Q4 2020 Avery Dennison Corp Earnings Call
Ladies and gentlemen, thank you for standing by during the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time it kind of a question. Please press. The one followed by the four on your telephone if at any time during the conference you need.
To reach an operator, please press star zero welcome to Avery Dennison earnings conference call for the fourth quarter and full year ended January <unk> 2021.
This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time February 6th.
To access the replay please dial 806, 338 to 84 or for international callers plus one.
Four zero to $97 790, 140, the <unk>.
Conference I'd number is two 190 690 418.
I would now like to turn the call over to John heavily Avery Dennison Senior director of Investor Relations. Please go ahead.
Thank you Martin.
Please note the throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined qualified and reconciled with GAAP on schedules a four to 89 of the financial statements accompanying today's release.
We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results.
These forward looking statements are made subject to the safe Harbor statement included in today's earnings release.
We undertake no obligation to update these statements to reflect subsequent events or circumstances other than his day be required by law.
On the call today are Mitchell, <unk>, Chairman, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer.
I'll now turn the call over to Mitch.
Mr. <unk> has disconnected one moment, please we will get them.
Okay.
Yeah, let's give mitchell one minute to rejoin.
Yeah.
Okay, Thanks, John and Hello, everyone. Good day.
All of these for that quick technical glitch there on the line dropped.
So as you can see from our results we continue to prove our resilience across business cycles of the company. We delivered another year of strong earnings growth with adjusted EPS up 8% and record free cash flow despite of 2% decline on the top line.
We said coming into this year that a key focus of ours on the lower growth environment would be to protect our overall profitability, we delivered on that promise.
Margins again expanded significantly reflecting the successful execution of our long term strategies as well as the teams fast response and implementing temporary cost saving actions.
The result, combined with better than expected volumes in the second half ex.
Essentially accelerated the margin expansion, we had planned for 2021 and the 'twenty 'twenty, enabling us to deliver EBITDA margins of over 15%.
Yeah.
Our strong performance reflects the remarkable preparedness and incredible agility of our teams who have come together of extraordinarily well in navigating one of the most challenging periods, we've experienced of the company.
In this environment, our focus continues to be on ensuring the health and wellbeing of our employees.
For our customers supporting our communities.
And minimizing the impact of the recession for our shareholders, while continuing to invest in the long term success of the company.
I am pleased with the progress we're making on all fronts.
Now despite our best efforts to protect employee health, we have identified roughly 1100 confirmed cases of the virus within our 30000 plus workforce with the majority of cases, reflecting community spread rather than of work base source of infection.
Fortunately over 80% of the employees impacted have already recovered.
The recent surge of 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 of safety and agile on meeting customer needs.
In light of the significant challenges throughout 2020, we also took additional measures in support of our employees and communities.
We provided additional compensation and benefits in the early stages of the pandemic to reduce the financial impact on employees and some of the hardest hit regions.
We provided supplemental payments to our frontline workers to thank them for their courage and agility in serving our customers the essential needs.
And we stepped up our level of community engagement, including an additional $10 million contribution for charitable causes.
I'm pleased with the continued progress we're making towards the success of all of our stakeholders has evidenced by the fact that we are on track to deliver the vast majority of.
Of our long term financial and sustainability objectives.
Our consistent performance reflects the strength of our markets our industry leading positions the <unk>.
T J foundations, we've laid and our agile and talented team.
We are focus on the consistent execution of our five key strategies.
Driving outsized growth in high value categories.
Growing profitably in our base businesses.
Continuing our relentless focus on productivity.
Being highly disciplined capital allocators.
And the leading with environmentally and socially responsible practices and solutions.
In 2020, we made progress on each Hy.
High value categories again outperformed.
We protected even grew margins in our base businesses.
We delivered $200 million of cost reduction both structural and temporary.
We completed two acquisitions, smart track, which significantly accelerates our strategies and capabilities to build out our intelligent label platform with RPT.
<unk>, which enhances our position in our North American label on graphics materials business.
Lastly, we continue to make solid progress towards our 2025 sustainability goals.
We have substantially reduced the environmental impact of our operations, while focusing increasingly on the development and launch of more innovative environmentally friendly products and solutions.
Yeah.
Okay.
Now a quick summary of our results by business.
<unk> adjusted operating margin expanded 180 basis points to just above 15% for the year on a modest decline in revenue.
And label and packaging materials underlying label demand has remained strong throughout the downturn given the increased consumption of consumer packaged goods and E commerce trends, while the somewhat more cyclical graphics and reflective solutions business declined.
From the start up of the pandemic until now volume trends for L. P. M have varied more than usual throughout the year.
From March through December overall, our North American label business has grown mid to high single digits roughly double the long term average for the region.
While Europe has grown low to mid single digits comparable to the region's long term average.
And while the mature regions have grown at or above their long term average since March Asia Pacific volumes were below their long term trend up low single digits across the period.
The slower than usual growth in Asia was due to declines from March to June before rebounding to mid single digit volume growth in the second half.
