Q1 2021 Avery Dennison Corp Earnings Call
Yeah.
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. If you have a question. Please press the one followed by the four on your telephone.
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Welcome to Avery Dennison earnings conference call for the first quarter ended April 32021. This call is being recorded and will be available for replay on new.
Pacific time today through midnight Pacific time May.
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The conference I D number is.
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One <unk>.
Nine.
Six nine.
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Sure.
And one nine.
I'd now like to turn the call over to John Emily Avery Dennison and head of Investor Relations. Please go ahead Sir.
Thank you Pam on.
Please note and 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 a eight of the financial statements accompanying today's earnings 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.
On the call today are Mitchell, <unk>, Chairman, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer.
Sure.
I'll now turn the call over to match all over to Mitch.
Thanks, John and good day, everyone.
We are off to a strong start to the year with revenue up 11% EPS up <unk> 45 per cent, both well above expectations and strong free cash flow.
The favorable results were driven by improving and broad based volume and productivity gains across the portfolio. It's all three of our operating segments delivered strong sales growth and significant margin expansion.
We experienced strong demand as many economies emerge from the depths of the recession amidst rising confidence.
This combined with both the structural and temporary productivity initiatives, we've implemented drove a strong quarter.
Now while we are pleased with the results. Our strong performance comes at a time of continued uncertainty given the global health crisis and constraints within supply chains.
The current environment further reinforces our determination to remain vigilant and protecting the health and wellbeing of our team and agile to ensure we continue to meet our customers' needs.
While the rate of COVID-19 infections declined and a number of countries, including the U S and optimism and increases as that vaccines rollout much.
Much of Continental Europe has been and locked down and other countries, such as India, and Brazil have experienced a significant rises and infection rates.
Fortunately the rate of new cases, among the team remains relatively stable.
In addition to the effects of the pandemic natural disasters, such as the Texas Winter Storm and other factors. The microchip shortage being an example are constricting supply chains, even further affect on our end markets and adding to inflationary pressures.
Despite these supply chain constraints, we've been able to deliver record volumes as our team has done a great job of leveraging our global network and scale to ensure we continue to meet customers' needs.
Now a quick update by business.
Label, and graphic materials posted strong top line growth for the quarter as demand for consumer packaged goods and E. Commerce trends continued to drive strong volume and our label and packaging materials business, while our graphics and reflective solutions business rebounded faster than expected.
L. James' margin was strong and the quarter ahead of expectations actually as the flow through from higher volume, including strength and high value categories, coupled with productivity gains enabled significant margin expansion.
Retail branding and information solutions delivered strong sales growth and the quarter driven by both high value product categories, particularly RFID and the core apparel business.
The strong top line was driven by retailers and brands gearing up for a rebound in demand and to a lesser extent easier comps.
Enterprise wide intelligent label sales were up 40% ex currency and up 20% on an organic basis.
As expected the strong growth of our RFID business was primarily driven by apparel, while outside of apparel, we continued to see strong momentum building for new applications.
Yeah.
As we outlined in detail at our Investor Day last month, we have a tremendous amount of opportunity and this space and apparel food logistics and more.
And and you also heard our focus is not only to be the world's leading RFID supplier, we are creating a broader intelligent labels platform to bridge, the physical and digital worlds.
As part of this we are investing and digital identification technologies that enhance the ability to manage and store item level information.
To this and we recently announced two digital initiatives one the acquisition of a small software startup zippy M and the other being the launch of a connected product cloud platform startup at my data I O.
That's what the bottom line pardon me I used to deliver significant margin expansion this quarter, driven by driven by higher volume and productivity initiatives.
Given the margin and growth profile of this business, we will continue to ramp up our pace of investments and the segment, particularly and intelligent labels with an accelerated pace throughout the remainder of the year.
Turning to industrial and healthcare materials, the segment delivered strong sales growth and the quarter driven by a significant rebound and demand for industrial products. While we continue to make good progress towards achieving the long term margin target for this business.
We continue to invest and this segment, including the acquisition of <unk> solutions, a small manufacturer of specialty tapes for use and a variety of high value industrial applications that we closed in March.
Now given our strong performance in Q1, and our revised expectations for the rest of the year. We have raised our full year outlook and now anticipate top line growth of 9% to 11% ex currency and earnings per share of $8 40 to $8 80.
We're pleased with the continued progress we're making towards the success of all of our stakeholders.
Our consistent performance reflects the strength of our markets our industry, leading positions the strategic foundations, we've laid and our agile and talented team.
We remain focused on our five key strategies.
Driving outsized growth and high value categories growing profitably and our base businesses.
Focusing relentlessly on productivity.
Effectively allocating capital and leading and an environmentally and socially responsible manner.
We are confident that the consistent execution of these strategies will enable us to achieve our long term goals, including consistently delivering GDP plus growth and top quartile returns.
