Avery Dennison Corporation

Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in listen-only mode. Afterwards, we will have a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. Welcome to Avery Dennison's earnings conference call for the second quarter ended June 27, 2020. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time July 30th. To access the replay, please dial 800-633-8284 or plus 1-402-977-9140 for international callers. The conference ID number is 21930679. I'd now like to turn the call over to Cindy Gunther, Avery Dennison's Vice President of Investor Relations and Finance. Please go ahead.

Thank you, Mladen. 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 A9 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 Levin, Senior Vice President and Chief Financial Officer. And now I'll turn the call over to Mitch.

Thanks, Cindy, and hello, everyone. Our teams have come together extraordinarily well in navigating one of the most challenging periods we've experienced as a company. The compounding effects of the health, economic, and societal crises are having a significant impact on our teams, our markets, and our communities. 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. and employees report that we are making solid progress on all fronts. Since the early days of the pandemic, we quickly adopted and then adapted best practices to keep our employees safe and our plants operational, while also taking steps to reduce the financial impact to employees affected by necessary furloughs and layoffs. Despite our best efforts to protect employee health, unfortunately, We have identified roughly 225 confirmed cases of the virus within our 30,000-plus workforce, with the majority of cases apparently reflecting community spread rather than a work-based source of infection. Now, before I shift to our operating results, I'd like to take a moment to comment on one other critical issue. In response to heightened awareness of the profound societal issues of racial and other sources of inequity, we are sharpening our focus on diversity and inclusion. starting with significant efforts to listen to and learn from the experiences of employees who represent racial minorities and other marginalized groups. We are incorporating these learnings and concrete plans to further support our organizational values. Now turning to business results. While both our top and bottom lines were down in Q2 compared to prior year, results came in better than we expected just a quarter ago. Following a sharp decline in April, total company sales improved sequentially in May and June. A key focus of ours in this lower growth environment is on protecting our overall profitability, which we accomplished in the first half of the year. Year-to-date, adjusted EBITDA margin was up 30 basis points, and in the second quarter, we reported an adjusted EBITDA margin of 14%, despite the significant overall volume decline. This relatively strong margin performance reflects the successful execution of our strategies over recent years, and the team's fast actions in implementing temporary cost-saving measures as well as lower costs from incentive compensation. Now, drilling a little deeper into our trends by business. Both LGM and RBIS came in better than our expectations on both revenue and margin, while IHM revenue was a bit short of our forecast. Our label and packaging materials business, the largest component of LGM, which serves a critical role in packaged goods and supply chains globally, remains substantially open to serve customers as the pandemic unfolded across the world. Our sites in Europe and North America experienced significant surges in orders mid-March through April, driven by both increased consumption and inventory build, resulting in backlogs that carried us into early June. In some cases, our lead times were longer than usual due to pockets of disruption in some of our plants located in COVID hotspots. Overall, though, by leveraging our strong operational excellence, the team delivered record levels of output for the better part of two months, all while keeping their colleagues safe. Then in June, LPM sales slowed in both Europe and North America, with a portion of the slowdown reflecting inventory destocking. In China, LPM sales improved sequentially following relatively steep declines in January and February, while the balance of emerging markets, particularly India, deteriorated as lockdown spread across the globe and continued through much of Q2. That said, demand across most emerging markets countries improved sequentially in June as the lockdowns eased. In contrast to the surge we saw in LPM in the early stages of the pandemic, we experienced a significant drop in demand for RBIS and the graphics portion of LGM, with April sales down more than 50% organically for both businesses. These businesses then improved sequentially faster than expected in both May and June. Enterprise-wide, RFID was up over 10% in the quarter on a constant currency basis, reflecting the contribution of the recent SmartTrack acquisition which more than offset a 20% organic sales decline related to COVID's impact on apparel demand. With 75% of the RFID business still tied to apparel, we expect RFID sales in 2020 will grow more than 30% ex-currency and will be roughly comparable to prior year on an organic basis. Our project pipeline continues to expand, with customer engagements now up more than 35% since just the start of this year. As these projects continue to move through the pipeline, we continue to expect 15 to 20% growth of our intelligent label platform over the long term. As you know, we've been continuing to invest to expand our intelligent label business, including through acquisition. The integration of SmartTrack is on track to accelerate the growth and value generation of this now $500 million revenue business. By leveraging the combined channel access, global footprint, and innovation capabilities of the two organizations in terms of product portfolio, process technology, and larger R&D and business development teams, we are positioned extremely well to develop solutions that meet rapidly expanding customer needs with a particular focus on apparel and beauty, food and grocery, and logistics. And COVID-19 has served to further strengthen the key drivers of RFID adoption. With new supply chain models demanding better speed and visibility, the need to reduce staffing levels, increased demand for food, product sourcing, and handling traceability, and increased importance of reduced contact at checkout, not to mention an acceleration of omnichannel retailing for apparel. Now returning to the total company. As we've said before, we've entered this crisis from a position of financial, operational, and commercial strength. Our business is resilient across economic cycles, Though the nature of the macro challenges is different today than in past recessions, historically, our businesses have continued to deliver solid free cash flow in periods of economic downturn, and sales and earnings have rebounded quickly in the 12 months following. We're doing more than just weathering the storm. Our teams are adapting quickly to new commercial and operational norms, responding decisively with best practice safety measures and prudent cost reduction, protecting our profitability in a lower growth environment, and are positioned well to capture demand as conditions improve. Our strategic priorities are unchanged. We are preserving our investments to expand in high-value categories, particularly our intelligent label platform, 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. I'll now hand it over to Greg.