Q2 2021 Avery Dennison Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by during the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question.
Session at that time, if you have a question. Please press the 1 followed by the 4 on your telephone and if at any time during the conference you need to reach and operator, Please press star zero.
Welcome to Avery Dennison and earnings conference call for the second quarter ended on July <unk> 2021. This call is being recorded and will be available for replay.
And from noon Pacific time today through Midnight Pacific time July 31, 2.
To access the replay please dial 806, 338284 or plus 140 to $97.790 140 for international callers. The conference I'd number is 2.1.
And 190.690 420.
Now I'd like to turn the call over to John heavily Avery Dennison and <unk> head of Investor Relations. Please go ahead.
Thank you Bill and please note that throughout today's discussion, we'll be making references to non-GAAP financial measures.
The non-GAAP.
And that we use are defined qualified and reconciled with GAAP on schedules, a 4 to 8 and 10 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.
GAAP measure.
These forward looking statements are made subject to the safe Harbor statement included in today's earnings release.
On the call today are Mitchell, Dear Chairman, President and Chief Executive Officer, Greg Lovins, Senior Vice President and Chief Financial Officer and Dr.
Our results and Vice President and General manager Rbis.
I'll now turn the call over to Mitch Thanks, John and good day, everyone. We delivered another strong quarter ahead of our expectations raised our outlook for the second half and announced an agreement to acquire best Com.
Our leader and shelf edge pricing and branded labeling solutions.
Stan and U S.
<unk> has roughly $400 million and revenue with a consistent history of strong growth and above company average margins.
That's come and will further expand our position and high value categories, while adding channel access and data management capabilities that have the potential to further advance our intelligently.
<unk> simple strategy.
Dan will tell you more about the acquisition both the strength of the company and how it will accelerate our strategies and a moment.
Turning to the results and.
And the second quarter earnings rebounded significantly as sales grew 29% on a constant currency basis, reflecting a strong rebound and <unk>.
S and IH, EM and continued strength and LG <unk>.
The quarter was even more impressive relative to 2019 with revenue up 14% EBITDA margins up 80 basis points and EPS up 30%.
Now while we are pleased with the results our strong performance comes.
And the time of continued uncertainty given the global health crisis and constraints within supply chains.
While the rate of new cases, among our team remained stable many parts of the world are experiencing an increase and COVID-19 cases.
Certain countries, particularly in South Asia have experienced a significant ryzen and infection rates.
And leading to the recent disruptions at a few RBS manufacturing locations.
While this is impacting July we don't anticipate these disruptions will impact demand and the back half of the year.
In addition to the effects of the pandemic supply chains remain constricted affecting and markets.
Turning to inflationary pressures.
And this constraint on the availability of raw materials freight and and the U S. Labor continues to impact the industries and which we operate.
Despite these constraints, we've been able to deliver record volumes as our team continues to leverage our global network and scale to minimum.
And my of disruptions to our customers.
The current environment further reinforces our determination to remain vigilant in protecting the health and wellbeing of our team and agile to ensure we continue to meet customer needs.
Now a quick update by business.
Label, and graphic materials posted strong topline growth for the.
Quarter and demand for consumer packaged goods and E. Commerce labels continued to drive strong volume and our label and packaging materials business, while our graphic and reflective solutions business rebounded significantly off prior year lows.
As for profitability LTM margins remained strong despite increasing inflationary.
And every headwinds including costs and the core from the supply chain constraints give.
Given the increasing inflationary pressures, we are redoubling, our efforts on material reengineering and again raising prices.
We are targeting to close the inflation GAAP relative to mid last year by the fourth quarter.
Retail branding and information solutions delivered robust growth and the quarter and expanded margins significantly significantly compared to prior year lows.
Compared to 2019 margins expanded further as the segment grew 25% on a constant currency basis and 14% organically.
Driven by strength in both high value product categories, particularly intelligent labels as well as the core apparel label business as retailers and brands continued to gear up for a strong rebound and demand.
Enterprise wide intelligent label sales were up 40% compared to 2.
2019.
As expected the strong growth and our RFID business was primarily driven by apparel, while outside of apparel. We continue to see strong momentum building for new applications in all key geographies.
And the food segment for example, and North American restaurant chain recently.
Began rolling out RFID across their network after a successful pilot over the past year.
And and logistics, we saw positive momentum, including the adoption of and intelligent label solution at a large global player and the transfer of hazardous materials, such as batteries, which require special shipping protocols.
And these are just 2 examples of programs of what will be many and the years to come.
And the industrial and healthcare materials segment sales rebounded off prior year lows showing positive growth compared to 2019 as the segment is on pace for its fourth consecutive year of margin expansion.
Given our strong performance and the second quarter and our increased expectations for the rest of the year. We have raised our full year outlook for the company both on the top and bottom lines.
Overall I'm pleased with the continued progress we are making towards the success of all of our stakeholders are.
Our consistent performance reflects the.
<unk> of our markets our industry, leading positions the strategic foundations, we've laid and our agile and talented team.
We remained focus on the consistent execution of our 5 key strategies.
To drive outsized growth and high value categories grow profitably and our base businesses.
Focus relentlessly on productivity.
Effectively allocate capital and lead and an environmentally and socially responsible manner.