In retail branding and information solutions revenue and margins were both down for the year.
Following the sharp decline in Q2 demand improved sequentially in the second half with Q4 coming in at 3% organic growth.
We delivered more than a full point of margin expansion in the second half driven by the better than anticipated volume and tight cost controls.
Enterprise wide RFID sales grew more than 40% for the year on a constant currency basis, reflecting the contribution of the smart track acquisition and organic growth of 9% for the year.
Organic growth of RFID rebounded quickly in the second half of roughly 20% driven primarily by apparel.
Outside of the apparel, we're seeing increasing interest in new applications within food and the logistics among other categories.
The momentum in these applications is focused on driving labor efficiency, improving availability of products and the migration to E commerce.
As the leader in Ultra high frequency RFID, we are positioned extremely well to capture these opportunities with industry, leading innovation and manufacturing capabilities and the best most experienced team of the space.
We continue to expect long term growth of 15% to 20% as we build RFID and the broader intelligent label platform, which is now at more than $500 million business.
Yeah.
And that's where industrial and healthcare materials, we expanded margin in the segment for the year Despite lower revenue.
H M returned to growth in Q4, and we continue to make progress toward our long term profitability target here.
Okay.
To recap we.
We delivered another year of strong earnings growth and free cash flow despite challenging market conditions.
We entered this crisis from a position of financial operational and commercial strength and we will emerge from it even stronger.
We are once again proving our resilience of the company and our ability to consistently deliver for all of our stakeholders.
And we remain confident in our ability to continue to deliver GDP plus growth and top quartile return on capital.
We look forward to sharing more about our long term objectives and strategies all of you on our Investor Day next month.
And I'll now turn.
Turn the call over to Greg.
Thanks mentioned well everybody I'll first provide an update today on our performance against our long term goals and then walk you through our fourth quarter performance on our outlook for 2021.
Slide 11 of our supplemental presentation materials provides an update on our progress against the five year targets that we communicated in 2017.
And recall that this represents our third set of long term goals after meeting or beating our previous two sets.
The consistent execution of our key strategies enables us to continue delivering against our targets.
With an overriding focus on delivering GDP plus growth and top quartile returns on capital over the long term.
As you can see we are largely on track to deliver once again.
Over the four year period sales growth on a constant currency basis is up nearly 4% annually with organic growth of 2% annually.
While both of below our initial target largely due to the late stage recession in the cycle, we are achieving our objective of growing above GDP over this period.
Reported operating margin was 11, 6% in 2020 or 12, 4% on an adjusted basis up significantly from roughly 10% in 2016.
Additionally, our EBITA margin was above 15% in 2020 and as always our focus will continue to be the optimal balance of growth margins and capital efficiency to drive incremental EMEA over the long term.
Our adjusted earnings per share is up over 15% annually largely driven by the solid topline growth and strong margin expansion.
And our return on total capital came in at 18% for 2020 above our 17% target, reflecting top quartile performance relative to our capital market peers.
And our balance sheet remains strong with our net debt to EBITDA ratio below the low end of our target range.
Given us ample capacity to continue executing our strategies.
Our consistent progress towards achieving these long term goals reflects the diversity of our end markets the strength of our position in those markets and our resilience and agility as an organization to adjust course when needed.
At the same time that we communicated our financial goals through 2021, we also laid out of five year plan for capital allocation, which you can see on slide 12.
We're tracking well against this plan starting with strong cash flow generation.
And we've deployed a total of $3 $4 billion over the last four years.
Alex hitting the inline with our long term plan.
And clearly our current leverage position gives us ample capacity to continue investing organically as well as through strategic acquisitions, while continuing to return cash to shareholders in a disciplined the way.
Now, let me turn to the fourth quarter overall financial results were strong with adjusted earnings per share of $2 27.
Up 31% versus prior year.
Reflecting better than expected top and Bottomline performance in each of our segments.
We grew sales by 12, 3% or three 2% on an organic basis.
And currency translation increased reported sales growth by two three points.
And the extra week in the fourth quarter increased reported sales by four 9%.
Adjusted operating margin increased by 160 basis points of 13, 5%.
The significant margin expansion in each operating segment.
Our tight near term cost controls in this environment.
Bind with the flow through benefit from a volume surge late in the quarter.
As well as our ongoing structural productivity actions and a benefit from the 50 <unk> week drove strong margin expansion in Q4.
And we realize the $18 million of restructuring savings net of the transition cost in the quarter due in parts of the long term actions that we accelerated into 2020, particularly in Rbis.
And for the year, we generated $548 million of free cash flow up 7% compared to 2019.
Total capital spending came in at $219 million higher than recent expectations as we accelerated investment in our high value categories, particularly in RFID.
And as mentioned previously our balance sheet remains strong with the net debt to adjusted EBITDA ratio at year end of one seven.
And as we've proven our ability to manage through the compounding global crises. We face this year, we've been putting net leverage capacity to work.
