For Immediate Release
Highlights:
● 2Q20 Reported EPS of $0.95
○ Adjusted EPS (non-GAAP) of $1.27
● 2Q20 Net sales declined 14.9% to $1.53 billion
○ Sales change ex. currency (non-GAAP) of (12.0%)
○ Organic sales change (non-GAAP) of (13.7%)
● Anticipate Q3 sales decline ex. currency of 5% to 7%
● Strong balance sheet (net debt to adj. EBITDA ratio of 2.1) with ample liquidity; strong annual free cash flow (~$500 mil.) targeted across range of scenarios
GLENDALE, Calif., July 27, 2020 – Avery Dennison Corporation (NYSE:AVY) today announced preliminary, unaudited results for its second quarter ended June 27, 2020 and provided an update related to the impact of the COVID-19 pandemic on the company. Non-GAAP financial measures referenced in this document are reconciled to GAAP in the attached tables. Unless otherwise indicated, comparisons are to the same period in the prior year.
“The team has come together extraordinarily well in navigating what is proving to be one of the most challenging periods we have experienced as a company. The compounding effects of the health, economic and societal crises are having an unprecedented impact on our teams, our markets, and our communities,” said Mitch Butier, Chairman, President and CEO. “Our focus continues to be on ensuring the health and welfare of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders. I’m pleased to report that we are making solid progress on all fronts.
“Second quarter revenue came in better than we expected,” added Butier. “Following a sharp decline in April, total company sales improved sequentially in May and June. In this environment, a key focus is protecting our profitability for the year, which we reported in the first half, with adjusted EBITDA margin above prior year.
“Our strategic priorities are unchanged. We are protecting our investments to expand in high value categories, particularly RFID, while driving long-term profitable growth of our base businesses, and we remain confident in our ability to create significant long-term value for all our stakeholders.
“Once again, I want to thank our entire team for their tireless efforts to keep one another safe while delivering for our customers during this challenging period, bringing a whole new level of agility and dedication to address the unique challenges at hand.”
Ensuring the Safety and Well-being of Our Team and Our Communities
The safety and well-being of employees has been and will continue to be the company’s top priority during this global health crisis. The company has taken steps to both ensure employee safety, as well as help mitigate the financial impact to employees resulting from mandated facility closures and necessary layoffs.
During the second quarter, the company continued to adapt its safety protocols based on new information, and shifted its focus to ensuring a safe return to the workplace following the lifting of government-mandated lockdowns.
The company has helped mitigate the financial impact of furloughs and layoffs through limited salary continuation programs, as well as employee assistance grants through the Avery Dennison Foundation, which significantly increased its annual grant-making to fund a new, global employee assistance program. The company also shifted internal resources to produce personal protective equipment and hand sanitizer, donating supplies to the local communities in which it operates.
In response to heightened awareness of profound societal issues of racial and other sources of inequality, the company is sharpening its focus on diversity and inclusion to sustain equal opportunity and mutual respect, starting with significant efforts enterprise-wide to listen to and learn from the experiences of employees who represent racial minorities and other marginalized groups. The company is incorporating these learnings in comprehensive plans that will further support its goal of promoting a diverse and inclusive culture within the organization.
Market / Operations Update
The company’s Label and Packaging Materials (LPM) business, which serves a critical role in supply chains globally, remained substantially open to serve customers as the COVID-19 pandemic unfolded across the world, with the exception of sites in India, which are now operational. The company’s operations in Europe and North America experienced significant demand surges in mid-March through April, resulting in backlogs that carried into early June, driven by food, hygiene, and pharmaceutical product labeling, as well as variable information labeling related to e-commerce. Demand for these categories slowed later in June in both Europe and North America, as overall supply chain destocking began to impact demand for labels. Demand in emerging markets weakened through the months of April and May, with improvement in June.
In contrast, late in the first quarter, the company began to experience a significant decline in demand for Retail Branding and Information Solutions (RBIS) tickets, tags, and labels for apparel, reflecting the widespread closure of retail stores and apparel manufacturing hubs, as well as a decline in demand for graphics and products serving durable and industrial end markets. These trends continued through April, followed by sequential improvement in May and June, as lockdowns were eased and demand improved.
All manufacturing sites impacted by government-mandated closures are now open.
Meeting Customer Needs / Mitigating Supply Chain Risk
To meet the surge in demand for label materials in Europe and North America, the company took a number of steps to address backlogs, which included leveraging its operational excellence to maximize production capacity; providing pay premiums to hourly employees in certain facilities delivering record production levels; and temporarily allocating a portion of graphics capacity to manufacture material for labels.
In RBIS, the competitive advantage from the company’s global footprint has been beneficial during the pandemic, as supply chain issues caused by shutdowns in one country were addressed by facilities that remained open in other parts of the world.
Overall, the company has had negligible disruptions to its supply chain. As the largest customer for many of its suppliers, the company has been able to secure continuity of material supply, while also benefiting from its global footprint and dual sourcing for most commodities. The company has also strategically built inventory of some key products to enhance its ability to meet customer needs during this period of supply chain uncertainty.
Managing Dynamic Environment
Relentlessly focusing on productivity is a key tenet of the company’s strategy for long-term value creation, serving as a key source of strength to ensure the long-term health and sustainability of its businesses through different economic scenarios. In particular, this focus has enabled sustainable improvements in the profitability of its base business, while freeing up resources to support growth of higher value categories.
In light of the near-term demand decline impacting some businesses, in addition to continuing its focus on long-term strategic restructuring, the company has undertaken temporary actions to reduce costs, including reductions in travel and other discretionary spending, reduced usage of overtime and temporary employees, delays of merit increases, and furloughs.
