Q2 2019 Earnings Call
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Welcome to every Dennisons earnings conference call for the second quarter ended June 29 2019.
This call is being recorded and will be available for replay from two PM Pacific time today through Midnight Pacific time July 26.
To access the replay please dial 806 338 to eight four or one four to 9779 140 for international callers.
The conference I'd number is 21896769.
I'd now like to turn the call over to Cindy Gunther Avery Dennisons, Vice President of Investor Relations and Finance. Please go ahead.
Thank you Tina.
Today, we'll discuss our preliminary unaudited second quarter results. Please note that throughout today's discussion will be making references to non-GAAP financial measures.
The non-GAAP measures that we use are defined qualified and reconciled with GAAP on pages eight four to eight attached to the financial statements accompanying todays earnings release, and the appendix of our supplemental presentation materials.
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 Mitch Butier, Chairman, President and Chief Executive Officer, and Greg Sullivan, Senior Vice President and Chief Financial Officer, now I will turn the call over to Mitch.
Thanks, Andy and good day, everyone.
Earnings in the second quarter and met our expectations delivering a roughly 12% increase over prior year on a constant currency basis, as we more than offset softer than expected growth with increased productivity.
No 2019 is obviously playing out a bit differently than we envisioned at the start of the year and as you can see from our results. We are once again proving our ability to anticipate shifting market conditions and are responding swiftly.
This agility is enabling us to sustain our earnings growth trajectory and maintained the midpoint of our EPS guidance for the year.
We continue to execute well and driving outsized growth in high value categories with growth of these products and solutions again outpacing the base business in Q2.
And at the same time, our relentless focus on productivity was again, a key driver of margin expansion.
In sum, we are making good progress against our key strategic priorities and despite the current environment are on track to deliver our long term financial targets.
Label, and graphic materials posted roughly a point of organic growth for the quarter driven by pricing with high value categories again growing faster than the base.
Overall volumes declined modestly, reflecting softer market demand as well as the previously discussed loss of share in less differentiated categories over the preceding couple of quarters.
Recall this share loss resulted from our disciplined execution of pricing actions near the end of the inflationary cycle.
We've begun to recover that share while sustaining the strong margin we achieved in the same period last year.
The slower demand trends, we saw in Q1 continued into Q2.
We've adjusted our full year guidance to reflect the softer market conditions through the balance of the year combined with gradual focus to share gain.
As I mentioned productivity efforts supported a strong operating margin for L., Jim in the quarter.
We had been anticipating the possibility of a general market slowdown and so in addition to some belt tightening we accelerated restructuring actions that we had had in the pipeline to further improve our competitiveness in each region as well to drive long term sustainable expansion of both margins and returns.
Retail branding and information solutions delivered solid organic growth driven by ongoing strength in RF I'd, while continuing to drive significant margin expansion.
Or if I D grew once again by more than 20%, while the pace of the base business slowed.
The slowdown in the base reflected general market softness as well as what appear to be some choppiness and timing of retailer purchases in light of trade related uncertainty.
While apparel market uncertainty remains we are well positioned to win here with our unsurpassed global footprint and differentiated product and service capabilities.
The strong growth in R&D continues to be fueled by apparel, while we made great progress in developing other promising verticals.
Our total pipeline of customer engagements continues to expand.
Now up by more than 30% from just the beginning of this year.
With engagements in categories outside of apparel, including food beauty logistics, leading the way.
As the leader in Ultra high frequency RF ideas, we're positioned extremely well to capture these opportunities with our industry, leading innovation and manufacturing capabilities and the best most experienced team in the space.
We continue to increase our investments in business development and other resources to drive this growth.
As we build our intelligent labels platform to enable a future where every item can have a digital twin and digital life.
In industrial healthcare materials sales were flat on an organic basis, driven by the decline in global auto production, which more than offset solid growth in other industrial categories as well as strong growth in our medical business.
And we once again made good progress in the quarter towards achieving our operating margin target for this business.