For the year, we deployed $350 million for strategic acquisitions, as well as returned $301 million to shareholders through the combination of share repurchases and a growing dividend.
Now, let me turn to the segment results for the quarter.
Label and graphic materials sales increased by three 6% on an organic basis driven.
Driven by the net effect of volume and mix.
And sales improved sequentially across all regions.
Label and packaging materials sales were up mid single digits organically.
Benefiting from of late quarter pandemic related surge in demand.
In specialty and durable label categories grew high single digits, but low to mid single digit growth in the base business.
Graphics, and reflective sales were down mid single digits, reflecting modest sequential improvement after rebounding significantly in Q3 following the sharp decline in Q2 as the result of the government mandated lockdowns debt.
Looking at the segment sales trends by region in Q4 in North America LTM sales were up mid single digits organically for the quarter.
With the L. P M up high single digits, while graphics declined modestly.
In Europe <unk> sales for the quarter were roughly flat on an organic basis.
Reflecting strong sequential improvement.
L. P M was up low single digits, while graphics declined by high single digits.
And in Asia L. G. M was up low single digits for the quarter on an organic basis with relatively consistent growth across the countries.
<unk> adjusted operating margin increased 210 basis points to 15, 4% of.
As the benefits of productivity favorable volume and mix and raw material deflation net of pricing.
More than offset higher employee related costs.
Shifting now to retail branding and information solutions Rbis sales were up 11, 6% ex currency and up three 1% on an organic basis.
Reflecting continued improvement in both the high value categories and the base business as retailers geared up for the holiday season early on in the quarter.
High value categories were up nearly 20% organically with enterprise wide RFID sales up 55% ex currency and up 21% on an organic basis.
And the base business was down low to mid single digits.
Looking at the total apparel business the value channel outperformed all of the other channels and was up 40% organically for the quarter.
And adjusted operating margin for the segment increased 210 basis points to 15, 7%.
The significant margin expansion was driven by productivity initiatives, including the accelerated structural actions and temporary cost controls along with the better than anticipated volumes.
These benefits were partially offset by higher employee related costs.
Turning to the industrial on health care materials segment sales increased by 0.7% on an organic basis.
The high single digit increase for industrial categories, reflecting continued sequential improvement in trends for automotive applications. In particular was partially offset by a mid single digit decline in healthcare categories.
Adjusted operating margin increased by 210 basis points to 12, 3% as the benefits from higher volume and productivity more than offset higher employee related costs.
So turning now to our outlook for 2021.
We anticipate adjusted earnings per share to be in the range of 765 to.
The $8 five.
We've outlined some of the key contributing factors to this guidance on slide 18 of our supplemental presentation materials.
We estimate that organic sales growth would be approximately 3% to 7% with the midpoint of that range, reflecting continued recovery in our end markets across the segments.
The extra week in the fourth quarter of 2020 will be a headwind of a little more than a point to reported sales growth.
The roughly 15 cent headwind to EPS for the full year.
We anticipate Q1 will benefit by roughly 10 cents based on the shift in the calendar.
More than offset by roughly 25% of headwind then in Q4.
Okay.
Based on recent rates currency translation is of roughly two point tailwind to reported sales growth with an estimated $25 million benefit to operating income.
And we estimate incremental pre tax savings from restructuring net of transition cost of roughly $70 million in 2021.
Given we previously accelerated from 2021 accidents into the second half of 2020, the vast majority of the savings represent the carryover impact from actions that we initiated last year.
And we also expect the majority of the approximately $135 million on temporary cost savings, we delivered in 2020 to be of headwind as markets recover.
Moving to our outlook on the tax rate based on current regulations, we expect both the GAAP and adjusted tax rates will be in the mid twenties for the full year.
And we expect free cash flow to be more than $600 million in 2021.
And finally, we estimate average shares outstanding assuming dilution of $83 million to $84 million.
In summary, despite the challenging environment, we're pleased with the strategic and financial progress we made against our long term goals in 2020.
We're confident in our ability to continue to deliver exceptional value through our strategies for long term profitable growth and disciplined capital allocation.
And now we'll open up the call for your questions.
And thank you very much ladies and gentlemen, if you would like to register a question. Please press. The one followed by the four on your telephone you will hear a three ton prompts to acknowledge the request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three if you are using a speaker phone.
Please lift your handset before entering your request to accommodate all participants we ask that you. Please limit yourself to one question and one follow up and then return to the queue. If you have additional questions. One on one for the first question.
Our first question comes from the line of Ghansham Panjabi with Baird. Please go ahead.
Hey, guys good day hope everyone's doing well.
Yes, Hello Ghansham.
Yes, I guess first question just on the L. G M strength in the fourth quarter, you know the 37% incremental margins year over year. I know you mentioned that there was the late quarter surge, but <unk> also got weaker which is higher margin I think for that segment. So just curious as you know if you can give us a little bit more color on the margin strength and then on the strength in L. P.