We are confident that the consistent execution of these strategies, both organically and through M&A, such as the best Com acquisition will enable us to achieve.
<unk>, our long term goals and.
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 1 another safe while continuing to deliver for our customers. During this challenging period.
Now I'll turn the call.
Today on to provide more color on the high performing and high potential acquisition, we announced today.
Thanks Mitch.
Turning to slide 14, best home as a market leading provider of pricing and branded labeling solutions with a retail shelf edge followed by the advanced data management capabilities.
It's a high growth high margin business generating roughly $400 million and annual revenue.
Based on as a highly synergistic adjacency to RBS and building on our pricing and data management capabilities and adjacent markets and increasing our presence and high value categories.
Best Com led by and excellent management team.
<unk> has been consistently growing at a high single digit rate organically over the long term with strong track records across cycles and highly accretive EBITDA margins.
As you May recall back in March at the Investor Day, we outlined Rbis's key strategies, which include delivering outsized growth and high value.
New categories.
Unlocking growth and value and food and logistics.
Growing profitably and the base business and <unk>.
Strengthening our digital capabilities and solutions best.
<unk> is an accelerator for all of these strategies in particular best on provides an opportunity to help accelerate our intelligent label's ambition.
Sued through their additional access to and uses and retail grocery drug and dollar in particular.
And to consumer package goods companies, who are key decision makers and the suite ecosystem.
As well as their sophisticated and complementary data management capabilities.
Turning to harvest from delivers for its customers.
And as you can see on slide 15 restaurant solutions create real value for retailers and brands and they do so by combining data management with outstanding customer service delivery.
<unk> solutions start with taking multiple data files, including price promotion plan, and Graham and brand content and filed.
And emerging these to create uniquely integrated shelf edge labels that have impact at the point, where the majority of consumers make their purchase decisions.
Their solutions, which provide both productivity and consumer engagement benefits include stacks, which delivers integrated price and promotion.
On labels to.
And to each store and time for store associates to label the shelf with the latest pricing and promotion updates in walk sequence that is sorted and ready to work and tag based on the exact plan and ground layouts for that particular store.
On slide 16 indicates.
Promotion deduction and store labor to execute these weekly price and promotion changes. So efficiency is significant and in addition, the improved level of pricing and plan and Graham compliance drives greater consumer impact and commensurate higher sales lift from the retailer.
First on and then builds on this effective productivity and pricing.
There are solutions by uniquely leveraging the same label real estate to add branded content from Cpg's other retailer to support their time specific marketing campaigns.
These and consumer engagement solutions include shelf ads.
Which allows for highly effective and store shelf.
<unk> edge advertising with a unique advantage of combining all 3 elements and front of the consumer and the price the promotion and the brand message of content.
This solution provides real value and both sales lift and return on advertising spend for both cpg's and retailers and.
The strong return.
And on investments delivered by both their productivity and consumer engagement solutions position best Com as a strategic partner to their customers reflected in the deep relationships they have across the grocery drug and dollar segments. They serve.
It is these relationships and solutions in combination with our own debt will help complement.
Elements of our strategy to accelerate <unk> adoption beyond apparel. This is particularly true and food, where we are already investing and our IL and digital capabilities.
And where the need for visibility and problems through the supply chain inventory and data freshness accuracy on shelf pricing effectiveness and managing.
And increasingly omni channel environment are key success factors for retailers and additionally.
Additionally, the combination of our business is provides the opportunity to create a unique and 2 and inventory management and pricing solutions for retail in the next evolution of our data solutions and digital journey building on the ACA.
<unk> and lithium and the launch of our <unk> Io platform.
Lastly, we are pleased to add this high performing business to our portfolio.
And I am personally looking forward to both welcoming divest from team.
And the future prospects of the combined businesses and with that I'll hand, the call over to Greg.
Thanks, Dion and Hello, everybody.
I'd like to first add a few points about <unk> com and I'll be referring to the transaction summary on slide 17 of our supplemental materials.
As mentioned D. On already mentioned <unk> annual revenue is roughly $400 million with.
With strong historic.
Low growth and EBITDA margins above our company average including synergies.
The purchase price of 145 billion.
Representing and EBITDA multiple below our overall company multiple.
And we expect this deal to be accretive to EPS by 2022.
We're currently.
Currently planning to fund the acquisition through a combination of cash and debt.
And if the deal closes in Q3 as anticipated we expect our leverage ratio to be near the low end of our target range at the end of this year.
Given us ample capacity to continue executing our capital allocation strategy.
Now jumping back to our Q2 results as.
As Mitch said earlier, we delivered another strong quarter.
With adjusted earnings per share of $2.25.
Which was above our expectations by about 10 cents and roughly a dollar per share above prior year driven by significant revenue.
Growth.
Sales were up 29% ex currency and 28% on an organic basis compared to prior year.
Driven by strong broad based demand and the benefit from easier comparisons given that the pandemic had the biggest impact on our results and Q2 of last year.
Revenue compared to 2019, our growth has also been strong with organic sales up 11% versus Q2.2019.
Our strong growth combined with productivity gains more than offset the headwind of last year's temporary cost reduction actions and.
Well as and increasing inflation.
And new organic investments to deliver and adjusted operating margin of 12, 8% up 210 basis points from last year.