In short another solid quarter and despite a softer top line, we are reaffirming our earnings guidance midpoint for the year.
Our strategies to deliver outsized growth in high value categories are clearly working.
And our relentless focus on productivity continues to enable us to increase our pace of investment in these categories increase our competitiveness overall and grow profitably in our base businesses, while importantly, continuing to expand operating margin.
We are confident in our ability to achieve our long term objective to drive GDP plus growth and top quartile returns and we will continue to seek opportunities to leverage our positions of strength commercially operationally and financially and lean forward, even as others may pull back.
Now I will turn the call over to Greg.
Thanks, and Hello, everyone.
As Mitch said, we delivered another solid quarter.
With adjusted earnings per share of $1.72 cents in line with our expectations and again up more than 10% on a constant currency basis.
We grew sales by 1.6% on an organic basis.
Currency translation reduced reported sales growth by 4.7 points in the quarter.
Adjusted operating margin increased by 60 basis points to 12.1%.
And we realized $12 million of restructuring savings net of transition costs in the quarter.
The LG and restructured in Europe was largely completed as of the end of Q2.
Well to drive a significant uptick in savings from this initiative in the second half.
Turning to cash generation and allocation.
Year to date, we have generated $165 million or free cash flow of nearly $38 million compared to the prior year.
Now as we've discussed we've increased our pace of fixed capital in it related spending for two to three year period to support our long term organic growth and margin expansion plans.
With capital spending is expected to be up by about $25 million this year.
We continue to expect capital spending then to moderate from this level over the next couple of years consistent with our long term capital allocation strategy.
And we continued to return cash to shareholders in the first half of the year, we repurchased roughly 1.2 million shares.
The aggregate cost of $117 million.
And paid $93 million in dividends, including the 12% increase in the dividend rate in April .
For a total of $209 million of cash returned to shareholders up 11% compared to the same period last year.
And our balance sheet remains strong.
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.
We are well positioned to take advantage of any dislocations in the market should they occur over the next few years.
I'll now turn to the segment results for the quarter.
Label and graphic materials sales increased by 0.9% on an organic basis.
Driven by prior year pricing actions as volume declined modestly.
Growth in L., James high value categories continued to outpace the growth of the base business.
Once again led by specialty and variables.
Which were collectively up high single digits on an organic basis.
Breaking down to L., James organic growth in the quarter by region, both North America, and Western Europe declined at a low single digit rates.
Reflecting that market dynamics already discussed.
Emerging markets grew at a low single digit rate with China up low single digits in South Asia up high single digits.
Adjusted operating margin for the segment was strong at 13.8%.
In line with the same period last year, reflecting the benefit of productivity actions, including material reengineering.
Partially offset by currency related headwinds and the impact of lower volume.
As I mentioned in last quarter's call. We've covered the cumulative effects of the roughly 18 months of raw material cost inflation that we experienced.
Through a combination of pricing actions and material reengineering.
We're now seeing some modest deflation in our raw material input costs on a sequential basis.
With comparable sequential declines in both the first and second quarters of the year.
Shifting now to retail branding and information solutions RBS delivered solid topline growth.
Up 4.4% on an organic basis.
Driven by faster growth in high value categories.
With sales of both RF ideas and external embellishments up more than 20% for the quarter.
Our base business was roughly flat adjusting for the impact of cannibalization due to RF I'd.
Adjusted operating margin for the segment expanded by 130 basis points to 12.5% as productivity and higher volume more than offset higher employee related costs and growth related investments.
Turning to the industrial and healthcare materials segment sales were flat on an organic basis, driven by the decline in global auto production.
As automotive applications globally represent about a third of items sales.
Outside of automotive industrial categories were up mid single digits on an organic basis.
Health care category is likewise grew at a mid single digit pace with better than 20% growth in medical applications.
We continue to make good progress on the margin front NIH Jim.
Adjusted operating margin increased by 120 basis points to 10.5%.
Driven by productivity and a net benefit of pricing and raw material costs.
Which more than offset higher employee related costs.