From a volume standpoint on in both November and December was that just a function of expanded lockdowns in Europe and the U S are just much better E commerce season, or whatever details you can provide there would be helpful. Also.
Yeah. Thanks, Scott you're on this Greg So I'm on the last part of your question certainly as you said you can see in the backup side with the monthly numbers that we saw a pickup in the L. P. M side of the business in November and December and Yeah. We think that's a function of similar to earlier in the year is there more of Lockdowns, particularly in Europe and in parts of the U S. We saw more consumption of packaged.
Late in the in the fourth quarter. So that was part of what lifted the the volume growth in Q4 and that also then helped drive part of the Q4 margins for L. G. M. As we've talked about in the past we've been driving the temporary cost savings with volumes coming in better than expected in the quarter that helped deliver stronger margins overall.
At the same time, we did have the extra week in Q4 that extra week tender turned out to be of pretty strong weak and we did see that also have about a 30 basis point margin impact and L. G M as well as the total company level.
Great and then from my second question on the three 7% of core sales growth for 'twenty, one how does that disaggregate between volume and price. The way you see it at current in context of pulp prices going up in petrochemicals and so on and we're in that range is one key tracking thus far on the consolidated basis. Thanks again.
Yeah, I think high level of Ghansham. The when we think about the range that we have for 2021, so the 3% to 7% there's a couple of.
Overall big drivers one as we've talked about intelligent labels, we still expect to grow in that 15% to 20% pace as we've talked about over the years and as we've demonstrated certainly in the back half of 2020.
That by itself given the size of the IOL business now would add about a point to point and a half of the overall growth for the company at.
At the same time, when we look versus 2020, and we see the quarters. They were hit the hardest Q2 net a little bit of Q3, if we fully recovered that we think that would be somewhere in three to four points of growth for the year on a full year basis. We've built in about two to three points of growth on recovering some of that volume decline that we saw and that was most hit quarters.
In 2020, so those are a couple of big drivers of the growth that we see year over year at the same time, we would expect in the businesses that were hit the hardest in 2020 to have the biggest growth rates as we see that recovery come through in those segments.
Our next question is from Adam Josephson of Keybanc capital markets. Please go ahead.
Mentioned, Greg good morning, and congrats on a really good end of the year.
I don't know Greg Greg.
Greg just one on your margin expectations for the year. It seems like Youre expecting roughly flattish margins I assume you would expect a notable expansion NIH M on Rbis, and perhaps some degradation and LG on margins given how good of you.
How good of year, you had in 'twenty and Alex you can you just talk about your margin expectations, either consolidated or by segment.
Yeah. So I think in total when we look at the year when as we're headed into 2021, just as we were when we are headed into 2020.
We targeted and we talked about a year ago, and a lower growth environment, we were targeting to hold margins and that would still be our expectation. This year. If we're in a lower growth environment continuing to target holding margins. When do you think just like you said across the company. The range of our guidance assumptions include the number of different factors, depending on the environment and the macro.
We would start to expect to see certainly when you look at the second quarter. When we had the trough in some of the business as it had a margin impact there we would expect to see of larger recovery, particularly in Q2.
When we look more broadly as you've as you know when we've talked about in the past our overall focus over time is balancing our topline growth with strong margins and strong capital efficiency in order to drive long term growth in EMEA and that's how we'll continue to think about it. So margins continues to be a big factor of course, and continuing to drive margins, but we're looking at the balance of those three.
To drive long term EBITDA growth over time.
Thanks, Greg and just one more on the margin issue. So if I look at from 2017 onward, all of the company's margin expansion has come from the SG&A line I think SG&A as a percentage of sales has gone from almost 19 to down to 15, whereas gross margins have been basically flat over that period.
This coming year and thereafter do you think more of your margin expansion is likely to come from the the.
Gross margin line or the SG&A line and perhaps Hawaii.
Yes.
Yes, I think when you look over the that long of a period of time certainly we were had a number of initiatives seen we've talked about few years ago on Rbis, the acceleration in turnaround there and that included some reductions in SG&A and other areas.
So there was some focus on that I think when we look at even 2020, we start to see our gross margins improved quite a bit from the inflationary cycle that we had a couple of years before that so we expect to continue driving strong productivity and SG&A over time, but we would also expect to continue to see.
Gross profit improve over time as well.
And our next question is from Neel Kumar of Morgan Stanley investments. Please go ahead.
Hi, Thanks for taking my question.
Can you just discuss how your lithium volumes in the fourth quarter compared to the industry.
And were there any specific regions, you would called out where you've gained or lost some market share.
[laughter].
Yeah. So Neal overall, if you look at our if youre asking of share question of.
Of our L. P M business so label specifically.
We don't have all of the market data in for.
The two regions, where we get it but generally for the full year share positions are pretty comparable for 2020 versus 2019.
If you look at where we are specifically in the fourth quarter in Europe, we are our share of positions, where we want it to be in North America, we're a little bit behind where we wanted to be.
So that's overall for the year, we've been comp share positions, but pretty constant and where we are from fourth quarter.