We realized $17 million of net restructuring savings and the quarter. The majority of which represented carryover from projects, we had pulled forward into 2020.
And we also recorded 2 items, which largely offset each other and our GAAP results and the quarter.
The first is a gain related to the recovery of Brazilian indirect taxes paid in previous years.
And the second is a liability related to the previously disclosed ruling and the ADESA legal matter, which the company and disputes and remains confident and.
And the prospects of a more favorable outcome upon appeal.
Now as Mitch mentioned supply chain remain tight and input costs have been increasing.
Both raw material and freight inflation were above our initial expectations.
And we have continued to see costs rise as we entered the third quarter.
With expected.
Sequential inflation in Q3 at a mid to high single digit rate.
With variations by region and product category.
We are addressing the cost increases through a combination of product reengineering and pricing and have announced additional price increases and most of our businesses and regions across the world.
Turning to cash generation and allocation year to date, we've generated $388 million of free cash flow.
With $206 million and the second quarter up significantly compared to previous years.
And the first half of the year, we paid 100 day $108 million and dividends and repurchase.
Over 500000 shares at an aggregate cost of $95 million.
For a total of $203 million returned and cash to shareholders. So far this year.
And as I said earlier, our balance sheet is strong with a net debt to adjusted EBITDA ratio of 1.3 at quarter end.
And this gives us ample capacity even after the <unk> acquisition to continue executing our capital allocation strategy.
Now turning to the segment results.
Label, and graphic materials sales were up 17% ex currency and 16% on an organic basis.
Driven by higher volume and.
King.
Compared to 2019 sales were up 11% on an organic basis.
Label and packaging materials sales were up roughly 12% organically with strong volume growth and both the high value product categories and the base business.
Graphics and reflective sales continued to.
And pray and nicely compared to the trough, we saw on Q2 of last year and <unk>.
Up 49% organically.
Now similar to last quarter, we do believe that Q2 benefited from customers pulling forward some volume from Q3 and.
Head of new price increases.
Looking at the segments organic sales growth.
Growth in the quarter by region North.
And North America sales were up high single digits and Western Europe sales were up mid teens as demand in both regions increased from Q1.
And emerging markets overall were up roughly 20% continuing their strength from the first quarter.
The Asia Pacific region grew roughly.
20% led by significant growth in India, and the ASEAN region with easier comps can get given the pandemic impacts we saw in Q2 last year.
And then low and then we had low double digit growth and China.
And Latin America grew over 30% with particular strength in Brazil.
And.
<unk> adjusted operating margin remained strong and decreased slightly from last year to 14, 5%.
This was partially driven by the impact of supply constraints, which led to both increase and inflation and some incremental costs and the quarter, such as expedited freight and overtime.
To ensure we had supply to service our customers' needs.
Shifting now to retail branding and information solutions Rbis sales were up 73% ex currency and 72% on an organic basis.
As growth was strong and both the high value categories and the base business due in part to lower prior year comps.
Compared to 2019.
Organic growth was 14%.
The apparel business continued its strength as retailers and brands per per prepared for increasing demand with particular strength and the value and performance channels and continued double digit growth and external embellishments.
Intelligent sales intelligent label sales were up organically roughly 60.
65% and up 40% compared to 2019.
Adjusted operating margin for this segment increased to 13, 1% as the benefits from higher volume and productivity more than offset the headwind from prior year temporary cost reduction actions.
And employee related costs and growth investments.
The Rbis team has continued to deliver increasing their topline growth and margins significantly over the last 4 years with margin expansion of more than 4 points since 2016.
Turning to the industrial and health care and materials segment sales increased 39% ex currency and 33% on and organic.
Basis.
Reflecting strong growth and industrial categories, particularly in automotive applications, which more than offset a decline and personal care tapes due to tougher comps.
Compared to 2019 sales were up 6% on an organic basis.
Adjusted operating margin increased 490 basis.
This points to 11, 7% and.
The benefit from higher volume more than offset the headwind from prior year temporary cost reduction actions and higher employee related costs.
Now shifting to our outlook for 2021, we have raised our guidance for adjusted earnings per share to be between $8.60.
And $8 and 95.
At 20% increase to the midpoint of the range.
The increase reflects the strong performance in Q2, as well as and increased expectation for the rest of the year driven by continued strong organic sales growth.
And as a reminder, this guidance does not yet include the impact of the best come back.
And 5 cents, which is expected to close later in the third quarter.
We now anticipate 2014% to 16% ex currency sales growth for the full year above our previous expectations driven by both higher volume and the impact of higher prices.
We've outlined some of the other key contributing factors to this guidance on slide 12.
Acquisition of our supplemental presentation materials.
And in particular, the extra week and the fourth quarter of 2020 will be a headwind of a little more than 1 point to reported sales growth and.
And the roughly 15 headwind to EPS in 2021.
We estimate Q1 benefited by roughly 15 based on the shift to the.
12 here and then anticipate a roughly 30 cent headwind and Q4.
The anticipated tailwind from currency translation is now roughly 3.5 points to sales growth and $35 million and operating income for the year based on current rates.
And we now estimate that incremental pre tax savings from restructuring net.
The calendar fish and cost will contribute $60 million to $65 million down somewhat from our April estimate as the stronger demand environment has led us to delay certain projects.