And once again I want to thank our entire team for their tireless efforts to keep one and another safe while continuing to deliver for our customers. During this challenging period, bringing a whole new level of agility and dedication to address the unique challenges at hand.
Over to you and Greg.
Thanks, Mitch and Hello, everybody as Mitch said, we delivered a strong start to the year with adjusted earnings per share of $2 40 above our expectations.
This is roughly 75% increase over prior year was driven by strong growth and productivity gains.
And as well as an estimated 25 benefit from the combined impact from the calendar shift and pre buys.
Sales grew ex currency, and 11% and 9% on an organic basis.
Driven by strong broad based demand as well as a modest benefit from easier comps as the pandemic began to impact our results and Q1 of last year.
Given the strong revenue combined with productivity gains, we delivered adjusted EBITDA margin of 16.5%.
And adjusted operating margin of 13, 9% both up roughly two points.
And we realized and $19 million of net restructuring savings and the quarter. The majority of which represented carryover from projects, we had pulled forward into 2020.
And we continue to expect roughly $70 million from net restructuring savings this year.
As Mitch mentioned to begin the year supply chain remain tight and input costs have been increasing.
As a result raw material and freight inflation were above our initial expectations and we've continued to see costs rise as we entered the second quarter.
We now expect mid to high single digit inflation for the year with variations by region and product category.
As we typically do we will address this through a combination of both product reengineering and pricing.
We've announced price increases and most of our businesses and regions across the world and <unk>.
Given the pricing announcements some customers accelerated orders and to the first quarter ahead of pricing adjustments.
We estimate the pre buy benefit to Q1 was roughly two points of revenue growth and.
And we anticipate this impact will largely come out of Q2.
We generated $182 million and free cash flow and the quarter.
Up substantially compared to last year.
Primarily driven by improved working capital and higher operating results.
Working capital as a percentage of sales improved compared to prior year, driven by better receivables and inventory turns.
And our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of one six.
Our current leverage position gives us ample capacity to continue executing our disciplined capital allocation strategy.
Including investing in organic growth and acquisitions, while continuing to return cash to shareholders.
Last week, we announced that the board approved a 10% increase to our quarterly dividend rate.
Following the 7% increase last year.
And in the quarter, we paid $52 million and dividends and repurchased roughly 300000 shares at an aggregate cost of $56 million.
And as you know we increased our pace of inorganic investments last year and we've continued on that front.
<unk> $31 million for acquisitions, and the first quarter, including J D C solutions and zippy.
Okay.
Now turning to segment results for the quarter.
Label and graphic materials sales were up eight 4%, excluding currency and seven 6% on an organic basis driven by higher volume.
Sales were up roughly 7% organically and label and packaging materials with strong volume growth and both the high value product categories and the base business.
Partially offset by carryover price reductions.
Graphics, and reflective sales continued to rebound nicely and were up 9% organically.
Okay.
Looking at the segments organic sales growth and the quarter by region.
North America, and Western Europe sales were up low single digits, while emerging markets overall were up mid teens.
The Asia Pacific region grew roughly 20%.
Led by growth in China and India.
Although the recent surge and COVID-19 cases, and India is heightened uncertainty and the region.
And Latin America grew mid teens with particular strength in Brazil.
<unk> adjusted operating margin increased 150 basis points to 16, 3%.
As the benefits from strong volume, including the benefit of the calendar shift and pre buy.
And productivity more than offset higher employee related costs, and the net impact of pricing and raw material cost.
Shifting now to retail branding and information solutions.
Rbis sales were up 15% ex currency and nine 3% on an organic basis as.
As growth was strong and both the high value categories and the base business.
The core apparel business was up mid to high single digits as retailers and brands prepare for the stronger demand with particular strength and the value and performance channels.
And as Mitch indicated excluding currency and intelligent label sales were up 40%.
And up 20% on an organic basis.
Adjusted operating margin for the segment increased 440 basis points to 12, 9%.
As the benefits from higher volume.
Lower receivables reserves and productivity more than offset higher employee related costs and growth investments.
Yeah.
Turning to the industrial and healthcare materials segment sales increased 18, 8%, excluding currency and 16, 3% on an organic basis.
Reflecting strong growth and industrial categories, particularly in automotive applications, which more than offset a modest decline and health care.
Adjusted operating margin increased 190 basis points to 12, 3% as the benefit from higher volume more than offset higher employee related costs.
Now shifting to our outlook for 2021, whether.
While there is a continued high level of uncertainty from the pandemic and tight supply chains, we've raised our guidance for adjusted earnings per share to be between $8 40.
And $8 87.
75% increase to the midpoint of the range.
The increase reflects the strong performance in Q1, as well as and increase the outlook for organic sales growth for the balance of the year.
We now anticipate 9% to 11% excluding currency sales growth for the full year above.
Above our previous expectation driven by both the higher volume outlook and the impact of higher prices.
We've outlined some of the other key contributing factors to this guidance on slide 12 of our supplemental presentation materials.