Yeah.
Okay. That's helpful. And then just for RFID, you talked from the past about the addressable market and apparel on.
30% of yourself penetrated what do you think that penetration rate can go over the next several years.
And then the more generally in terms of your 15 of 20% of all the RFID growth guidance quite.
Quite that range, given the potential acceleration of adoption rates.
Okay.
It's already pretty large such that it'll get income equity harder to do that.
Yes, the overall two questions there as far as the apparel adoption rate. So apparel continued I mean, the pandemic has really with what we've seen is the second the inflection.
The point, if you will and the acceleration of activity.
Not just tier one, but a lot of tier two retailers and brands. In addition to tier one so a significant amount of our pipeline is also apparel growth. We've traditionally said, we're roughly a third penetrated it's.
It's clearly a bit more than that but we also said over time, we expect the addressable market to increase a bit over time as well.
So that's where we are in addressable market is still quite of bit of upside overall within apparel and we see obviously a huge opportunities outside of apparel on so to your question of 15% to 20% do we see upside of that.
Yeah, I mean, we see huge opportunity for us, it's a really around developing market opportunities on the capturing those opportunities.
We see significant long term potential here the <unk>.
The 15% to 20% we've created because theres a certain level of just pace of adoptions that we go through.
And given the size of this business being over $500 million now as Greg said, it's now adding one of the one five points to our overall growth.
So that's a pretty significant amount of dollar growth every year. If you look at it from that perspective so.
We're clearly not limiting ourselves to what the upside can be moving 15% to 20% of the right target, we're clearly aspiration or to develop this into a much larger business and as of today and we see of having a very long runway ahead of it and in general to your questions about addressable markets and everything else, we'll definitely be updating all of that head of Investor call Investor Day next month.
Our next question comes from the line of Josh Spector with UBS Securities. Please go ahead.
Okay.
Yeah, Hi, Thanks for taking the question on.
Just within Rbis, and the base ticket and the label business.
There's obviously been some uncertainty on how first half of 'twenty, one would play out given some of the the weakness we saw kind of early last year. I guess, you you've mentioned you'd have more visibility on that kind of ask of the holiday season. Just curious if you can give us an update on on what customers are saying about order patterns and kind of inventories here over the next six.
On.
Yeah. So.
Generally holiday was a bit stronger on the average if you will than our retailers were expecting.
So that bodes well as far as.
It's too early to say how things are playing out post the holiday or just the timing of the lunar new year, we have really easy comps of the past week or so.
So too tough to tell we'll have a better read after January and February comp through the lunar new year.
Overall, what youre seeing though is the north American market doing better than Europe. If you look at just the apparel import trends alone.
Errol imports in the U S net for the full year, they were down close to 20%.
If you look at the last six months, where the data is available it was down 11.
It's up a couple of percent if you look at the last few months. So that does show an improving trend here in the U S.
Europe, However continues to be down quite significantly down around 20% or so the last few months. So.
Bit of of decoupling between the U S and Europe is what we're seeing right now and generally holiday of was a bit better than people had anticipated and we're really going to need a little bit more time than just right. After the holiday to get a good sense of where things play out and I'd say Europe is the bigger question for us.
Yeah.
Yeah.
So that's helpful I guess going back to the RFID side of things.
I think there's generally a view that with COVID-19 some of the impact might be some acceleration of adoption. There I guess I was wondering if you could give us a general view of what typically the timeline looks like until a customer first engages with you about the idea you guys work with them to develop it and then it actually goes out it's the only actually might see some of that.
Kind of flow through your earnings.
Yeah within apparel the T.
<unk> has shortened quite a bit.
From where it was a few years ago, just because theres a number.
Technology is proven and everybody knows that the business cases very robust.
As far as learnings you can translate from one retailer brand to another.
So that that's fairly fairly quick there's not the average isn't that great, but say six to nine months because of what I would give us an estimate within the other categories. It can vary quite a bit and obviously the longer than that.
As far as the pipeline when it starts from just the business case and the moves into pilots and tests.
Testing and so forth.
So that takes a bit longer I would say the biggest area of the pipeline growth that we're seeing.
You talked about the.
Apparel, having good increases within apparel overall, but outside of that if you look at food our pipeline is up quite significantly as well as with the logistics up quite significantly and we're seeing the number of pilots that we.
In the pilot phase will give us a million dollars of revenue ex out of here in 'twenty 'twenty, one and the assuming they're successful and convert which we sure confident they will they will turn into you know $5 million programs.
Each individual one so.
That's where we are of the food we have been working for a while they've accelerated a bit in the pandemic along with logistics, we will see a bit more revenue here in 2021, and we expect that to be of base for.
More growth going into 2022.
Our next question is from Anthony Pettinari with Citigroup Global markets. Please go ahead.
Hi, good morning.
Just a follow up question on RFID and Smart track you know I think when you acquired smart track I think you indicated it could be sort of modestly dilutive in 2020, given integration and interest expense costs and I think you said margins would be sort of in line with the base business by 2022, just wondering if that's still sort of accurate.
