Avery Dennison Corporation

Welcome to Avery Dennison's earnings conference call for the third quarter ended September 26th, 2020. During the presentation, all participants will be in the listen-only mode. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time October 24th. To access the replay, please dial 800-633-8284 or 1-402-977-9140 for international callers. The conference ID number is 21930680. 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, Frank. 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 are Mitch Butier, Chairman, President, and Chief Executive Officer, and Greg Levin, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Thanks, Cindy, and hello, everyone. Once again, we are proving our resilience across business cycles. Levin came in significantly better than we anticipated at the start of the quarter, which combined with our cost reduction actions, enabled us to deliver 15% growth in adjusted earnings per share and strong free cash flow in the quarter despite lower sales. We said coming into this year that a key focus of ours in a lower growth environment was to protect our overall profitability. We're delivering on that promise. Margins expanded significantly in the third quarter, reflecting the successful execution of our long-term strategies as well as the team's fast response in implementing temporary cost-saving actions in a better than expected volume environment. Even with the sharp drop in volume in the second quarter, our year-to-date adjusted EBITDA margin is up 80 basis points to 14.9%. Our strong performance reflects the agility of our teams, which have come together extraordinarily well in navigating one of the most challenging periods we've experienced as a company. In this environment, Our focus continues to be on ensuring the health and well-being of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders. And I'm pleased with the progress we are making on all fronts. Now, despite our best efforts to protect employee health, we have identified roughly 350 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. Fortunately, about three-quarters of the employees impacted have already recovered. While all sites were operational throughout Q3, the recent surge in confirmed cases in a number of the regions in which we operate highlights the continued uncertainty of the current environment, as well as the importance of remaining vigilant with respect to safety and agile in meeting customers' needs. Now a quick summary of the business trends. All three segments came in better than we expected at the start of the quarter on both sales and margin. LGM sales, though still down in the third quarter compared to prior year, improved sequentially due to a faster than expected pickup in the global graphics business. Overall, our label and packaging materials businesses moderated sequentially as expected with North American emerging markets having picked up a little faster than we expected, while Europe came in a bit weaker. From the start of the pandemic until now, volume trends for label and packaging materials have varied by region. From March through September, volumes in North America were up mid-single digits, while volumes in Europe were up low single digits. In both regions, we experienced significant volume surges during the early stages of the pandemic, followed by a moderation of growth due principally to destocking. Now, as we look across this period overall, our North America business has been trending faster than the long-term average for the region, while Europe has been trending a bit below the region's long-term average. The emerging markets picture has been different. Asia-Pacific volumes have been flat overall from March through September, with volumes rising to mid-single-digit growth in the third quarter. While it's good to see the recent pickup in demand here This is still below the long-term trend for the region. As for RBIS, demand improved much faster than we anticipated back in July, down only 5% organically for the quarter, compared to the roughly 35% decline we saw in Q2. Enterprise-wide, RFID sales grew by 65% in the quarter on a constant currency basis, reflecting 20% organic growth and the contribution of the SmartTrack acquisition. The strong growth of our RFID business was primarily driven by apparel, particularly within the value segment of the market. Outside of apparel, we continue to see increasing interest in new applications within logistics, as well as food and grocery. Specifically, we are working with logistics companies to assess the technology in light of the accelerated shift to e-commerce, with many providers operating at holiday-like peak volumes throughout the pandemic. Given the stress that this has put on supply chains globally, we're now working with several companies to demonstrate how RFID and related solutions can drive an increase in both the throughput and accuracy of their operations. We're active on multiple pilots in this area and have some smaller deployments already underway. The momentum in food-related end markets likewise continues, with increased pilot activity among quick service restaurants as well as retail, both in the U.S. and emerging markets. These applications are focused on driving labor efficiency and improved availability of products. Similar to apparel, the migration to e-commerce for food delivery is strengthening the use case for RFID in this market. Overall, we continue to expand our RFID project pipeline. Customer engagements are now up close to 45% since the start of this year. As these projects continue to move through the pipeline, We continue to expect long-term growth of 15% to 20% as we build RFID into a broader intelligent label platform, which is now a more than $500 million business. Returning to the total company, we entered this crisis from a position of financial, operational, and commercial strength. And as I mentioned earlier, our businesses are once again proving their resilience across economic cycles. Our teams are adapting quickly to new commercial and operational norms, responding decisively with best practice safety measures, protecting our profitability in a low-growth environment, and positioning us well to capture demand as conditions improve. 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. Our strategy remains clear. We are continuing to invest to expand in high-value categories, particularly our Intelligent Label Platform, while driving long-term profitable growth of our base businesses. We remain confident in our ability to continue to create significant long-term value for all of our stakeholders. I'll now turn it over to Greg.