And particular, the extra week and the fourth quarter of 2000, and 'twenty will be a headwind of a little more than one point to reported sales growth.
And a roughly 15 cent headwind to EPS to 2021.
We estimate Q1 benefited by roughly 15 cents based on the shift and the calendar and anticipate there and are roughly 30 cent headwind in Q4.
As noted earlier, we estimate the pre buy benefit to Q1 was roughly 10 cents of EPS, which will come out of future quarters, mainly Q2.
And the anticipated tailwind from currency translation is roughly two points to sales growth and $25 million and operating income for the full year based on recent rates.
Yeah.
And the majority of our 2020 temporary cost reductions have come back in at this point.
The exception is our belt tightening cost and travel expenses for example, which have remained low to start the year with many of our employees still and locked down and we're working from home.
And we expect these costs to come back in later through 2021.
And finally, given the increased outlook for earnings and working capital productivity, we're now targeting to generate over $675 million of free cash flow this year.
So in summary, we delivered another strong quarter and a challenging environment and we remain on track to deliver on our long term objectives to achieve GDP plus growth and top quartile returns on capital, which together drive sustained growth in EMEA.
And now we'll open up the call for your questions.
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Our first question comes from the line of Ghansham Panjabi with Robert W. Baird and company. Please proceed with your question.
Thank you ma'am.
Hope everybody is doing well and I'm sorry.
And so far from the it's on <unk>.
Yes, as we kind of think out ahead, it's still pretty and the year, but pretty early in the year.
And your core sales guidance is now nine per cent of the midpoint versus 5% previously.
Clearly you have a free buy and <unk> that may come on the expense of <unk>, you have tough comps and some businesses.
And then you have the India, and Brazil, and other parts of the world buyers flourish. So I guess in context of that and and what you've called out and passed in terms of sort of limited visit visibility on a go forward basis for your businesses and seeing that they're short cycle.
I guess, what gives you confidence to be able to raise organic sales guidance. This early in the year and also you know in terms of <unk>.
Share gains are you embedding any sort of future share gains and net.
Thanks Ghansham. This is Greg so yeah, just maybe to.
To give you a view of how we're thinking about it and when we look at the full year, obviously and the first quarter and we delivered strong volume growth from about 9%, which adds a little more than two points to the full year a growth rate. We then look at the second and third quarters, which obviously Q2 last year was the trough and the pandemic for us and we still had a decline of about four points.
And the third quarter of last year as well. So just looking at if we can recover the declines that we saw and the businesses most impacted last year by the pandemic and Q2 and Q3 those quarters would add another four four and a half points of growth for the full year growth rate. So between Q1 and just recovering the declines that we had last year and Q2 and Q3 will get us.
About seven points and then in addition to that you'd be looking at and impact from the incremental pricing actions that we've talked about given the inflationary environment. This year. So that's kind of how we've thought about getting to that eight to 10 point range. The strong growth, we had and the first quarter and addition to recovering the volume declines that we had last year plus the incremental impact of the pricing.
Okay and then my from my follow up question in terms of April are you seeing the deceleration as it relates to the pre buy that you called out and then also for the L. G. M. L. P M I should say.
Vantage markets from last year, so the pre packaged food et cetera that benefited last year are you seeing the comparisons changed dramatically associated with that or do you still see elevated demand.
Yes. So overall April the trends early on broad based are continuing what we saw in Q1.
The impact of the pre buy from the pricing is now and we're just starting to see visibility of that to our orders because when we received the orders. We continue to ship into early April. So we do are starting to see as far as order trends at the impact a bit from the pre buy.
But overall right now we're seeing some of the trends continuing into.
And into Q2, what we saw Q1, which further reinforces the guidance that Greg.
Greg just spoke to so as far as you know if you look at from a market perspective, and you asked about share a little bit because you know we have a little bit of share movement. Each quarter. We believe share in Q1 was comparable to what we had.
In North America, the last couple of years over the average and in Europe, we captured some of the share we talked about that we had ceded.
Eric so ago within the quarter as well now and all that data is not finalized that's based on our estimates.
So the market overall from mature regions actually we believe moderated in Q1.
And thats off of a very tough comp of Q1 of last year Ghansham. So that's kind of already baked in a little bit of that a tough.
Tough comps if you will from last year as far as the growth within the markets and what we're seeing.
Now Conversely, what youre seeing and emerging markets as we said those were up significantly within <unk>, So China was pretty soft.
Q1 of last year and was soft relatively throughout much of the year and we saw a big strong.
Performance here in Q1 and would expect as that economy continues to rebound and continue to see good strong momentum on volumes and so forth within that business.
Thanks, So much Mitchell.
Absolutely.
Our next question comes from the line of Anthony Pettinari with Citi Group that global markets. Please proceed with your question.
Good afternoon.
I was wondering if it's possible to say when you'd expect to see price cost balance to get and L. G. M. You know understand that you have a lot of off net long on restructuring savings, but you know how many quarters will it take you to get caught up.