Gains on the pricing side largely relate to strategic adjustments, we made as a result of our work to more effectively segment our portfolio.
Focusing now on our outlook for 2019, we have maintained our guidance midpoint for adjusted earnings per share, while tightening the range to $6.50 to $6.65.
We have reduced our outlook for organic sales growth to a range of 2% to 2.5%.
In light of the slower market conditions and LTM during the first half that we assume will continue.
We've outlined some of the other key contributing factors to this guidance on slide nine of our supplemental presentation materials.
In particular, and just focusing on the changes from our assumptions in April .
At recent exchange rates currency translation represents a roughly two and a half point headwind to reported sales growth for the year.
With a pre tax operating income hits of $28 million.
This is up slightly from the $27 million, we'd anticipated previously.
We now estimate that incremental pre tax savings from restructuring net of transition costs will contribute about $45 million to $50 million.
Up $5 million from our April estimate.
As we have accelerated a number of actions that we are in the pipeline.
We've already realized about $17 million in net savings year to date and expect the balance of our full year savings will be split roughly equally between the third and fourth quarters.
And we have narrowed our range on average share count assuming dilution of 84, and a half to 85 million shares.
Reflecting an assumed pickup from the Q2 pace of share buyback during the second half.
In summary, we delivered another solid quarter in a more challenging environment.
And we are confident in our ability to deliver the earnings guidance, we communicated at the start of the year.
And are on track to deliver on our long term objectives.
To achieve a GDP plus growth in top quartile returns on capital driving sustained growth in EMEA.
Now, we'll open up the call for your questions.
Thank you.
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To accommodate all participants we ask that you. Please limit yourself to one question and one follow up and then return to the queue. If you have additional questions. One moment. Please for our first question.
Our first question comes from Ghansham Panjabi of Robert W. Baird. Please go ahead.
Hi, everyone. Good day.
Good morning.
Hi, Mitch Greg Hi, Cindy.
I guess first off on margins and LG being flat year over year during the second quarter.
Even with the obvious moderation in volume growth.
You mentioned accelerated productivity actions reengineering et cetera.
Can you just give us more color on in terms of what actually benefited you relative to your initial expectations for that specific segment.
Yes, I think overall.
A couple a couple pieces, one we talked a little bit about the stronger growth and higher value segments in that helped the overall with our margins there as well.
As well as some of the share loss that we've talked about.
Over the last couple of quarters and some of the less differentiated segments. So having a generally kind of lower average variable margin than our than our average would be on that decline at the same time as you mentioned guns and we've accelerated productivity efforts combination of restructuring actions as well as finished short term productivity actions.
Including belt tightening as Mitch mentioned mentioned, a little bit of incentive costs and a little bit of benefit from price deflation year over year, So really a combination of things with the productivity as well as stronger growth in high value segments, helping maintain the margin year over year.
Okay Thats helpful. Greg and then Mitch back to your comments on RBS and the comments of the base business slowed.
Kind of looking back do you think that you benefited from it to any material extent from a volume pull forward previously that may have impacted twoq you.
Or do you see incremental weakness I guess, what are customers, telling you as you cycle into the back half and then also have you seen any impact specific to RF I'd as well. Thanks, so much.
Sure so overall as far as pull forward.
It's tough to call overall, ghansham as far as what end retailer behaviors and been doing in the first half there has been just more choppiness as I commented on.
The other big factor just between Q1 Q2 is really around.
Just timing of holidays in Chinese new year and everything else.
That aside Q2.
Seem to have a bit of a slowdown in the base and.
It's really around just some of the uncertainty, particularly around announced tariffs and then tariffs being canceled and so forth. So even within individual quarters, we're seeing a bit more lumpiness than we normally see.
Now with that regard performance athletic continues to be well positioned category they've moved a lot of their sourcing outside of China already.
And I'd say the value segment, so think of discounters and so forth are more exposed to what's going on with the China U.S. trade relationships.
Thank you. Our next question comes from Edlain Rodriguez, Yes. Please go ahead.
