of different we had two I'd say sharpen up different elements of our scenario planning, but we were.
And we will pretty quickly go into deployment mode and the team was already used to being able to do this and so I think that it just reinforces the value of scenario planning and we've learned that in a big way coming out of the last recession, and that's something that I and we have continued to make sure is a key priority.
Which.
I think maybe a lot, but many people would maybe take their foot off the gas a little bit on scenario planning when you have a long steady expansion like we've experienced we did not and I think its proving out right now and so we go into next year or.
Our focus here is on protecting margins, even in a low growth environment and that's as Greg commented earlier, that's our focus and theres lots of variables around restructuring cost temporary cost savings, what's going to happen with volume raw material costs everything else. There's lots of variables you got to think about just our overall drive here is to continue to ensure we have a business.
It can sustain we delivered GDP plus growth and top quartiles over the long run that is our focus and.
Yes, our biggest lesson is to keep doing what we're doing.
Our next question comes from Josh Spector.
To be securities. Please proceed.
Yeah, Hi, Thanks for taking my question, let me reiterate my congratulations to Cindy and thanks for all your help much appreciated.
You're welcome.
So thanks.
So just on the quarter looking at some of the monthly trends specifically just thinking about RV is its kind of impressive how stable. Each month was I was wondering if you can give us a little bit more color on maybe some of the undercurrents behind that was Rs I'd stronger earlier or later or base label and Tad stronger earlier.
Or later or was as smooth as it looks based on.
On slide seven.
Yes.
So there's some some movements between months I think the other thing is September was actually a a tougher comp for us as well as a very strong one for us last quarter, so even being down 5% in the month of September is still a from a pace perspective, a bit better than what we saw earlier in the quarter. So I think we as we've talked about from the base apparel business materially below that.
Gearing up for a holiday that started to impact us as we move through the quarter and then RFMD is Mitch has talked a fair amount about has been strong pretty much across the quarter.
So all of that continuing to progress as we move through and through the very early part here of October.
Okay. Thanks, and just on the free cash flow side and cash deployment. I mean, you did a small amount of share repurchases. This quarter I think if you look at.
Perhaps forecast your leverage comes down pretty quickly over the next couple of quarters as you move past the tougher twoq comp how do you think about cash deployment here over the next couple of quarters, you think share repurchases play a bigger role.
And along with that is the M&A pipeline Act.
Active and rebuilding is it possible to do deals given what you might see in terms of tougher performance through 2020 in terms of targets you may be looking at.
Yes, I think overall.
As you said and meet our balance sheet has continued to strengthen here through through this time period this year.
We've got ample capacity to continue managing across all the levers of our capital allocation. So continuing to invest organically in the business. We're continuing to work the M&A pipeline just as you talked about.
I haven't seen much flow through there yet well after the Smarttrack acquisition that we just closed in March of this year, but we're continuing to work that pipeline I Wouldnt say that we've seen big changes in valuations this year, but continuing to work that and of course continue return cash to shareholders with a growing dividend and continuing share buybacks. So our focus is on continuing the same.
Capital allocation priorities I think that we've had over time, we took a bit of a pause on buybacks for a little while of course of their early part of the pandemic here, but we'd expect to return to our overall capital allocation strategies and priorities going forward.
And the only thing I'll add is we did comment that passes we had.
Active M&A pipeline, mostly bolt ons and so forth, but there was a pause in just in the large amount of activity engagements has ever company was working to manage through the depths of the crisis. There. There is just totally a bit more pickup in activity overall so.
That's that's what we're seeing but we're not going to go.
We're in a good position from balance sheet perspective, and we're.
Finding the leverage it.
Our next question comes from Jefferies cost so it cost us from.
From JP Morgan Securities. Please proceed.
Thanks very much.
In looking at your income statement you are.
Your EPS tree and eight costs year over year really doesn't change very much.
For all of the interim cost savings and the structural cost savings.
The real changes in cost of goods sold in that cost of goods sold this down more as a percentage. It's obviously a much bigger number than SG night.
It's also a place where you've got negative volume leverage.
Why is it that the cost savings are really located in cost of goods sold and not enough.
Yeah, So I think over the over the course of the year, it's pretty well balanced between EBITDA and cost of sales obviously, a lot of those volume driven temporary cost reductions. We've talked about are more in cost of sales because those are things like overtime and cost us some furloughs in the second quarter et cetera. So that chunk is really more focused on cost of sales.