With the pricing initiatives and given a really unprecedented raw material inflation environment are there any sort of special price increases or special measures that you're undertaking to recover costs.
Yes, thanks, Anthony So I think to.
The last part of your question of course at the beginning of the year, particularly in North America are really at the end of last year and North America, we started to see the spike in and chemicals and films with propylene going up and we did implement a surcharge there and I think we've also implemented a surcharge and a couple other regions as well as well when we've seen some chemical increases through the first quarter at the same time.
So as we move through Q1, we started to see inflationary pressures continue to increase as I talked about a bit earlier and we expect more of a sequential increase here and the second quarter, probably in the mid single digit range from Q1 to Q2 in particular.
So from our perspective of managing that are covering that we always take a two pronged approach as you've heard us talk about before looking at material cost reengineering and to take cost out and cost out.
As well as reducing pricing no occur increasing price to cover the rest of that so I think overall, we're looking at over a period of time continuing to be able to cover the inflationary pressures between those two levers typically we do have a quarter or so lag as we've talked about before as well and we'd expect to see a similar level here. This year, we actually and the Q1 year over year.
You still had some price down and like the deflation we had last year.
Okay, that's very helpful and.
And then just on the chip shortages and any potential impact to your global automotive business and IH M or RFID, we've heard about.
And that impacting readers.
And any kind of finer point you can put on the impact of the chip shortage either in the quarter or maybe the risk for the remainder of the year.
Yeah.
Yes, well Anthony so we're seeing if you're talking about end markets automotive being a good example.
And we would be impacted by whatever is happening and the end markets there and the chip shortage would be and pet packaging that we talked about our strong growth and that's including and automotive in Q1.
Even even adjusting for the easier comps so.
That's definitely something that should be part of your outlooks part of hours for sure. We think there is also going to be some pent up demand for automobiles as well so.
And that's something that we would see is a bit temporary if you will.
More broadly if you think RFID, so from our own supply chain standpoint, and so forth we feel that we're in a good position.
And to continue to meet our objectives for for this year next year and so forth.
And obviously you know we've had to jump through a few more hoops.
And one things around between various suppliers and so forth.
But we feel and we're in a good position overall from that perspective.
Thank you.
Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yes. Thanks for taking my question, just maybe a follow up on the on the raw material side.
Just given all of the supply related issues, the surge and raw material issues did you have any issues and actually getting material for the quarter or do you foresee any from <unk> and and as best you can tell.
Are you on a similar boat as your competitors or did you maybe fair. This better just given your scale I guess, how should we think about that.
Well, we absolutely had a lot more hoops to jump through here and the quarter, particularly because of what happened and North America and John with.
With the Texas Winter storm as I called out. So there was a we were able to leverage our global scale sourcing material from various regions.
And as well as just our size and overall, but.
Yes, that's definitely had an impact and the entire industry, including us on lead times. So our lead times were a bit longer than the normal two days. They were a few days oh throughout the since that winter storm and continue to be a little bit of elevated levels.
Overall, so yes, it has impacted lead times non our ability to overall meet customer demands and as far as on a relative basis, we haven't seen the share data for North America, specifically yet.
And so can't comment specifically on that but we feel that we were.
And where.
Probably in a better position on a relative basis than the broader market.
Got it fair enough and then maybe you can just speak to you on the RFID front, obviously from some really solid volumes and it sounds like even your excitement level, which has always been pretty high here. It sounds like it may be even higher and and the investment that you're putting into it maybe stronger I guess, how should we think about just given all the pilot programs you have been doing the what seems to be.
COVID-19 kind of putting on and incremental light on the importance of supply chain management I guess, how should we think about the ability for at least the next 12 to 18 months call for this business to even accelerate from the high levels that it's at right now.
Well, John you, Sir and level of excitements, increasing and maybe we were understated in the past we've been consistently energized about what this business can do.
Yes, as far as you know.
What the next 12 to 18 months, we've laid out that we expect this business to be able to grow 15% to 20% over the long term, we continue to have that conviction and as those get on to be ever built upon ever larger numbers and it has an even greater impact on the overall growth trajectory.
Of the company. So as we said we have a number of years still ahead of us on just retail apparel adoption, we see huge opportunities and other categories food and logistics as examples and.
And you know we're looking to further build on our RFID capabilities as we build out and the intelligent labels platform. So it's very consistent with what we've been talking about and we continue to be energized by the opportunities that lie ahead.
Thank you.
Our next question comes from the line of Jeffries, Our caucus with J P. Morgan Securities. Please proceed with your question.
Thanks very much.
And your operating cash flow and the first quarter was a couple of hundred million pound and.
Normally it's a reality.
Number relative to the other quarter.
And it looks like you managed your payables differently than you've done historically and that usually payable stuff change very much.
Year over year, but this time, maybe they were up on shrink a $50 million.
Are you doing something different from working capital.