Thank you. Thank you good morning, everyone.
Quick question Mitch in terms of LG.
Volume softness you've seen in the base label business, but what are the what are some of the key end markets. What are you seeing that softness.
Key end market is for base, if you're talking about.
Paper based products and so forth would be variable information labels. So E. Commerce labels. If you think about the variable information labels for shipping for near at the grocery store and you get a barcode at the deli counter and so forth. So thats some of the less differentiated categories that were referring to.
Okay, Okay and can you talk about like the progress you're making on regaining lost market share in.
And again, we minus again like how exactly are you doing that to get that volume back is it pricing or is there something else going on just a little more color.
Yes, we're seeing progress, particularly in North America, and Europe , where we have clear data on what was going on in the market. We can tell from volume trends that we're seeing we're making progress we have stabilized the share position and began to recapture that share.
Here in Q2.
We are focused on doing this in a disciplined and gradual way as we said it will take us a few quarters.
To recapture that share and how we are doing is basically continuing to focus around our differentiated quality and service.
That is a key area of focus for us and so we're willing to take some risks, particularly late in the inflationary cycle, knowing that our core fundamental points of advantage continue to play through overtime.
Having said that our markets clearly are competitive and less differentiated categories are competitive as well. So we continue to have a balanced strategy focused around innovation and productivity to remain competitive and continue to have attractive returns within the base categories.
I do want to comment real quick also gone. Some you had another follow up question around our if I'd. So again, just as my comments said continuing to see strength within our if I'd RF ideas and enabler for continuing to show.
Not only provide opportunities for end market demand in managing through the omni channel all the advantages we've talked in the past, but also around shortening lead times and cycle times, which given some of the trade uncertainty also is a great capability for any retailer and brand to have so there is not any impact or.
Changing views over on our if I'd in any way other than just reckon general recognition that.
It is the technology of the future within the apparel categories and we're seeing the new opportunities continue to flourish outside of apparel as I talk through as well.
Thank you. Our next question comes from Anthony Pettinari of Citigroup Global markets. Please go ahead.
Good morning.
Per quarter.
LTM you identified variable information and shipping labels is maybe couple of the weaker end markets that.
You sell into in the quarter I apologies, if I missed this but for LTM is it possible to say, which geographies or which regions were particularly.
Weak or strong from a volume perspective in the quarter I know you gave those volume trends regionally for RBS.
If you're talking about specifically for VI and shipping labels volumes by region. If we saw actually strength in China pretty strong growth within the vie variable information label category, reflecting just and strong growth of e-commerce as well as a little bit of easier comps in that specific category in China.
And then elsewhere, we're actually seeing.
General slowdown, which.
Reflects a general slowdown we think in economic activity with Europe being the biggest decline.
And obviously there is a piece of share loss in there as well as far from our business I'm talking bit of market.
Got it got it no that's helpful and then.
In your comments you discussed the levers you can pull to grow earnings and returns and I think you you talked about leaning forward as others pull back and I'm. Just wondering I don't know if that comment was specifically around M&A, but can you just talk about maybe valuations that you're seeing is it too soon for kind of the economic slowness that we've seen in some regions to actually impact multiples.
Conversations you've had with potential targets any general thoughts on M&A.
Yes, so it's a general comment overall and so just if you are around our organic strategy, we've been ramping up our pace of investment for the last few years to drive this outsized growth in high value segments.
And weve been leaning forward with continued restructuring activity that you hear us announce periodically we continue to focus on around how to find more productivity to fund those investments.
Protect the core and expand margins those leaning forward on all the those strategies and it's also around.
Just capital allocation of what's left over to free cash flow as you comment on and its M&A and we find most of what we're looking to companies in the pipeline are privately held prices tend to be a little bit sticky we are actively engaging.
A number of targets there, we did slow down a little bit of the slow quarter ships and I. It Jim we're now going to be ramping that up as well as far as how we court people, but it's in general pipeline is healthy.
But the pricing is a bit sticky ads is what I'd say and that's why things haven't converted of late.