And given the increased outlook for earnings and working capital productivity. We are now targeting to generate over 700 million and free cash flow. This.
Net of tranches up roughly 30% from last year and 40% from 2019.
Now given the distortion and our year over year comparisons due to the pandemic last year. Let me provide you with some color on our second half outlook in relation to the first half of this year.
There are 4 primary drivers, which are each worth roughly.
Year, 15, plus or minus and the second half compared to the first half.
First item is the calendar shift I just mentioned a minute ago. Secondly is the impact from the pre buy of volume from Q3 into Q2.
Third there was a sequential price inflation gap and the third quarter, which we expect to close in.
Roughly 4 driven by the timing of passing new pricing increases through and lastly, given our continued confidence and our business. We are ramping up our pace of investments to drive our long term strategies.
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.
Q4, GDP plus growth and top quartile returns on capital, which together drive sustained growth in EBITDA.
We'll now open up the call for your questions.
And thank you very much and ladies and gentlemen, if you would like to register a question. Please press. The 1 followed by the 4 on your telephone you will hear eighth street on prompts to acknowledge your request.
To achieve question has been answered and you would like to withdraw your registration. Please press. The 1 followed by the 3 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 your questions to 1 and 1 follow up and then return to the queue. If you have additional questions 1 moment for the first question.
If you.
And our first question comes from the line of George Staphos with Bank of America Securities Inc. Research. Please go ahead.
Thanks, Operator, hi, everyone.
Thanks for the details.
Congratulations on the progress so far this year I guess my first question is on on <unk> Com, obviously, a pretty big topic today and.
Question, you know given the run down to you on that you gave I understand why the customer would like and I understand how it utilizes data management and so on and I understand how the brand owners and retail as you would like it how does it really leverage Avery is core capabilities and smart labels and and why did you need this and.
And your view what would the 1.
Primary issues and can you comment a bit on what the competitive landscape is.
How does <unk> com rate versus its nearest peers and if I don't know if theres, even a share you could market share you could offer there. Thanks.
Thanks, George for the question.
So let me just start by saying from us, whereas the acquisition.
1 or 2 is perfectly aligned with our strategic initiatives and our strategies the rule. It firstly increases our exposure to high value categories given.
Given the high performing high value business and it is and.
And secondly is highest and logistic as you pointed us.
George to RBS business with complementary channel access.
And our strong variable data management capability and the third thing is it really helps to leverage and grow our IL ambitions and particularly in food, where they specifically have axis and deep relationships and a channel that we are just starting to build traction and and secondarily and combination with.
Our variable data.
Management capabilities, we're able to execute more efficiently and then finally I think more important and the longer term is that the combination of both businesses I think will help acceleration accelerate the innovation that really needed at retail level to provide better and more integrated inventory management pricing.
With our consumer engagement solutions and some other stuff that we started to build on and ready with its appeal and.
And ethanol on the Io platform launch.
From a competitive position there are clearly the market leader in their segment.
By some distance.
And we believe that the complementary skill set that we both have both and variable data management.
And.
And that will create from and intelligent label perspective will be value additive to all of our stakeholders.
Okay. Thanks, a lot Jan and I haven't really good rundown.
And I just want to switch gears, given that we've seen inflation and cost increases pretty much climbed steadily throughout.
The 2021 second half earnings it would likely be burdened by additional inflation that didn't hit the P&L and the first half now I know that's in your guidance, but is there a way to quantify if you agree with that premise what that burden that youre getting over.
Roughly equate to 2 and the second half, thanks, and I'll turn it over and over.
Yeah, George as I mentioned it.
Tim there relative to the guidance from a first half to second half perspective, just as you said, we've seen inflation increasing throughout the year, increasing throughout the second quarter and really at the end of Q2, beginning of the third quarter really starting to see some more increases and some other region. So we have been announcing new pricing and it'll take a little bit of time for that new pricing and door.
They're finding new ways to take costs out of on materials to kick in and so we have a little bit of a GAAP from the first half to the second half from that timing of passing that through we think that's roughly and that 15, plus or minus range that I talked about a little bit earlier, so somewhere in that range is what we'd expect from a sequential first half second half GAAP.
And our next question comes from Ghansham Panjabi with Baird. Please go ahead.
Thank you a good day everybody.
On the incremental core sales increase relative to your prior guidance I think it's about 500 basis points at the midpoint.
Can you sort of disaggregate for us how much of that is incremental pricing relative to volume.
The volume piece, which segment and regions that are sort of driving that upside.
Yes. Thanks, Ghansham. So I think when you look at that kind of 5 point increase at the midpoint roughly.
Roughly 40% to 50% of that came and the second quarter with the second quarter volumes coming in and a bit stronger of course as we already talked about the rest of that comes in the back half.
And I know the rest of that being you know kind of 2 and a half points is.
Assuming some continued strength and volume and a little bit of incremental price from what we had assumed before so probably a little bit more on the volume side versus price when I think about debt raised in the back half, but it's a combination of both of those and in the second half from a growth perspective.
Great terrific and then for my second.
<unk> sits on the invest com.
Can you just share the historical growth rates the margin profile over time and also is it mostly north America in terms of sales and also if that is the case on the transferability of the solution to some of the overseas markets, including in Europe.
Yes, ghansham on that on <unk>.