Hey, Jeff This is Greg so on working capital I think it's a it's a number of fronts really that we've been driving one is obviously last year at this point and time, we are seeing our customers stretch payments and little bit DSO and had gone up a bit last year and this year. That's that's back down seven days or so better than it was a year ago.
<unk> improved our inventory turns and.
And our GPO isn't too much different now than it was at the end of Q1 last year. It's really just the change from prior year and we did have and can we talked about last quarter, just given the calendar shift a little bit more.
Payments that otherwise would have fallen into Q1 that went out and Q4 of last year. So that's really the biggest difference on our payables perspective, when we look at this quarter versus others. It's not that we've made a significant change and in terms of other things on a more ongoing basis.
And.
And your label and graphic materials business when you think about your China.
China volumes.
Volume.
Think that they were unusually strong and the quarter and.
And if they werent and they kept on at this level.
The volume comparison day year over year.
Yeah, Jeff I'm not sure exactly so the China volume was quite strong and it's coming off of a weak comp so China last year was down and Thats, where the pandemic started on it.
And it's relatively anemic through most of the year. So the comps are.
Not as easy I'd say going through rest of the year, but still relatively easy based on what generally overall GDP is doing within China, and so forth. So we do expect.
We've got tougher comps, if you will and the mature regions and a little bit easier comps in China as an example.
And maybe I should've asked differently sequentially and trying to change very much.
And how you saw on growth in the quarter over prior year and last year is obviously when we saw more of the impact.
From COVID-19 and early in Q1 of last year, and China started to recover a bit and Q2 last year and then and then recovered more on the back half. So the comp is certainly a different impact this year and the first quarter I think from a run rate perspective, we continue.
And to see some improvement, but a lot of year over year growth. This quarter was really due to the comps from last year.
Yeah, So Jeff Q1 on just the Sapir sequentially is above Q4.
Overall.
Thank you.
Our next question comes from the line of Adam Josephson with Keybanc capital markets. Please go ahead. Thank you.
Thanks, Good morning, Mitch and Greg and.
Congrats on another really good quarter.
Thank you Greg so.
And so you raised your organic sales growth range by four points and if I heard you correctly, I think price and incremental price is about a point of that please correct me if I'm wrong. There. So assuming your volume expectation went up by about three points for the year can you just talk about which regions and end markets, particularly surprised you to the ups.
And the quarter such that you can move the range up by as much as you did.
Yes, so I guess price, we would expect to be.
A couple of points this year, given inflation and that kind of mid to high single digit range. So again year from a year over year perspective price is down a little and Q1, we'd expect it to be up as we move through the course of the year given the price increases that were taken effect at the tail end of Q1 in particular and and early here in Q2.
So we did raise organic maybe not or the the volume growth I guess, maybe not quite as much as you indicated, but we certainly raise it just based on the strong growth that we saw coming out of the first quarter.
Across the portfolio really and then as Mitch already talked about and April we're really seeing the rebound and especially in the businesses that were most hardest hit last year. So looking at the year over year comps and April isn't as meaningful just given that was really the trough month for a lot of the.
<unk> declined last year, and Rbis, and graphics and IH M, but.
Overall net of the price at the pre price increase pre buy continuing to see strong volumes as we entered April so that's what gives us confidence to increase the range for the year.
And on and I'm just to add on that.
Shifting our growth outlook for the year and when we were at Investor day, we laid out our long term objectives of 5% plus cash.
CAGR through 2025.
Ex currency and we said from 'twenty to 'twenty, two beyond it'd be 4% plus and basically what we are communicating and we couldn't really tell the timing of the recovery and how quick it would come back we knew by 2022 between this year and next it would be fully back on.
And it seems to be coming in a bit quicker than our assumptions were originally so definitely things are picking up faster than we had anticipated for the reasons that we've talked about and Greg referred to but when you think about long term perspective.
Think about it is we weren't sure exactly what the pace and timing of the recovery would be it seems to be happening a bit quicker than we had.
Anybody who had previously now.
And I appreciate that Mitch and just one follow up on that so you had really strong growth in China, which is.
Mostly rid of it and the rate itself of the virus find out Brazil is almost the exact opposite and Thats one of the worst hit countries and the world and yet those are two of your strongest countries and <unk> if I if I heard you correctly.
So what is the denominator here in terms of its strong growth you're experiencing.
But one theres a general I mean, the common denominators and e-commerce and focus on consumer packaged goods broadly specifically within those it's a bit different in Brazil and they've.
Ben.
Huge surge and COVID-19, which has a normal migration, we've seen elsewhere towards consumer package goods, but you also have a lot of stimulus.
And so a lot of money and a lot of People's hands and they are are there they're spending it so that is a different very different than what we're seeing and China of course.
Thank you.
We now have a question from the line of near Kumar with Morgan Stanley Investment Research. Please proceed with your question.
Great. Thanks.
Can you just give us a sense of what's embedded in your full year guidance in terms of incremental margin.
The consolidated company and and by segment is it.