The other element of the comment is just there's more volatility in general around.
Stock market, and so forth and silver and well positioned for share repurchases as well so it's multifaceted Anthony.
Thank you. Our next question comes from John Mcnulty BMO. Please go ahead.
Hi, Good afternoon. This is published today, John you touched on the oddest lighty opportunities and it's it's great to see maintaining strong growth.
As you think about how that impacts the segment.
How do you see any changes in implementation and that expansion from customers that either they may be slowing down things to reduce spend or.
If we deem to be accelerating their adoption to head into efficiency. So.
Maybe you can touch on how to think about both those sites.
So I'm not sure I caught the beginning of the question I think you're asking the RF idea and if we're seeing any change in behavior, given the current macro and the answers.
The only change we've been seeing over the last few years is the continued interest in acceleration.
Again this is.
Enables.
Companies to connect more with their end customers enables them to have more efficient.
Retail as well as omnichannel strategies and enables them for more efficient supply chain. So even if things do turn down it actually says this technology is a key enabler.
For the success of various companies in that environment. So we're not seeing any negative shift just a continued acceleration as we commented are on both in our revenue as well as in our pipeline of activity.
Thanks, as a quick follow up any any updates on the M&A environment for this segment or outside of it.
[noise], just we continue to see opportunities for M&A and we're continuing to work the pipeline and that no additional comments beyond what was discussed.
Part of the reason of yours as you've noticed we've been below our targeted leverage level and it's so that we have the capacity to both do M&A as well as continued disciplined share buyback and we're well positioned for that and continue to engage in active pipeline.
Thank you. Our next question comes from George Staphos Bank of America Merrill Lynch. Please go ahead.
Hi. Thank you. This is my boss sitting on for George I, He's traveling today, but one of the questions that he wanted to ask was.
The impact is recycling and other sustainability efforts, having on LG and RV I ask both from a volume perspective, but also how is that impacting your product development effort. Thanks.
Yes, the overall on sustainability, we've committed as you all know to a number of sort of long term targets and we're making great progress on that both.
Procuring more sustainable raw materials reduce the environmental impact of our business and developing more sustainable and innovative products and solutions.
So a key area of focus is around really the recyclability of.
[noise] of packaging and it's getting a disproportion amount of our investment dollars as we've talked about we have innovative solutions out there such as clean flake.
That enable more efficient and effective recycling of plastic containers.
That's been growing double digits, and we are continuing to invest a higher amount of our innovation spend specifically in this area.
Given that fact that we are spending a disproportion amount of the industry's R&D spend we feel we're well positioned for this and.
I see that there will be a slow change overall, but we are well positioned to help lead that change.
Thank you for that and then I don't know if I heard this correctly I think one of the comments in terms of RV I ask based business being flat that was adjusting for some cannibalization from our if I D can you.
Quantify kind of what the impact would have been if you included that and just give a sense for.
How you expect that to trend going forward. Thank you.
Yeah. So we said to the base business and RBS was roughly flat with the cannibalization that would be down low single digits. If you exclude that impact so.
Low single digit impact in terms of the transition from certain tags that used to be without RF ideas personnel price tag for instance, it would include RFMD.
Thank you.
Our next question comes from Adam Josephson Keybanc capital markets. Please go ahead.
Thanks, Good morning, everyone. Mitch in terms of the cadence of volumes throughout the quarter can you just talk about them and and how that cadence led to your guidance reduction on organic sales.
Yes, the overall just.
The lowering that we had when we had the Q1 performance we've seen blips for individual couple of months at a time, even a quarter and so we weren't calling as a bigger shift and with what how we saw how Q2 came in we concluded giving a range of guidance that at the low end just shows a pure continuation of the first half growth and at the high end assume that once we get through the easier comps in Q4 that that growth rate increases a bit. So that's very simple how we came up with the with the guidance.
I mean, it just a follow up to that April through June did you see any meaningful change in underlying trends.