The company estimates incremental savings from restructuring actions, net of transition costs, of $60 million to $70 million during 2020, and anticipates carryover savings, net of transition costs, of approximately $70 million in 2021, up approximately $10 million since the company’s April outlook for both years. In addition, the company is targeting net temporary savings of approximately $150 million in 2020 (over half of which has been realized in the first half of the year), with the vast majority of the savings expected to be a headwind as markets recover.
In the second quarter, the company realized approximately $15 million in savings from restructuring actions, net of transition costs, and incurred net restructuring charges of approximately $39 million.
Balance Sheet, Liquidity, and Capital Deployment
The company’s balance sheet remains strong, with ample liquidity.
The company’s net debt to adjusted EBITDA ratio (non-GAAP) was 2.1 as of the end of the second quarter, below its long-term target of 2.3 to 2.6. The company currently has $800 million available under its revolving credit facility, and approximately $260 million in cash and cash equivalents on hand at quarter-end.
The company’s long-term priorities for capital allocation support its primary objectives of delivering faster growth in high value categories alongside profitable growth of its base businesses. These priorities are unchanged in the current environment. In particular, the company continues to protect its investments in high value categories, while curtailing its original capital spending plans for the year by approximately $55 million in other areas of the business, and heightening its focus on working capital management.
The company is maintaining its dividend rate. The company has not yet resumed the repurchase of shares, following its decision to temporarily pause its share repurchase program during the first quarter of this year as the global pandemic spread.
Second Quarter 2020 Results
Net sales were $1.53 billion, down 14.9 percent. Sales were down 12.0 percent ex. currency, and down 13.7% on an organic basis.
Reported operating margin declined 350 basis points to 8.1 percent. Adjusted EBITDA margin declined 60 basis points to 14.0 percent, while adjusted operating margin declined 140 basis points to 10.7 percent.
Reported net income was $0.95 per share, compared to $1.69 per share in the prior year second quarter. Adjusted net income was $1.27 per share, down 26 percent, above the company’s expectations, reflecting a sales decline below the low end of its outlook range in April.
The company’s second quarter effective tax rate was 21.5 percent. Its adjusted tax rate (non-GAAP) for the quarter was 24.7 percent, in line with the company’s current expectation for a full year adjusted tax rate in the mid-twenty percent range.
Year-to-date free cash flow was $109 million, down 34 percent. Free cash flow in the second half of the year is expected to accelerate reflecting normal seasonality as well as higher net income and an increased focus on working capital productivity.
Net of dilution from long-term incentive awards, the company’s share count at the end of the quarter was down by 1.1 million compared to the same time last year.
Second Quarter 2020 Results by Segment
Label and Graphic Materials
● Reported sales declined 8.7 percent. Sales were down 4.9 percent on an organic basis, driven largely by volume/mix.
○ Label and Packaging Materials was unchanged from prior year as modest growth in the base and specialty label categories was offset by a mid-teens decline for durable label categories.
○ Sales declined by approximately 30 percent organically in the combined Graphics and Reflective Solutions businesses.
○ On an organic basis, sales were down low-single digits in North America, midsingle digits in Western Europe where Graphics represents a larger share of the total business, and high-single digits in emerging markets.
● Reported operating margin decreased 90 basis points to 12.5 percent, reflecting higher restructuring charges. Adjusted operating margin increased 100 basis points to 14.8 percent, as the benefits of productivity, including material reengineering and net restructuring savings, as well as raw material deflation, net of pricing, more than offset unfavorable volume/mix.
Retail Branding and Information Solutions
● Reported sales declined 29.5 percent. Sales were down 28.2 percent ex. currency, and 35.5 percent on an organic basis, in each case reflecting an approximately 40 percent decline in the base business, driven by site closures and lower apparel demand.
○ Enterprise-wide sales of RFID products were up over 10 percent ex. currency with the benefit of the Smartrac acquisition, and down 20 percent organically, as increased penetration of the market was more than offset by a decline in existing programs tied to apparel.
● Reported operating margin declined to negative 3.6 percent, including the impact of significantly higher restructuring charges. Adjusted operating margin declined to 0.7 percent, reflecting reduced fixed cost leverage in this high variable margin business, which was partially offset by aggressive cost control measures.
Industrial and Healthcare Materials
● Reported sales declined 22.8 percent. On an organic basis, sales fell 20.9 percent, reflecting an approximately 30 percent decline in industrial categories driven by automotive. Healthcare categories were relatively unchanged from prior year.
● Reported operating margin decreased 390 basis points to 5.7 percent, including slightly higher restructuring charges. Adjusted operating margin decreased 370 basis points to 6.8 percent due to reduced fixed cost leverage, partially offset by productivity.
Outlook
The company is prepared for a range of possible macro scenarios and how they might impact each of its businesses. The company currently expects sales and earnings to decline in 2020 on lower demand, with the second quarter representing the trough.
In the third quarter, the company anticipates a decline in sales before the impact of currency translation in the range of 5 percent to 7 percent, or 7 percent to 9 percent on an organic basis.
The company has initiated cost control and cash management actions to partially offset the decline in demand for certain of its businesses, and is targeting to deliver free cash flow of approximately $500 million in 2020.
Other factors expected to impact the company’s full year financial performance are summarized in the company’s supplemental presentation materials, “Second Quarter 2020 Financial Review and Analysis.”
For more details on the company’s results, see the summary tables accompanying this news release, as well as the supplemental presentation materials, “Second Quarter 2020 Financial Review and Analysis,” posted on the company’s website at www.investors.averydennison.com, and furnished to the SEC on Form 8-K.
Throughout this release and the supplemental presentation materials, amounts on a per share basis reflect fully diluted shares outstanding.
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