It still fair to expect a stronger margin step up on Rbis and <unk>.
And then a higher proportion of value added categories.
Yeah, I guess, so broadly looking at the years, we and we talked about when we came into into 2021, and our last call looking at high level coming into the year, maintaining or even growing a bit our margins year over year with the biggest part of that growth coming from <unk>.
Obviously, which was depressed last year, particularly and the second quarter and when the trough of the pandemic.
So looking at debt to recover closer to or maybe better than 2019 levels within Rbis, and then continuing to move IH and towards its long term target. So we would expect to continue following that path.
As we look across the course of the year and continuing to drive growth, particularly in those segments and LG and we did grow our margin two points last year.
And you know obviously, what the inflationary pressures here this year Wouldnt look for as much margin growth and L. G M. As we would see and the other segments in 2021.
That's helpful and then well.
And the graphics business, you know you realize 9% organic growth and the quarter and the POS I think you've talked about this business historically taken and about 46 quarters, the pony and recover from the downturn.
And discuss some of those drivers and strength on thoughts on them and keep steady recovery.
Okay.
So just generally I would say, it's the increase and you would normally see compounded by you know people have.
Spending more time on focusing on customizing their cars and putting on car wraps and so forth and then we also believe we've captured some share, particularly here in North America.
Yes.
Thank you and Ken.
And we now have a question from the line of Georgia Staphos.
And with Bank of America Securities. Please proceed with your question.
Thanks, everyone. Good morning, and good afternoon, and thanks for all the details on my first question what was going on.
And focus on Rbis, and kind of the first part of that and in particular with intelligent labels, the 15% to 20% long term target and.
The 20% growth that you saw on the first quarter and certainly very very good.
If there was a gating factor in terms of the.
Demand or the ability to grow even beyond that.
And where would it line would it be your customers' willingness to trial and have the capital to do these trials or is it on the Avery side in terms of your ability to manage that type of growth or is it and the supply chain and how should we think about that.
If you if you if there is impact on.
The growth and beyond.
Okay.
Right.
Yeah. So we think the 15% to 20% is the right range overall, George as we've reiterated and as far as the gating factor. If you look at within apparel, it's not our ability to roll this out or anything its just theres a normal adoption curve as you go through these things and.
We're always when you actually go to first adoption for a particular retailer or brand, there's a big surge for that individual retail brand and creating tougher comps for the next level of rollout and so forth and so on.
So we think thats the right right target overall for the business.
So that's on apparel, if you look outside of apparel I mean, it's very nation, but we see a huge amount of opportunity there and a lot of pilots going on and it's where apparel was five six years ago. We.
And so that was an accelerant and what happened with COVID-19 was an accelerant within the apparel category specifically over the last from where we were 12 months ago, and we expect that are and will continue to see momentum and rollouts from those customers that we're working with now.
Thanks Mitch.
Very helpful and <unk>.
And part of the question and then I'll throw my other one.
I thought I heard you say that within Rbis.
Had some benefit from releasing reserves on receivables if I heard that correctly could you quantify that and cash.
And that correctly just you.
You know.
State what Youre getting out there and then if you could talk about the other cost I think you said the majority of the other temporary cost savings have come back into the P&L, but theres still some amount related to travel that hasnt come in and recognizing that's not going to come in until the business is actually can sustain that and right. Because you were you were.
<unk> two to travel and so on for commercial purposes, how would those numbers how would you parse that whats come in what has yet to come in from the temporary cost saves and thank you.
Alright, Thanks, George just on your first question. This is really about in the first quarter of last year. If you recall at the start of the pandemic when when really retail apparel started to get impacted heavily in the month of March we saw some delays in payments and some some things happening and the market there where we took more receivable.
Reserves, we sent to work through that through most of last year. So it wasn't really an item in Q1 of this year. It's really just more about the comparison to prior year, where we had a headwind last year and the first quarter that didn't repeat this year and.
And then on the tip cost piece as we talked about earlier last year, we had about $135 million of temporary cost savings and that was split into a few buckets. One was really volume related items and that was more about half of our sorry about half of the overall savings that items like temporary cost reduction over time reductions and furloughs et cetera.
And the majority of that by the way it was really in Q2 of last year, and we had the volume trough.
And then another portion of that was incentive compensation and the remainder was belt tightening costs, such as travel and other type of expenses like that so the volume piece has clearly come back as we saw volume return late last year and into the first quarter as well as the incentive compensation pieces coming back here in the first quarter of 2021 as well so it's really that.
Last piece around.
And more discretionary type of spin belt tightening and type of spend that we would expect some of that to come back already in Q1, and the rest to come back as we move through the year and people start traveling more and things like that so we still would expect the majority of those savings to be a headwind this year versus what it was a year ago and that would reduce a little bit, particularly in Q2, where we had the bulk of it.
Net savings last year that would reduce a little bit of flow through from the incremental growth year over year as well.
Thank you.
And our next question comes from Josh Spector with UBS Securities. Please go ahead with your question.