How the business has performed relative to expectations and the growth rates that you've called out for RFID is there any way that you could do.
Friendship between RFID and the sort of the NFC technology that you acquired with smartphones.
Well the overall, we look at of the combined business and it is integrated so as far as how we how we go to market and everything else.
So the growth is basically on the combined of the two we have talked about specifically.
If you look at smart track, they had about 50% to apparel retail on 50% the auto food and other other category. So.
We will discuss it more about what the market trends are for those end markets, but it won't be calling out of separate growth rate for smart track versus of the overall RFID and intelligent label platform.
So that's the as far as your first question, we actually it was not dilutive in 2020, we actually if you look at the adjusted EPS was actually modestly accretive in 2020, so we're able to execute quicker than expected. We do expect the margins to be comparable to the overall margins for the IL platform, which were above the.
The company and divisional averages for EBITDA margin.
Okay. Okay, that's very helpful and the.
Then just you know it seems like Covid has pulled forward a lot of the technology adoption and you've talked of how that's impacted the RFID I'm just wondering on the <unk> side has COVID-19 changed the adoption of pressure sensitive versus Google applied versus shrink.
You know of customers delayed some capex projects are pulled them forward I'm just wondering if you've seen or if you anticipate any any impact from COVID-19 really on on the Neal GM side.
I think the.
The biggest impacts are really just what we've been talking about it it's more around just the resurgence of consumer packaged goods. So we're seeing strong demand in the market and for our business in.
In packaged decoration.
Particularly in film categories.
Then also just the E commerce, so E commerce growth.
It's been quite significant and our business linked to that is growing growing the similarly so.
Yes, where we're seeing those of the two trends overall, we think the E commerce trends, while there was a big surge we think that will be just the new baseline for continued accelerated growth in packaged goods I think everybody is you know.
The Covid there were good reminder, not just with stay at home, but the importance of packaging for decoration sanitation and everything else.
Our next question is from Jeffrey Zekauskas Jpmorgan Securities. Please go ahead.
Thanks very much on.
On average were your raw material costs down in 2020, and how much on average to expect them to be up in 2021.
Yes, Jeff this is Greg so overall and across 2020.
We saw kind of in the low to mid single digit range in terms of deflation across the year and it was a little bit different as you move through the year more of that was earlier in the year as we got into Q4, and we look sequentially from Q3 to Q4 overall was relatively stable, but we did start to see some some pressure mid way or to the towards the tail end of the quarter.
Typically on chemicals on film so on propylene in particular in polypropylene are we starting to see that pressure on the U S. Late in Q4, we see that continuing here in the first quarter and then starting to also rise in Europe at the same time here in Q1, so right now based on what would be what we've been seeing we would expect somewhere in the low to low single.
Digit inflation based on what we've seen so far without predicting what may happen as we go forward.
Okay, great on Jeff just to add to that we are the right now evaluating the.
Big question is how much of this inflation is temporary versus our sustaining and so from a pricing standpoint, we are evaluating price increases the announcer.
Surcharge in one region four of propylene poly.
Polypropylene sorry.
And evaluating another region and so forth that that's probably one of the bigger questions around the guidance specifically for L. G M.
Is what.
Whats the volume environment and as the volume environment linked to overall consumption and what does that due to the commodity markets and our pricing actions, but that the debt.
Linked to that.
Okay, and your industrial and healthcare businesses had really nice margins in the second half of two.
2020 of that as they were up above 12% is that a new level of margin for that business.
And then secondly, you donated $10 million two of charity was there an earnings per share impact from that extra 10 million net debt you donated and if there was what was the EPS impact.
Okay.
Sure Jeff. So your second question first so yes that is the increase that you see the $10 million is on the corporate expense line of Q4, that's why at corporate is higher than usual and so that is in our numbers include we didn't adjust that out or anything else. So that would be roughly of <unk> impact to Q4.
And then as far as IHS, we're still targeting our objective here for 2021 was 12, 5% of.
Operating margins or more from this business, we're not quite there yet the team has done a great job and I will say under Greg's leadership Greg's been the overseeing this group of divisions for the last couple of years.
And our objective and if you look at the high end of our range has to be within that targeted.
Targeted range by next year, So continued margin expansion in the Gulf.
Our next question is from George Staphos Bank of America. Please go ahead.
Yeah.
Hi, everyone a good day.
On my question congratulations on the year.
Hum.
I wanted to take a step back and talk a bit more about return on capital mentioned, Greg So.
Avery has a long successful track record you pointed to that at the beginning of your presentation in terms of.
Capital allocation of return on capital.
And that's all well and good.
We have seen over the last three to four years, that's not just the result of Covid the written.
Turn on capital for the company begin to tick lower.
If you've evaluated that and you agree with that point, what do you think is driving that and then related Lee it.
It looks like Covid has really changed the the growth outlook for a lot of your businesses, whether it's the RFID or L. P M.