Second question, just very quickly and the growth rate has been above the average as well as the margins. The grocery I think we've commented on and high single digits over 10, plus years, so very consistently delivering that level of growth and the margins are above the company average both pre synergy and obviously post synergy so great.
Great business.
Synergistic with Rbis I actually.
You don't see very many businesses that are close to Rbis does as far as integrating managing variable information to be able to deliver promotional pricing and branded solutions. So just and it's and a new adjacency linked to food, which we see as an.
Highly to accelerate the intelligent label strategy. So that's the <unk>.
Sort of it and Ghansham.
Okay.
Our next question is from Anthony Pettinari with Citigroup global markets and U S.
Good morning.
And.
And L. G. M. I think you indicated North America was up high single digits and Europe was up mid teens is that kind of a function of mix or last year's comp or maybe the timing of pull forward ahead of some of these price increases or some share shift and I'm. Just wondering if theres anything you can tell us.
About how the recovery that.
What youre seeing is kind of playing out regionally and how that.
Might play out and the second half.
And then if your question is why did Europe outpace North America, but if you look at last year. They both had periods are early in the spring of.
High.
Levels of growth and the teams and then things fell off in June and July for both regions. So they're both comping actually and the second quarter pretty strong demand on all from Q2 of last year.
Within Europe, we basically if you recall last year, we said in both regions that we had thought we had ceded some share.
During that period, we've recovered that fully within Europe, we have not yet and North America.
And that's basically just because we got very long.
And just or a big order book and we're gonna be seeing a tremendous amount of orders from the demand levels, we got longer lead times and North America than we usually do.
And the surge and demand as well as the supply constraints.
And that are disproportionately and North America. So that's a little bit of a distinction between the 2 as far as how it plays out through the rest of the year and when we look at it E. Commerce demand remains robust we expect that to continue.
And as far as the demand for branded labels at the end market.
Those remain strong, they're clearly softening and and I'm talking about the end market with the Cpg's are reporting they're softened growth from where it was last year. When you had a lot of the pantry loading and so forth.
Overall consumption looks to be pretty high from that standpoint. So there is a question and we've.
<unk> talked about this last quarter at some point as some of the high levels of demand.
Any of that around inventory building and so forth.
And there is a potential for that.
So thats something and the range of our guidance that we have and why mid year midway through the year, we saw a relatively wide range on our guidance on the topline.
Okay. Okay, that's very.
And then on vest Com is there anything you can say about how long you've been looking at the company as maybe a potential acquisition target and then I don't know if you've partnered with them or competed with them and the past.
Understanding there's some clear synergies between the 2 is it is.
<unk> per se that there's very little apples to apples overlap between Avery and best Com right now just trying to understand what you do versus what they do.
Yes, so in general we've been looking when we look at and think about capital allocation. Our investments are focused as you know disproportionately towards higher.
Is it accurate categories and we're obviously looking for.
Spaces within things within intelligent label space or adjacent to that and this fits both of those criteria. So we've got as we've talked about before quite a few companies and we have on our radar from an M&A pipeline perspective.
So that's what I'll say about that and.
And your value direct overlap.
This is an adjacent market to Rbis its as.
As I said very synergistic very similar as far as on what they do and how they do it but it's as far as selling to dollar stores and grocery stores and drug stores here and the U S debt is not something you do a lot of.
And as far as the synergistic overlap based on customers is really around our pipeline development and business development, we're doing for intelligent labels and food. We are working with grocery stores and summit business case on the pilot and we're working with restaurants, which VESCO and doesn't focus on and of course.
That's where.
Where the emerging territory, we received with IL intelligent label, sorry, and.
Invest comments, where we see the opportunity to have so do you on anything you want to add to that.
No I think.
The other piece mentioned and I'll, just reemphasize and as well both businesses have the strong similarity of manager.
And I think highly complex data from multiple sources and being able to 2.2 and that data into demonstrable value solutions for their customers be there and different channels.
Yeah.
Our next question is from Neel Kumar of Morgan Stanley Investment. Please go ahead.
Great. Thanks for taking my question you.
You mentioned <unk> been about 10 cents above your expectations or budget can you discuss where specifically performance and better versus your expectations or was it generally broad based.
And then your 'twenty.
Our full year guidance increase implies second half numbers that are about 10 times above your prior expectations.
And that concentrated in any particular segment.
So I think and the second quarter is relatively broad based and I think as we talked about demand was strong across all the segments and Q2, I think particularly probably and RBS and <unk>, where we saw a little bit more upside in the quarter versus our own expectations that.
We've continued to see strong growth and the apparel business as we've talked about as well as intelligent labels business within Rbis, and continue to see strong growth and item. So our back half guide assumes a little bit of those continued trends as well from that strength and the volume demand across the businesses that we've seen and the second quarter.
Alright, that's.
That's helpful. And then on just a couple of questions on Dot com could.
Could you quantify the potential synergies from the deal.
And then I was just wondering if you could touch on the cash flow characteristics and any sense on the capital intensity and free cash flow conversion on the business.
Yeah. So.
It's highly.
Synergistic overall from a cost synergy standpoint, most of those would be around materials supply.
And there's other areas of opportunity, but we're not going and get into specifics around synergies, we don't do that on our acquisitions and general and as far as the cash flow levels and Greg you want to comment on it yes, I think overall, it's a pretty strong cash generating business.