Yes.
I think there is some movement up and down between quarters, a little bit of incentive comp favorability, we talked about in Q2, a little bit of Unfavorability then from that perspective in Q3.
So I think over time, it's fairly well balanced between the two but moved around a little bit between quarters.
Okay I'm in.
In the label business I think you said that your European volumes were down 10% in the quarter was that because they were down.
A lot in July and then they really improved like what just the down 10 look like for each of the months or can you frame. It. So that we have an idea of where things stand in Europe or what were European volumes in October.
Yes, so they were down upper single digits volumes.
Within Q3 for Europe, our labels packaging materials business, they are down almost 10% in July.
July and trended better throughout and then in October there.
Down low single digits.
So an improving trend.
Our next question comes from Bartosch, Ms, Rob with Burberry capital markets. Please proceed.
Thank you everyone and congrats to you Cindy.
When did it go back to your I guess I'd pipeline size I guess engagements are up 25%, so where does that put the number of engagements now is that close to 500 now.
And how much of the that revenue growth I guess I'd revenue growth in the battle of business, you think net net growth because I'm guessing you're missing on sales stuff.
The traditional based tax to some of these battles customers. So just curious what's the net incremental there.
So most of it is net incremental I don't have a precise number and you have to also understand because of what's going on in retail some categories and just customer categories are down and others up dramatically and particularly value as we had mentioned earlier so.
As far as the pipeline down we're still seeing robust.
We're not going to probably be disclosing the actual number of act.
Activities within each of the pipeline.
Overall, but it's a it's it's coming.
It's continuing to ramp up at the pace that we've talked through.
Fair enough and Mitch can you talk about the some of the sustainability and he has she's related initiatives that you have.
Currently going on in your organization any opportunities for every two I really differentiates our standout versus other packaging and specialty materials companies on that front.
Sure and just quick comment.
So we've got two broad focus one is just reducing the environmental impact of our actual operations. We've had a focus that we embarked on back in 2015 on reducing greenhouse gas emissions by more sustainably produced from materials.
Such as paper and so forth. So we've had ongoing activities. We are on track or ahead of schedule on all those greenhouse gas emissions in absolute terms not relative terms, so while we've grown.
Actually reduced our greenhouse gases by more than 30% already and are ahead of the track of our targets. So that's one category second is really around how do we.
Create more sustainable products, enabling more circular economy around recyclability and so forth, we launched clean flake a number of years ago, specifically with that end, which it helps more efficient and effective recyclability of plastic containers.
We are now looking at how to roll that out and brought in the specific number of the product portfolio all around clean flake.
This is starting to take more hold within the market. So our focus here is continue to reduce the environmental impact of our API.
Operations as well as more sustainable products, we're seeing a lot more opportunity there and plan to our and plan to continue to leverage our innovation strength to go. After so we will early next year.
Layout more of our strategies, we've had on the sustainability front, we laid out some 2025 goals back in 2015, we're going to add a new set of horizon goals through 2030 early next year and we'll be talking about more fulsomely with all of you.
Our next question comes from Christopher caps.
Loop capital markets. Please proceed.
Yes, hi, Thank you and author and my congrats to Cindy as well actually I have been following the company long enough to remember that Cindy.
Cindy sort of tried to retire once before and so hopefully this one sticks right. So.
We wouldn't letters, we dantzler [laughter] Scott.
Yes, so Mike.
Yeah. So my questions are focused on LTM and.
You mentioned sort of the disparate trends by geography, contrasting, particularly North America and Europe.
And you talked about those trends Europe lagging North American maybe as we progress sequentially through the quarter, but you also mentioned this trend, which im hoping there's an explanation for where north America sort of trending above its long term characteristics in Europe has been lagging that for some time now I'm wondering if there's something different about that.
Positive dynamic for something structurally about the markets that are different now that could help explain that trend.
Yes, So I think there's two factors one is as we look over the seven months from March through September that what we commented on the base.
The biggest one is just consumption in Europe is below the U.S.
That is one clear thing can't really tell the difference between de stocking levels inventory relative to but the other one is we did comment that we thought we lost some share in Europe in Q2.
We have been recovering not here in Q3, and we will continue over the next couple of quarters that we've covered a good portion of that here in Q3 already.