Yes, we were probably strongest in the middle of the quarter and a little bit softer in April and June So as Mitch said, it's been a little bit choppier over the last couple of quarters, So nothing meaningful that I would say.
And again, Mitch mentioned, our comps are a little bit tougher in Q2 and Q3.
So we would expect to third quarter to be a little bit on the lower side of our guidance range in the fourth quarter, a little bit stronger.
Thanks, and Greg in terms of volume versus price I know in LG M. Europe , one to organically and I know all of that was price because line was down to your expectation for the second half an LTM specifically are you expecting volume growth in the embedded in your guidance what is volume versus price for LG am or anything you can talk about with that.
Along those lines.
Sure. So I think we talked about a couple of quarters ago. Our original expectation for this year was about a point to point and a half of growth. When we started the year growth from price. When we started the year, we were around that point and a half level I think now for the full year and LG and were probably expecting to be closer to a point maybe slightly below.
And.
Most of that year over year is carryover pricing from last year and most of that impact was in the first half.
So we would see a little bit more volume growth in the back half and a little bit less on the price side.
Thank you. Our next question comes from Jeff Zekauskas Jpmorgan Securities. Please go ahead.
Thanks very much.
Can you talk about July business trends across your three segments.
Yeah, Jeff. This is Greg there is I think July is not much of a read so far.
Just given holidays in July in the U.S., and then Europe holiday period, starting so.
I wouldn't say that we make.
Or take much return from what we've seen so far this quarter or so again, what I would say is Q2, we expect to be more Q3, we expect to be more like the first half maybe a little bit lighter.
In terms of year over year growth given the harder comp in the third quarter would that picking up a little bit in the fourth quarter as Mitch indicated earlier, given some of the share loss and some of the soft end markets. We saw at the tail end of last year.
Okay, and maybe you discussed this before and I missed it can you talk about volume trends in label and graphic materials in the U.S. generally Europe , South America, and China for the quarter.
Yes, Jeff the volume trends, we don't talk about the specific volume trends overall weve region by region, but if you look at within North America.
It was growing.
Low single digits organically through the end of 17 and the growth began to moderate a bit in 18, and then moderated fully again here in 2019 and.
Yes, as we talked about before Q1, we think we saw a bit of softness that was probably a little bit more share than just the market.
At least in the beginning of the quarter.
Now we're seeing all the same macro trends, you're seeing and we don't yet have share market data for Q2.
But if you look at the macro trends it seems that there might be a bit of a softening in Q2 here.
Europe .
Had even stronger growth in North America up until early last year, and then moderated moderated still further from a market perspective and looks like volumes is actually went negative as an overall market as well in Q2.
In China, we continue to see strong growth within the variable information labels tied to e-commerce .
It's tough to tell exactly there's no clear market data here, but there's just a lot more uncertainty in general there's growth decent growth overall outside of variable information labels in the market.
But it's.
Lot more push and taken just uncertainty I'd say with engagement that we have with our customers.
And then yes, South Asia, we continue to see strong growth.
Obviously on a little bit lighter than India audience, basically has tough comps they are going through India seeing strong growth still although that's moderating a bit exports are down coming out of India, which is having a general macro view and Latin America.
Decent growth relative to the environment and you can see what's going on in the environment. There. We've got had a quite a bit of currency price and so forth over the last couple of years.
Okay. Thank you very much.
Thank you, ladies and gentlemen, as a reminder, you May press star one four on your telephone keypad to register a question or comment that is the line up for our next question comes from Chris Kapsch with capital. Please go ahead.
Yes, so I look at the income statement I see the gross margins roughly flat year over year, but your SDMA was.
Down 70 basis points year over year, I don't think its ever been below 15% I get that's partly just.
Sales leverage.
With the growth over time, but the.
And I guess, you mentioned, obviously the relentless focus on productivity you called out belting and I'm. Just wondering if you could comment on the sustainability of that metric and if there's anything more specifically that you can point to that's contributing there was there like a reversal of some incentive accruals or just the absence of some incentive accruals. There that may have the story that metric and how should we think about that metric over the balance of.