Expect in 'twenty, and 'twenty, 2 and probably more than $60 million of cash after the impact of financing costs and everything else as well. So we expect a pretty solid cash contribution in 2020.2 from this business.
Our next question is from Josh Spector with UBS. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question just when you talk about raw material constraints and North America and the quarter can you just give us some color on what materials are seeing more shortages and what visibility you have on that improving over the next couple of quarters.
Yeah, So it's chemicals and films largely.
In addition to that it's just freight so theres longer lead times, and bolt and the receipt of our material.
And just freight companies, you know things being left and cross docking stations for an extra day for example, as well as our outbound freight to our customers. So those are the 2 primary areas.
Overall, it's a lot of this is still just.
And but further upstream and us working through all the capacity limitations that existed because of the storm in Texas the industry slowly working through those backlogs from what we see.
We also think that that's what's driving some of this demand quite high and people building, some inventories and so forth and so it might.
And the elevated across multiple industries and is that are you see some abatement of that that should ease ease on the supply chain. So we don't have clear visibility overall of when these will and it's broad based but we would expect a looking here as we get towards the end of this year and things start to ease up.
Okay. Thanks, and then just on the raw material inflation sequentially can you characterize how that inflation would look different between <unk> and Rbis, and when you talk about recovering that in fourth quarter is that across both segments or would we expect 1 to be ahead of the other.
Yeah, the largest impacts on raw material inflation.
And our materials businesses, so between L. G M and IH and that's where we're seeing the biggest impacts, especially from Q2, we're still on the first half really really driven by chemicals and films increases and we're starting to see some paper increases in late Q2, specifically in Europe.
So we've seen increases really on the <unk> side it progressed.
And I realize it's probably mid single digits and Q2 versus Q1, we're looking at kind of a mid to high single digit increase from from Q2 to Q3.
Really driven by continued increases and chemicals and films and the second quarter and then increases moving into Q3 here on paper. So that's how we're how we're seeing the inflation environment and evolve right now.
Progress on our next question is from Jeffrey Zekauskas Jpmorgan Securities. Please go ahead.
Thanks, very much and your Rbis.
Business.
Much did the non intelligent label solutions area and growth.
Jeffrey on growth for knowledge and.
And non intelligent label business, which is really the core business our base business grew at mid single digits overall.
Okay, that's great.
Jeffrey debt on Texas.
And the context is relative to 2019 sequentially versus 2020, clearly with Q2.
So low last year it is significantly up and the contract is more appropriate relative to 2019 alright.
Great.
On that.
<unk> com and.
And your release.
And you say that its revenues for about $400 million and it has 200 people that work, there which seems quite labor.
Being sensitive what are the more labor intensive parts of the festival.
So overall Jeffrey and the way that the business works is they are highly efficient and taking and data as I've said earlier on and transforming that into unique shelf edge labeling solutions.
And then a very sharp.
And tepid time, they're able to assimilate the data from different sources, and then printed typically on digital asset book very similar to our own.
And then those printed.
And on labels are effectively taken and box by individual store across the vast network that they serve their customers and there is.
And certainly in that area, a number of labor component pieces. They have across the 11 DC as they operate and that DC network give them the ability to reach customers and are in the geographic radius and a very very short order of time, which is critical so that those stores can complete their pricing and promotional changes that are absolutely required for them.
And and if I can just add to that Jeff.
In addition, with Dion said, it's the.
Relative to Rbis, and I'd say it has more information technology experts.
Relative to the level.
<unk> revenue and then less as far as a lot of the production.
And much less more automation and some of that but then more I'd say on the very back and on the finishing and the <unk>.
And before distribution because of the complexity of the actual just delivering and creating a unique pack for every single store, if you will and the U S and their customers and so forth if that gives you a relative sense.
Our next question is from John Mcnulty BMO capital markets you on <unk>. Please go ahead.
Yes. Thanks for taking my question just on on the acquisition if I'm understanding the multiple kind of level that you're that you paid.
It kind of backs into.
And EBITDA level of give or take $100 million or so or EBITDA.
<unk> purchases that are and kind of the mid to upper twenty's or are we thinking about that right or is there something else that we need to be factoring in here.
Yeah, John given the relatively size of this business, we're not going to get into a bunch of specifics around around that but overall as we said the multiple that we're paying is below the company average.
And more business that is higher growth and the average higher margin and the average.
And so and the multiple that we're paying being less as both before and after synergies of course and.
And I think just to add to that the way we've thought about this on.
In terms of capital allocation and our focus on EBITDA.
And so we'd expect this business to be EBITDA accretive excluding the any amortization within the second year. So we're literally looking at this being pretty quickly EBITDA accretive and we've thought about this and relative to our long term targets. We just issued a few a few months ago, we're talking about continuing our strong growth rates continuing to expand our margins continued to deliver double digit.
For us growth and deliver top quartile returns on capital and we look at this business, it's accretive to our topline growth rate, it's accretive to our EBITDA margins. It's also accretive to our EPS growth of course, and we think we can continue to deliver top quartile capital and meet our long term target for OTC with this acquisition. So it really fits and helps us accelerate.
And <unk> all of our key financial.
Long term targets that we communicated a couple of months ago.
Got it fair enough and helpful color.
