Avery Dennison Corporation

Welcome to Avery Dennison's earnings conference call for the first quarter ended March 28, 2020. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time May 2nd. To access the replay, please dial 800-633-8284 or or 1-402-977-9140 for international callers. The conference ID number is 219-306-78. I'd now like to turn the conference over to Sydney Gunther, Avery Dennison's Vice President of Investor Relations and Finance. Please go ahead, ma'am.

Thank you, Frank. As you saw in the materials we released this morning, the pandemic is changing how we operate in myriad ways, including how we communicate with our various stakeholders. We hope that you found our more extensive news release and supplemental materials, which are available at the investor section of our website, helpful in understanding both our results this past quarter as well as recent developments associated with the virus. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled with GAAP on Schedules A4 to A8 of the financial statements accompanying today's earnings release. We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release. We undertake no obligation to update these statements to reflect subsequent events or circumstances other than as may be required by law. On the call today, dialing in from different locations, are Mitch Butier, Chairman, President, and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. And I'll now turn the call over to Mitch.

Thanks, Cindy, and hello, everyone. Clearly, the pandemic is having a huge impact on all of our stakeholders. The situation has been evolving in unpredictable ways, and the team is doing a tremendous job adapting to the new reality, anticipating and planning for various scenarios. Our first priority in this crisis has been and will continue to be protecting the health and welfare of our teams, followed immediately by continuing to deliver industry-leading product quality and service to our customers. We took aggressive and decisive measures early on to protect the health of our team. When the crisis first developed in China, We provided and required face masks, temperature checks, and social distancing, among other things, within our operations. We then implemented these best practices in other sites, modifying them where appropriate as the virus rolled across other countries. As a result, we have had fewer than 10 confirmed cases of the virus among the team to date. I am proud of the actions we've been taking to help keep our people safe. In addition to protecting their health, we also took measures to soften the initial economic shock to employees when we were required to close operations or where we experienced a precipitous drop in volume. We delayed some of the restructuring actions we had planned for the year. We have extended salary continuation, particularly in jurisdictions with weaker social safety nets. And the Avery Dennison Foundation has stepped forward to provide grants for employee assistance. I'd like to say thank you again to our team and especially to those in our plants for their tireless efforts to maintain our industry-leading quality and service through this crisis. You are keeping each other safe, meeting our customers' needs, and bringing a whole new level of agility and dedication to meet the unique challenges at hand. Thank you. Turning now to the impact on our businesses. As you saw in our published materials, Q1 earnings came in higher than our expectations. We'll provide a few quick highlights on the quarter and address any additional questions you have in the Q&A. In LGM, we delivered strong volume growth, both from the anticipated recovery of prior year share loss, as well as a demand surge late in the quarter related to the pandemic. As you know, we entered this year with a focus on protecting our margins in a period of lower growth, and we beat our expectations on that front. In RBIS, continued strong growth in high-value categories was offset by a roughly 7% decline in volumes in the base, reflecting shutdowns early in the quarter in China and then late in the quarter in other countries as the pandemic spread. These pandemic-related headwinds in the base, as well as a tough prior year comp, drove the margin decline in this business. The high-value categories were at mid-teens on an organic basis within RBIS. Enterprise-wide, RFID was up mid-teens in the quarter. As you know, we have been continuing to invest in growth in these categories, and that includes our recent acquisition of SmartTrack. This acquisition accelerates our strategy to build our Intelligent Labels platform that now spans both RBIS and LGM. Just a couple of months into our integration with SmartTrack, we are confident our combined capabilities position us extremely well to capture the long-term growth opportunity in an increasingly digitized world. And lastly on the quarter, the IHM team successfully delivered their planned margin expansion despite a drop in sales from lower industrial demand, especially for automotive. Focusing on more recent trends, it's clear that the early stages of this downturn are playing out differently than past recessions. Label and packaging materials, our largest business, serves essential categories that are experiencing higher demand during the pandemic. In particular, our operations in Europe and North America experienced a significant surge in demand in March and thus far in Q2, driven by food, hygiene, and pharmaceutical product labeling, as well as variable information labeling related to e-commerce. In contrast, RBIS, which primarily serves apparel markets, is seeing a significant decline in demand, reflecting widespread retail and store and apparel manufacturing closures. Overall, we anticipate a decline in organic growth and earnings for the company this year, as anticipated strong volumes in essential label categories is more than offset by declines in categories serving apparel and industrial end markets. We saw the beginnings of these trends in March, which accelerated through April, pointing to a substantially more pronounced impact to our second quarter results, particularly for RBIS. While it's still early days in the downturn, we expect that these trends will improve sequentially in the back half of the year as retail and manufacturing reopens. Due to our longstanding focus on innovation, productivity, and capital discipline, we entered this crisis from a position of financial, operational, and commercial strength. Though the nature of the macro challenges is different than in past recessions, our business is resilient across economic cycles. Historically, our businesses have rebounded quickly in the year following a recession. Now, it's too early to call, but if the depth and duration of the economic impact across this cycle is similar to what we experienced in the Great Recession, we would be targeting 2021 earnings and free cash flow above 2019 levels. As for our financial position, past scenario planning has ensured that we have ample liquidity and a strong balance sheet. and we're targeting free cash flow in 2020 of more than $500 million, comparable to what we delivered last year. Our years of relentless focus on productivity and capital discipline continue to serve us well. We are continuing to execute our long-term strategic restructuring initiatives to enhance our competitive position in our base, free up resources to invest in high-value categories, and support our margins. In addition to these long-term initiatives, we are implementing short-term temporary actions to reduce costs in the face of this disruption to global demand. That said, our strategic priorities are unchanged. We are protecting our investments to expand in high-value categories, including RFID, while driving long-term profitable growth of our base businesses. And we remain confident in our ability to continue to create significant long-term value for all of our stakeholders. Over to you, Greg.