Youre going to have to spend money it sounds like you've already begun to do so.
On capacity.
How do you continue the the return on capital trajectory debt you'd been seeing longer term as youre now needing to spend behind.
Behind this growth and then I had a follow on.
Yes. Thanks, George This is Greg So I think when we look at our return on capital when we set our targets back at the beginning of 2017, we'd come out of 2016 with about a 17% our OTC.
And you know the last couple of years, there's been some.
Some of the pension impacts when you.
Look at those in 17, and 18 and you can see the adjusted numbers in the appendix of our slides, but when you adjust out that were roughly 19%. The last couple of years and in that 18% level here in 2020. So we feel like we have been continuing to expand our OTC above the based on where we started out back in 2016.
With this year of course includes a couple of acquisitions that were.
We're in the first year of sales so feel good about the progress we're continuing to make on a return perspective and in continuing to be in the top quartile among our capital market peers, there and when we think about investments going forward, we English talked already about RFID overall as EBITDA margins above our our average for the segments in the company and that generates good returns.
For us and we continue to invest in areas, where we think we will have strong returns. So a lot of our capex is in areas like RFID and it's also on other high value segments like specialty labels within L. G M or industrial with NIH M and also looking at some of the emerging region. So we're investing in areas that we think are high return on where we can continue to generate strong.
Return on capital.
Yes, George and just to reinforce the overall same here the GDP plus growth and top quartile returns on capital.
These levels were bolt and that is our continued focus on that's a recipe for superior value creation over the long term on when we had set out the 2021.
<unk> back in 2017, we did say that the capital efficiency, we had gotten into the top decile of efficiency and that we would go through a period of recapitalization of both organically and be looking for M&A and when we haven't done M&A for a while.
Then started doing M&A over the last four years.
Takes a while some of the returns perspective for the returns to match the the invested capital base that you have in there and once we.
I have a series of the even the years going forward and so forth on it all starts comping in the returns.
Are catching up on acquisitions, you've done a few years ago, you'll see that.
That continue to flow through okay.
Understood on that I guess, the other question that I had got a lot of.
On my questions were answered earlier, if you think about where youre applying capital going forward and trying to grow the business are these areas that you would expect would have higher margin higher return on capital are the areas where in some ways youre applying capital defensively, because you don't want to see some of these markets move towards your.
Your peers in terms of share I know, that's a broad question and hard to answer in a sentence or two but how would you have us think about it is it likely to see.
Like the to generate higher margin higher return on capital over the next two to three years.
And the lead to share gains thanks, I'll turn it over.
Yeah, So we're investing I mean.
If you look at both of our high value segments on our base.
We look at EBITDA and returns we don't look at just the average that we disaggregate it and for US its continuing to invest in businesses, where we have good E. B a potential and that's the bulk of the high value segments on the base it would be disproportionately in high value categories.
Particularly in RFID. So that's been the significant part of our growth investments.
And as far as the base goes.
<unk> seen on our investments we just go back over the last five years.
When we need to invest for growth. We also concurrently invest for productivity. So if you look at the investment we did in Europe of few years ago.
The significant expansion on where we need the capacity and to one of our plants and we subsequently we were able to take offline some capacity to drive productivity so of both enabled growth.
For that market at the same time as lowering our cost base. So a good very good return on outcome from that perspective.
Our next question is from John Mcnulty BMO capital markets. Please go ahead.
Okay.
Yeah.
Mr. Mcnulty of your line is open.
And moving on to the next question.
As Christopher <unk> with loop capital markets. Please go ahead.
Yeah, Hi on sorry to follow up on the RFID business and if I look back of it looks like you closed on smart track early March of.
Probably just weeks before the the pandemic lockdowns ensued.
And it sounds generally the consensus has coalesced around this idea that the pandemic has increased your addressable market opportunities in RFID, but I'm curious to peel that back a little bit more if you look at the apparel and food applications. It looks like what what's happened is the behavioral changes that maybe accelerated the adoption in those.
Applications, what I'm curious about in the case of logistics, because you were talking about having traction in logistics.
It sounds like maybe the the pandemic.
Pandemic influence of the business case, there. So I'm just wondering if that's a good characterization because if I think I think back to early days of item level apparel adoption. The business case was very clear right. It was it was inventory accuracy of preventing stock out of the consequential sales lift and eventually the dovetailed in.
This transition to omni channel and the E commerce.
Help me understand like what what's the business case in this logistics opportunity it sounds like it is.
Compelling it sounds like it's there's more visibility in and around your traction there so of the interested to hear your thoughts on that thank you.
Yeah, So Chris the business case is really around increasing productivity because.
Coming more touch list in your operations.
And that's.
Some of the fundamental base case of what you had before apparel you have in these other categories and that's specifically why we targeted these other categories as we looked for and markets that shared some similar characteristics and some challenges is what apparel is going through albeit in a different form.
Absolutely the pandemic accelerated a lot of the activity within the pipeline you say adoption has not yet really had a significant mover on adoption levels because it takes some time to work through the pipeline I commented earlier about some of these programs.