So if you look over the March to September timeframe that is part of the impact but majority of it. We believe is tied to just differentials in consumption.
And is that differentials. The end consumption is they have to do with economic activity or is it something just the nature of the way.
Packaging is trending in Europe, BMW North America.
Economic activity in general and the.
Inversion to more E commerce seems to have been slower.
Our next question comes from the line of John Mcnulty would be more capital markets. Please proceed.
Thanks for taking my question and congrats India Awesome awesome career over the years. So when we think about the $150 million of temporary cost saves I guess clearly the management compensation, one like you can't cut it and hold it there for forever, but have you learned anything through either the belt tightening.
Side or the volume metric driven cost cuts that that maybe don't reversed and so that we could actually see some of the some of the portion of the 150 actually actually hold as a permanent cost cut how should we be thinking about that.
Yeah, We said we expected.
Vast majority to come back to pay on volume environments, but clearly in the current environment I think as a provided new opportunities for new ways of working and so forth. So we would expect some of that.
Be sticking through the long term just around how to travel and everything else and we were fortunate in the amount of technologies that we had already deployed globally. We could quickly go to virtual on everything. So it was a good catalyst for us to kind of go to that next step.
But thats clearly not call sustainable to be running the business that way. So some will stick we haven't done the full assessment of exactly how much of it will be we will be doing that actually over the coming few months.
But some of it will but the vast majority will be coming back.
Got it okay. Thanks for the color.
Our next question comes from George Staphos with Bank of America. Please proceed.
Hi, guys. Thanks for taking the follow on questions. So.
Already told US that next year, you would hope to keep EBITDA margins relatively constant with 2020 and correct me if I missed phrase anything there.
Is there a way to give us a bit more color given in to take a mile on what you expect for RV I guess you said.
Half of the savings will be from restructuring will be going into our guy yes.
I guess that sort of the question behind the question is you are putting up margin RV I asked that you know years back would have been great in a normal volume environment, which we've not been in so.
Do you expect RBS this flat or do you think rvs margins actually have the ability to be up year on year or how would you guide us if you could.
As we think out to 21 and then the other question I had regarding our gas I'll turn it over.
You mentioned that retailers and brand owners are trying to position ahead of the holiday season.
Maybe got a little bit earlier than expected could go on longer recognizing that are going to be a bit of variability into 21 that level of activity by your customers right now.
Is that really going to drive your volume for the fourth quarter Arbor, I guess a lot of their shipments would have already occurred and is it really more we should be looking at it as a bellwether for what your orders will be late.
Late for Q1, Q looking out to the spring season, Thanks, guys and good luck in the quarter.
Yes, George a couple of questions. There first one as far as Rvs margin outlook for next year I think we're going to comment on that our overall point here of laying out the expectations for 2021 is that with a modest amount of growth modest recovery. We are going to be focused again, just like we've talked about for the last two years and low growth and.
Byron to protect margins and that will be a key focus of ours and that's across the enterprise.
They're getting into individual components of the portfolio.
It depends what the volume environment is as well so I think what you can see the rvs despite significant challenges on topline, particularly in Q2 is may.
He's managing those well and if I recall mind you that in Q2, even we could have even had better margins there, but we chose not to move on some actions.
At the time.
So we deferred a number of restructuring and cost out actions and everything else.
The depth of the crisis into Q3, so some of that was bunched up into Q3.
And that's what you're seeing between between the two quarters, but not going to comment on specific upon some portfolio for 2021 at this time I think a lot of it goes to what your own assumptions would be around how each of the end of individual markets.
Respond to the environment, what the environment is in general next year, but our focus here is doing exactly what Greg laid out earlier.
As far as the.
Timing of RBS sales in some of the uncertainty the uncertainty is really late Q4 early Q1 around just what the impact is going to be around.
The fact that retail was largely close in the spring of 2020, and some garments weren't sold so.
For that reason, one and two retailers and apparel brands will have seen early how high.
How holiday is performing and that impacts retailer sentiment and what their open to buy as for the following season. So it's really I'd say watch closely on the consumer behavior and retailer brand communications here mid to late Q4 and that will be a key driver for us.
[noise] Mr. Booted there are no further questions at this time I will now turn the call back to for any closing remarks.
Okay, well I just want to thank everybody for joining the call and once again, thank our team for their endless commitment and ensuring the success of all of our stakeholders. Thank you very much.
Ladies and gentlemen 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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