Maybe you can also can you give us an update now that I don't know if a COVID-19 completely in the rear view mirror, but it seems to we seem to be progressing at least a little bit past. It can you speak to what youre seeing in terms of some.
I'll, let activity around RFID and some of the some of the new initiatives that youre seeing from the customer basis, that's starting to accelerate at this point.
Now the workers can be and place et cetera, how should we be thinking about that we'd be thinking on that.
Sure John.
Dino and comment on your question on intelligent labels and part and the level of pilots and what.
The paying before doing that you're just mentioning COVID-19 and the rearview mirror I mean, it's still there's still an uncertain environment and particularly when you get out of.
The U S and maybe western Europe, and China, it's still depending on which region you're in and they are experiencing and increase in infection rates and so as.
What we're seeing out specifically there is an impact.
<unk> here in July from some disruptions in Rbis, and South Asia, specifically now given our experience and managing through and the past, we expect especially since demand and demand is strong.
And that will be able to work that through here and the second half and I would say that COVID-19 is still something top of mind.
And we call it and leadership and something we're.
Continuing to manage on a regular basis, so looking forward to being in the rearview mirror.
Got you want to answer the second part of his question.
Sure John as it relates to intelligently pool.
And you see a healthy appetite interest and and focus on leverage.
And for technology from our customers, but our overall pipeline has increased by almost 20% a year on year since last year and bear in mind that was during also appeared when retail, particularly in apparel and we're also increasing their interest as I was thinking about dealing with the COVID-19 crisis and much more of a touchless environment really so specifically and apparel.
And that's it.
We continue to see growth and interest and the pilot and in our AR and our pipeline across a number of <unk> is the first of which is just new.
Customers apparel retailers and brands that are getting to the point of saying they want to use the technology. There's always been the interest that's been a relative decision for them as to how they decide on what they allocate their capital.
Apparel. The second area is just on existing customers and continued expansion per customers using the technology and leveraged into new categories or to promote into new geographies. They occupy.
And then and then on our non apparel customers broadly, we continue to see a significant uptick and interest more than 60.
And so that pipeline increase is largely and non apparel and particularly I think as Mitch touched on earlier on both and food and logistics.
And food, particularly the whole drive around provenance.
And freshness with also the associated labor savings that will go into making sure that's clear from the retailer.
Starting from.
Per center, and Mitch talked about so that rollout, that's not progressing underway and the United States, but we're seeing similar demand and the U S and in Europe and in China, and then on the logistics side.
And the ability to make sure that you can identify clear line of sight throughout the supply chain and particularly when it comes to routine of that say for example high value of high.
There isn't that Ali.
And Ali hazardous materials through the supply chain is also attracting a lot of interest and where we're seeing expansion and travelers.
And I'd say just to build on net interest continues to be strong and we saw a small pause as we've said and activity in Q2 of last year.
Because you know restaurant.
Very close and everybody's focused on just COVID-19 at the time, but the interest remains strong and I would say that the.
We're balancing the focus on filling the pipeline, but also just converting the pipeline and that's why we shared a couple of those examples of some important milestones that have occurred and more and more moving to custom solutions and then partial rollout.
<unk> as well as a couple on full rollouts outside of apparel.
The momentum is as strong as we've been talking about over the last couple of years.
And our next question is from Christopher cash with loop capital markets and LLC. Please go ahead.
Yes.
Yes, Hi, I was hoping you could provide any color on how demand or order patterns trended sequentially during the quarter, maybe with granularity by business or by region. I'm. Just curious if there's any pockets of strengthening or weakening as the quarter progressed, given how the macro is evolving and and any comments on how those trends may have looked thus far.
And just 1 month into the third quarter or anything notable there.
Yeah, Chris I don't think from and certainly from a comp perspective, it's moved around quite a bit from a year over year, but when I think sequentially I don't think there's much of a change as we move throughout the quarter I think demand continued to stay strong as Mitch talked.
Earlier, we've got longer lead times, and our LNG and businesses or some of the regions. There. So that continued to stay throughout much of the second quarter entering the third quarter. We've continued to see strong demand and strong shipments out of our LG and business.
And the other business as well, we also talked a little bit about some of the disruptions from a COVID-19 perspective and.
About <unk> and some of our best facilities early here in July but other than that continuing to stay on track with our expectations.
Got it and then just as a follow up and <unk>.
China specifically.
And that area and I.
IH and in particular, given some overweight and auto end market exposure.
What has really impacted.
South Asia, and just wondering how those trends look and that business. This year, there's been some macro data about possibly swallowing. So just curious on China, specifically thank you.
Yes.
Yes, I mean overall for us within <unk> as we said earlier industrial categories grew about 60% and the quarter with automotive within that we grew about 80%.
And last in the quarter, so pretty strong across the globe, we're a little bit heavier weight on China from and auto perspective. So certainly call continued strong growth in China from and automotive side as well so continue to see that at this point.
And we're typically a little bit of head of auto builds just given where we are and the supply chain and automotive but.
And indeed to see strong growth and the second quarter and outside of automotive.
Revenue growth trends.
Softened a little bit softened a bit from Q1 and that was largely the pre buy that we had seen.
And the Q1 that we talked about last quarter. So overall the growth within Asia we.