More moving into pilot.
The pandemic during the height of it in the spring or the.
The early phases of it I should say we commented it actually slowed down the amount of activity when restaurants were closed as an example, there was the fewer opportunities for some pilots those of all re ramped up again here in the second half kind of talk about the momentum going into 2021. So the.
Use cases, it's really around just becoming more touchless as far as interactions driving productivity you wanted to increase the visibility reducing waste of RFID, the huge opportunity to reduce waste so enabling companies to meet their own sustainability objectives.
Those are all included within that.
We see tremendous opportunity here. So that's the use case, you should think about as the very similar to apparel, albeit in a different form.
Okay. Thanks for that and then just as the follow up in the the iron.
The level of apparel.
The.
Effectively backward integrated into inlays, I mean, and I guess, it's comparable on some of these other applications, but I'm just wondering if it's <unk>.
Given the there you are there are different effect of technologies and therefore, maybe.
The key systems I'm wondering if the the margin profiles of each of these different applications evolve or are they similar or is one of our.
Are you gonna see more of an on the margin opportunity tied to the sort of the apparel and food categories. Thanks.
Yeah. So it really is for each end market, there's going to be elements of it where we are providing.
Providing as you say just the base in La and then where we're actually providing a full solution set managing the day the printing the data.
Working on supplying the solution around hardware and so forth. So in apparel, we actually sell just the base and lay of the minority of our sales to through the smart track channel on the LG I'm channel through without managing the information and so forth to some competitors of the apparel solutions division on the vast majority.
40 of those of course of what our apparel business sales.
Sales through as we say, we're vertically integrated with managing the information.
Food will be the same as an example, where we're providing the full solution set in many areas and I'd say the early adoption aspects will be more solution based.
And so I would expect it to your ball of similar to what we've seen in apparel.
Next question is from John Mcnulty BMO capital markets. Please go ahead.
Yes. Thanks for taking my question hopefully you can hear me this time.
So I guess to two things one would be on the Rbis front if.
If I look at 2019 and I look at 2020, it looks like there was a geographic shift with the U S kind of gaining about five points and in Asia actually.
The losing about five points, which seems a little surprising just considering how Asia weathered COVID-19 may be better than <unk>.
Better than some of the other regions. So I guess, what's driving it is it is it just the RFID growth and where that stemming from or is there something else we should be gleaning from this.
It's RFID adoption, that's exactly in the RFID adoption.
As far ahead in the U S versus the other.
Other regions.
Got it okay and the continued if you look at peer volumes Asia, where we're actually seeing a continued strength of penetration. If you were to look at it just from a pure volume standpoint within Rbis.
Got it okay. That's helpful.
Then I guess the other question was just in terms of the fourth quarter right in on the temporary savings did you quantify that I don't recall you, saying it on the on the call, but I guess, if not can you quantify what those savings were.
Yeah.
Yes, we didn't quantify the quarter. So I think we said for the full year, we had about $135 million of the temporary savings a little bit lower than what we had projected for the last couple of quarters, just given we'd said when volume starts to come back some of those costs would return so a little bit lower than we had projected before so the fourth quarter I think was in the.
Roughly $15 million range something like that.
The next question is from Adam Josephson Keybanc. Please go ahead.
Thanks, So much from taking my follow up Mitch just one on the geographic situation for you just the including any observations.
Thus far in the first quarter, you mentioned that North America was was really strong, particularly in L. P. M. On the last I don't know eight months of the year much more so than was Europe, even though they both locked down much of that time can you just talk about what youre seeing geographically if it if the trends differ much than what you saw in.
In the fourth quarter and what your expectations are if you can by region roughly speaking as part of that 3% to 7% organic sales guidance. Thanks very much.
Yeah.
Yeah, I mean as far as what we're experiencing yes, North America is definitely.
Having a resurgence in the volume that we're seeing right now.
And that's just what I explained and I think its the drivers of you look at it do do consumer packaged goods consumption as well as the E commerce.
It's hard to tell the talks about volumes have been a bit lumpy.
If you look across the various months by region.
So there could be a little bit of inventory build within the current surge that we're seeing in North America and Europe is the.
Definitely it came back stronger in Q4, and I'd say all the regions came back very solid growth within Q4.
America, particularly strong but.
Even they finished the year strong.
And now as we look at January which might be some of your questions. We're continuing to see the strength in North America is the softening a bit in Asia is just too early to.
To tell because of the <unk>.
Lunar new year.
And Mr. Woods here there are no further questions at this time I will now turn the call back over to you for closing remarks.
Alright, well. Thank you everybody for joining the call today again want to thank our team for their commitment dedication of agility and.
Moving a very strong year from a bottom line perspective, and delivering for our customers and what was the very challenging market conditions I do want to just encourage everybody to join us for our Investor Day next month, where we'll be sharing more about our long term objectives and strategies. Thank you very much.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation on that could you. Please disconnect your line.
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