Thank you.
Yeah, Hey, guys. Thanks for taking my question.
Just on the LG on margins and to kind of follow up on some of the price cost dynamics here.
And I don't know if you could provide us some context on what you think the exit rate is for LG M. This year.
And what you guys stepped up last year over 2019.
Do you think is that a sustainable level margins and stepped up for you and key peers.
And what makes you confident and the margin level of that business or what are some of the puts and takes we should think about.
Yeah.
Yeah. Thanks, Joe So I think.
We don't give margin targets by by Bu I guess right now for the year, but when we look at where we exited last year and we talked about or I talked about a few minutes ago and I think on our last call our focus on margins for the year, and we really expected more growth and Rbis, and <unk> in lgs had already grown a couple points last year, He said look and more to hold debt.
This year and we've done that obviously and the first quarter, but it's not just really about price, it's a bit and a heavy amount of volume growth that we've talked about and Q1 as well as a significant amount of productivity. So a lot of the restructuring cost that we talked about came in <unk>, particularly and the graphics side of the business, but also with some footprint actions and North America over the last year or so is.
Well, so it's been a combination of driving productivity and continuing to drive that over time, the ongoing every year productivity as well as periodic restructuring type of productivity. That's helped drive those margins and addition to the strong volumes that we've seen recently.
Thanks, and I appreciate that and just as a follow up you talked about the raw material increases and the impact of that near term.
How about any cost impact that's kind of baked into your thoughts for the next couple of quarters for and maybe using a different formulation that might be more expensive to supply a customer or the logistic costs that might be added in this current environment is there anything that you would call out as kind of more temporary over the next couple of quarters that's built in.
Well I think in addition to raw material costs, we have seen cost increases, especially and ocean freight.
We have seen cost increases, even and things like pallet costs. For instance is wood cost has gone up a little bit and certain regions. So when we think about inflation. We're looking at it more broadly and just materials. We're looking at all of our input costs freight and supplies and other things as well and those are areas, where we look to get more productive where we can and through productivity actions and then.
Also obviously, increasing price and we take all of those things and do account when we think about pricing actions or surcharges on freight and things like that also.
And Josh just to build on.
Broader context here and as Greg said our objective.
And EMEA driven company looking from the optimum point between organic growth margins and capital intensity, and we had expanded LNG and margins quite a bit going.
Last year, we hit our.
Objective as Greg already said was to hold it this year.
So that's the overall contact and Q1, specifically you know if you recall, we had accelerated a number of restructuring actions are still on the comp.
Temporary cost savings as well as the fact that we had the variable flow through the <unk>.
The pre buy happening.
And the margin you see.
We remain confident and our ability to hold the margin level based on what we see now hold the margin level that we had last year.
Now that is a total across our regions and a lot of the.
And cost pressures, both raw material as well and the other factors that Greg called out are disproportionately and Q1 were in North America. So North America is actually having a profitability challenge right now.
As far as where they are so.
The average doesn't necessarily tell the story of what's happening within each region and.
A lot of us here sitting in the states can see things more of what's happening here. So there's definitely a little bit more of a challenge there that we're working through and both from driving productivity and working with our supply chain partners.
And as well as raising prices right now.
Thank you.
And our next question comes from the line Rosemary and more families with G. Research. Please proceed with your question. Thank you good morning, everyone.
While I recognize it is a small piece of your business that I am talking about health care and I know you'll have great expectations for that business. So can you touched on on what is behind the decline is it more a question of a difficult comp versus you know.
I hired him and last year, well all day, all the underlying reasons for it.
Yes, so the health care portion of AGM is really has two components. One is our kind of medical tape business and the other would be what we call personal care tapes, such as diapers tapes and we look at medical tapes over the last number of quarters. We've seen just given a reduction on the number of elective surgeries and things like that a bit of reduction that we think we're kind of <unk>.
And through at this point, but a bit of a reduction over the last few quarters of medical tapes as a result of some of those type of activities.
Being being lower than they normally would be.
Where we actually saw a decline and this quarter was and diaper tapes. So a year ago, we actually saw and increase their partially due to some of the surge and stocking up by consumers at the beginning of the pandemic and the U S and Europe in particular, and so we're just seeing a little bit of a comp headwind year over year on the <unk> side in particular.
Alright, Thanks, and then looking at does not track and acquisitions have you seen any benefits in terms of extending your RFID in market, such as auto food and on the market, which they were bringing.
Some business into.
Yes, absolutely.
And so smart tracts and minute very fortuitous acquisition for us thus far given just the continued ramp across all end markets specifically your question around industrial and automotive applications.
As you would expect given the end markets declined a bit since the.
Since the acquisition due to COVID-19.
But as far as the pipeline and the customers, we're working with a number of programs, where we've already got ramping up adoption right now we do continue to see good opportunity there.
The key element here was and market access you've mentioned Rosemarie as well.
Just broader capabilities and they are very complementary to what we had.