It's one of the 19.
Yeah, Chris I think we as you've seen we've been kind of pulling down our run rate on this you know over the last four quarters really with some of the actions that we started taking rvs a couple of years ago that continued through last year as well as some of the actions we've been taking an item for instance is in both of those business, we look to improve our speed reduced our complexity, while also reducing our costs and much of that work has been benefiting shannay.
So you've seen our run rate come down over the last year and then at the same time also reinvesting some of that savings from those initiatives in the higher value segments as Mitch talked about earlier as well.
So we do expect.
I should say this quarter as well, we had a little bit of a benefit from incentive compensation as you mentioned as well.
But we do expect overall to be more or less in line with where we've been the last four quarters as we move forward.
Okay, and then if I had if I could follow up on RB I ask you mentioned.
External embellishments as a category growing I think over 20% and just curious if that is.
Is that something thats.
Happening in the apparel market where.
Retailers are are spending more on that or is it something.
Is that dynamic that metric a function of some commercial efforts that youve put in place.
Perhaps more design efforts with key.
Retail or apparel companies, if you could just talk about.
What's driving that dynamic and is that something that you view as sustainable in the market. Thanks.
Yes.
Part of a deliberate effort and strategy, both commercially and to increase our market presence.
And really to leverage our material science capabilities, we have within the company to go from the interior the government to the external part of the garment and really trying to capture the overall trend within retail and while apparel, specifically on customization and personalization. So that is a key intent key driver we've been investing in it it's been growing from a very small base over the last number of years at well above the average and the key growth right now is largely coming from Europe , where we are seeing growth in the.
Sportswear fans sportswear categories and so forth.
Thank you.
Our final question comes from Rosemarie Morbelli GE research. Please go ahead.
Thank you good morning, and good afternoon, rather everyone.
I was wondering you mentioned Mitch the performance I'd say take did well as a CEO of pessimism moved out of China.
So does that did that show slide into a higher close until a higher costs and while you may steal the growth. It is at the lower margin.
Yeah. So my comment specific around performance athletic is one that they as a category that is a category that's doing well just in end markets.
And two with regard to some of the sourcing region uncertainty that's out there it's not a recent item, but overtime. They migrated more of their manufacturing outside of China already so it's more of a relative comment from what we see.
So that that's what my comment was and as far as what's going on I think your second part of your question Rosemary was around just the impact of migrating.
Sourcing.
This is something that can cause some near term disruption in the industry.
Related to some of the Choppiness I noted we are extremely well positioned for this given our global footprint that we have our long experience of doing business and all the emerging markets that where apparel is made and so this is something that we see as an opportunity should things shift more.
At a more accelerated pace.
Okay. Thanks, and then I was wondering you talked about the impact to us that trade on the demons retail right apparel items.
Looking at the fact that no I believe fleet Taylor is beginning to August saw the holiday seasons.
Are you seeing a big change versus what was happening last year.
There is some of the uncertainty around it for sure.
I can't call, one way or the other and I will say I mean, theres no the tariffs aren't being implemented so and they've been broad discussion about for the vast majority of apparel that there won't be really an impact here. So I think this is overall had some early on we were thinking potential delays, but just in general some of the choppiness that ive talked through.
If you look at just more broadly than that.
China the devaluation of the Renminbi is actually made China cheaper to some retailers and brands as well and in the meantime, so there's a number of factors that go into their decisions and we're just seeing general Choppiness and it's too early for us to call.
Thank you Mr. Butcher I see no further questions via the phone last I'll turn the call back over to you for any closing remarks.
All right well, great well, thanks, everybody for joining the call and I really wanted to thank our team for their commitment and agility and delivering another solid quarter, we're confident as you've heard many times and our ability to achieve our long term targets really reflects the resilience of our industry, leading market positions the relative stability of our end markets and the strategic foundations weve laid so thank you very much.
That does conclude the conference call for today, we thank you for your participation and ask you. Please connect your lines. Thank you have a good day.
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