Continuing on we commented quite high in Q2 year over year, the comps get a bit tougher go into Q3. So we expect it to normalize going into Q3 and forward.
Our next question is from George Staphos Bank of America Securities. Please go ahead.
Expect yes, hi, thanks, everybody just a couple of quick ones from me to finish up. So do you on can you talk at all about what Youre seeing in terms of payback periods and returns to your customers and how that might have from adoption of smart label on RFID and how that might have evolved over the last couple of years, either and aggregate or.
By channel and recognizing you're not able to get into a hell of a lot of detail here, but just.
And I wanted to see what you might be seeing there in terms of what your customers are saying and why that youre seeing growth and the pipeline and then the second question and back to Chris's question.
We have seen some signs from our contacts that there was a bit of a June lull after.
On April and May I take from your comments you didn't see that from your product, but just want to affirm that thanks and good luck on the quarter.
Okay.
George I wasn't sure what the June low was that you were referring to I'm not sure what business are you referring to overall.
You can come back online and you want to talk about our intelligent label payback.
What our customers are experiencing.
Yeah.
And that specific points I think the lost and we touched on this.
And the payback continues to be significant and strong for apparel customers and increasingly based on the pilots and trials, we've seen from both food and logistics customers.
And inclusive, we typically tend to see paybacks within the year.
And what customer.
Program deployment.
Overall, I'd also say that the ancillary benefits that are starting to accrue at the various and customers are seen more so for example, where and apparel it might have been much more around inventory actress and store there is not much more use of the same technologies.
From a same labeling for example to say what is the supply chain visibility and increasingly how are they going to start to tying that to some degree of consumer engagement as well.
And Similarly, then and food for example, where there may be a big focus on productive use of labor. The same quick service restaurants, that's not extending using the centric.
And just looking backwards and say well how do we want to make sure that we have provenance and where products are coming from and ensuring the freshness of the license as well and George.
Okay.
And our next year or so.
And so maybe just on the Barnwell and if I can just comment on the other part on sure George I'm not sure exactly what the nature of the other part of your question was around June and June volumes remained.
<unk> long for us.
And if it's referring last year, because there was a June mall and it started but this year volumes remained strong and as we look at from an end market perspective, we comment about L. G M and as well as RBI asked I mean demand remains strong and some of it and they'll Jim could be a bit of.
Uh huh.
And so inventory building, we don't yet know, but we definitely think and markets remained relatively strong from where they were a couple of years ago, and then and within Rbis.
Tellers and brands are focused on getting product available and ready for back to school and thinking through holiday because they were expecting a rebound pretty big 1 relative.
<unk> too where we've been.
Our next sources from prioritize misra with burn per capital markets. Please go ahead.
Thanks, and good morning.
Why is food 1 of the main areas of focus for best Com.
That because food items to have shorter.
Summation day, so you're constantly need to update pricing and from which sales or is it something else.
Yeah. So just very quickly vast com is focused.
On the categories and grocery stores drug stores and dollar stores here and the U S and do the branded.
Experience and pricing labeling solutions at the shelf edge.
Much more beyond food and food or comment around food and specifically the link that we see where for our ability to accelerate adoption of intelligent labels in the food category. That's 1 of the areas, where we see a high value strategic option.
And just to be clear best Com is.
Across categories within all of those stores.
Talking about food really from the lens of our intelligent label strategy.
Got it Okay, and then are there customers, who currently use the best comps.
<unk> and data management and your RFID products.
So that kind of opportunity.
And.
Yeah.
That is actually where the opportunity is so.
We actually some of the.
And some of the companies that customers that they have on we're actually already working with flow through are in the pipeline. If you will whether it be business case.
And pilots and so forth.
And then there is an opportunity beyond what we've traditionally been interacting with on the organic.
Organically, if you will so that's absolutely where part of the opportunities as well as bringing the combined capabilities of the 2 around data management and the data access that best Com brings and obviously.
Case, or the technological and business development capabilities that we have within intelligent labels within Rbis.
And Mr. <unk> there are no further questions at this time I'll turn the call back over to you for closing remarks from me.
Very good well, thank you everybody for joining the call today.
Thank again the team forward.
And for their tireless efforts and keeping each other safe and continue to deliver for our customers and we are focused on the success of all of our stakeholders. Thank you very much.
And ladies and gentlemen that does conclude our conference call for today. We thank you all for your participation and ask that you. Please disconnect your line.
Okay.
[music] growth.
Thanks.
And.
And.
And.
And.
And.
And so.
Uh huh.
Okay.
Gross.
And.
And so.
[music].
Okay.
Yeah.
Okay.
Okay.
[music].
Okay.
Okay.
And then.
And then.
And so.
And.
And.
And.
Okay.
And.
Yes.
Okay.
Okay.
And.
And then.
Right.
And so.
And.
[music] from that.
Okay.
And.
Fair enough.
Okay.
And.
Yes.
Okay.
Okay.
And so.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
And.
And.
Okay.
And.
And.
And.
Perfect.
And.
[music].
And.
Okay.
Thanks.
And.
Okay.
And.
And Ah.
And.
[music].
And.
Okay.
And from.
Sure.
Okay.
And so.
And.
And.
Sure.
And then.
[music].
And.
And.
Okay.
[music].
And then.
[music].
And.
[music].
Yeah.
[music].
[music].