See RFID business as well so overall the acquisition is.
Meeting and exceeding our expectations on top and bottom line.
Thank you.
Our next question comes from the line of Christopher <unk> with loop capital markets. Please proceed with your question.
Yeah, Hi, Thanks, Mitch and response to a prior question you mentioned that some of the disruptions and higher raw material costs were more acute and skewed North America. So I'm just wondering if and if that would imply that your pricing actions were more aggressive also on North America, and and really curious if the pre buy therefore was.
And more pronounced and North America.
And I'm curious further.
Outsize growth in emerging markets I was wondering how much they're benefiting from pre buy.
Yeah.
Yes.
And that we're getting into too much detail overall.
It's not just a by region and it's also by category. So films and chemicals is where we tend to see the broad based level of inflation in Q1, North America, and definitely was feeling and first and it's where we announce some of the first price increases in the quarter, but since then U S and kind of led the way, but the rest of the regions have been following as far as.
And the raw material inflation that they're seeing some when you look and a sequential Q1 to Q2, it's pretty broad based overall as far as the pre buy.
Seeing elements of that and a number of regions, but North America is definitely one and then some and emerging markets as well specifically, China is where we believe that we've seen some.
Okay.
Detectable levels of pre buy.
Okay, and then on the margin and the RCM segment.
Hugh.
You mentioned that volumes, but also mix contributed and makes sense on the mix with graphic sum reflective recovering and stronger than you expected and with the outsized growth in emerging markets. So because you've said in the past that emerging markets carry a higher margin than the more mature western market. So I'm just wondering if you're any way you could parse out the <unk>.
And benefit from volume leverage versus mix and in terms of the.
And the margin improvement and L. G M segment. Thanks.
Yes, Chris I don't know if I parse out specifically clearly there's a benefit from both just the strong dollar.
Strong volumes overall on the label and packaging materials side, and we saw that and the base, but we also saw strong volumes on durable labels and specialty labels, particularly and a handful and regions as well. So it was kind of broad based strength not just on graphics and reflective, but also and the kind of durable side of the label business, which typically has a little bit.
Higher variable margins as well so a good mix from from strong growth and those areas as well as this really strong volumes on the base portion of El P M as well.
Thank you.
We now have a follow up question from the line of George Staphos with Bank of America Securities. Please go ahead Sir.
Thanks very much.
Hey, Greg I, just wanted to double back so the comparative factor versus first quarter of last year in terms of the.
Reserves on receivables, what would that have been quarter versus quarter a few.
$2 million $10 million just trying to.
Ballpark and I had a question on sustainability.
Yeah from a year over year perspective, we saw an impact and we talked about this last year and Q1 really on the on the graphics side of the business with an L. G. M and then within the apparel businesses, where we saw more of that the first quarter of last year. So that was probably in the.
10, plus cent range from that perspective last year.
Okay.
Thanks for that and then my other question and I was going through your sustainability data and it looks like you've done a pretty good job of.
Reducing your ghd emissions relative to where they had been a few years ago and same thing on waste generation I know, it's not one thing or three things, even but if there were a couple of highlights in terms of what youre doing on those and those areas to reduce.
Generation, what would they be thanks, guys and good luck on the quarter. Good luck on the quarter.
Yeah. Thanks, George Yes, so specifically I would say, we are just making it a priority and area of focus.
You'll recall on the past if you go back and <unk>.
Seven years ago, and we had said we were going to start focusing our engineering teams and so forth not just on driving productivity on the P&L, but also on capital intensity and improving our capital efficiency overall, we made great strides there.
And then a number of years ago. We then said we also want to shift our focus towards <unk>.
<unk> and the environmental impact of our business and so on and greenhouse gas emissions specifically.
A lot of it was just reducing the energy intensity of our plant.
As far as reducing the amount of natural gas that we use and so forth and electricity.
And just redesigning our processes, specifically on the manufacturer of our goods and operations of our plants. So so.
Really just an area of focus and Theres not like you said on the one or two big things. It's a lot of little actions and it's just about setting a goal and measuring our progress and performance every step of the way and giving it a lot of the visibility and attention from our <unk>.
Senior management Cascade, it on down and.
And as you saw on our new targets that we laid out through 2030.
In addition to raising the bar on reducing the environmental impact of our business both on greenhouse gas and responsibly sourcing materials, we're talking about how we reduce the environmental impact of our products are delivering innovations that advance the circular economy, continuing to reduce the environmental impact of our on.
Operations, and they said and obviously, making a positive social impact and our communities.
Okay.
Thank you.
And I looked the last turn the call and thank you for any closing remarks. Thank you. Thank you.
Okay, well, thank you everybody for joining and once again I just want us and a huge thanks to the entire team for their tremendous agility and just continued commitment to excellent. Thank you very much.
Thank you and.
Ladies and gentlemen concludes your conference call for today.
You all for your participation and ask that you. Please disconnect your line.
Once again.
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