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 conduct 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 fourth quarter and full year, ended January 2, 2021. This call is being recorded and will be available for replay from noon Pacific time today through midnight Pacific time February 6th. To access the replay, please dial 800-633-8284 or for international callers, plus 1-402-977-9140. The conference ID number is 2196-9418. I'd now like to turn the call over to John Eble, Avery Dennison's Senior Director of Investor Relations. 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 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 they be required by law. On the call today are Mitch Buttier, Chairman, President, and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Mr. Butcher has disconnected. One moment, please. We'll get him.

Okay. Thanks, John. And hello, everyone. Good day. Apologies for that quick technical glitch there. The line dropped. So as you can see from our results, we continue to prove our resilience across business cycles as a company. We delivered another year of strong earnings growth with adjusted EPS up 8% and record-free cash flow, despite a 2% decline on the top line. We said coming into this year that a key focus of ours in the lower growth environment would be to protect our overall profitability. We delivered on that promise. Margins again expanded significantly, reflecting the successful execution of our long-term strategies, as well as the team's fast response in implementing temporary cost-saving actions. The result, combined with better than expected volumes in the second half, essentially accelerated the margin expansion we had planned for 2021 into 2020, enabling us to deliver EBITDA margins of over 15%. Our strong performance reflects the remarkable preparedness and incredible agility of our teams, who 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 wellbeing of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders while continuing to invest in the long-term success of the company. I'm pleased with the progress we're making on all fronts. Now, despite our best efforts to protect employee health, we have identified roughly 1,100 confirmed cases of the virus within our 30,000 plus workforce, with the majority of cases reflecting community spread rather than a work-based source of infection. Fortunately, over 80% of the employees impacted have already recovered. The recent surge of 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 customer needs. In light of the significant challenges throughout 2020, we also took additional measures in support of our employees and communities. We provided additional compensation and benefits in the early stages of the pandemic to reduce the financial impact on employees in some of the hardest hit regions. We provided supplemental payments to our frontline workers to thank them for their courage and agility in serving our customers' essential needs and we stepped up our level of community engagement, including an additional $10 million contribution for charitable causes. I'm pleased with the continued progress that we are making towards the success of all of our stakeholders, as evidenced by the fact that we are on track to deliver the vast majority of our long-term financial and sustainability objectives. Our consistent performance reflects the strengths of our markets, our industry-leading positions, the strategic foundations we've laid, and our agile and talented team. We are focused on the consistent execution of our five key strategies. Driving outsized growth in high-value categories, growing profitably in our base businesses, continuing our relentless focus on productivity, being highly disciplined capital allocators, and leading with environmentally and socially responsible practices and solutions. In 2020, we made progress on each. High-value categories again outperformed. We protected even grew margins in our base businesses. We delivered $200 million of cost reduction, both structural and temporary. We completed two acquisitions, SmartTrack, which significantly accelerates our strategies and capabilities to build out our intelligent label platform with RFID, and AFPO, which enhances our position in our North American label and graphics materials business. Lastly, we continue to make solid progress towards our 2025 sustainability goals. We have substantially reduced the environmental impact of our operations while focusing increasingly on the development and launch of more innovative, environmentally friendly products and solutions. Now a quick summary of our results by business. LGM's adjusted operating margin expanded 180 basis points to just above 15% for the year on a modest decline in revenue. In label and packaging materials, underlying label demand has remained strong throughout the downturn, given the increased consumption of consumer packaged goods and e-commerce trends, while the somewhat more cyclical graphics and reflective solutions business declined. From the start of the pandemic until now, volume trends for LPM have varied more than usual throughout the year. From March through December overall, our North American label business has grown mid to high single digits, roughly double the long-term average for the region. While Europe has grown low to mid single digits, comparable to the region's long-term average. And while the mature regions have grown at or above their long-term average since March, Asia Pacific volumes were below their long-term trend. up low single digits across the period. This lower than usual growth in Asia was due to declines from March to June before rebounding to mid single digit volume growth in the second half. In retail branding and information solutions, revenue and margins were both down for the year. Following a sharp decline in Q2, demand improved sequentially in the second half with Q4 coming in at 3% organic growth. We delivered more than a full point of margin expansion in the second half, driven by the better than anticipated volume and tight cost controls. Enterprise-wide, RFID sales grew more than 40% for the year on a constant currency basis, reflecting the contribution of the SmartTrack acquisition and organic growth of 9% for the year. Organic growth of RFID rebounded quickly in the second half, up roughly 20%, driven primarily by apparel. Outside of apparel, we are seeing increasing interest in new applications within food and logistics, among other categories. The momentum in these applications is focused on driving labor efficiency, improving availability of products, and the migration to e-commerce. As the leader in ultra-high frequency RFID, we are positioned extremely well to capture these opportunities, with industry-leading innovation and manufacturing capabilities, and the best, most experienced team in the space. 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. And as for industrial and healthcare materials, we expanded margin in this segment for the year, despite lower revenue. IHM returned to growth in Q4, and we continue to make progress toward a long-term profitability target here. To recap, we delivered another year of strong earnings growth and free cash flow despite challenging market conditions. We entered this crisis from a position of financial, operational, and commercial strength and will emerge from it even stronger. We are once again proving our resilience as a company and our ability to consistently deliver for all of our stakeholders. And we remain confident in our ability to continue to deliver GDP plus growth and top quartile return on capital. We look forward to sharing more about our long-term objectives and strategies with all of you at our investor day next month. And I'll now turn the call over to Greg.

Thanks, Mitch.

And hello, everybody.

I'll first provide an update today on our performance against our long-term goals and then walk you through our fourth quarter performance and our outlook for 2021. Slide 11 of our supplemental presentation materials provides an update on our progress against the five-year targets that we communicated in 2017. And recall that this represents our third set of long-term goals after meeting or beating our previous two sets. The consistent execution of our key strategies enables us to continue delivering against our targets with an overriding focus on delivering GDP plus growth and top quartile returns on capital over the long term. As you can see, we are largely on track to deliver once again. Over the four-year period, sales growth on a constant currency basis is up nearly 4% annually, with organic growth of 2% annually. While both are below our initial target largely due to the late stage recession in this cycle, we are achieving our objective of growing above GDP over this period. Reporting operating margin was 11.6% in 2020, or 12.4% on an adjusted basis. up significantly from roughly 10% in 2016. Additionally, our EBITDA margin was above 15% in 2020. And as always, our focus will continue to be the optimal balance of growth, margins, and capital efficiency to drive incremental EVA over the long term. Our adjusted earnings per share is up over 15% annually, largely driven by the solid top line growth and strong margin expansion. And our return on total capital came in at 18% for 2020, above our 17% target, reflecting top quartile performance relative to our capital market peers. And our balance sheet remains strong, with our net debt to EBITDA ratio below the low end of our target range, giving us ample capacity to continue executing our strategies. Our consistent progress towards achieving these long-term goals reflects the diversity of our end markets strength of our position in those markets and our resilience and agility as an organization to adjust course when needed at the same time that we communicated our financial goals through 2021 we also laid out a five-year plan for capital allocation which you can see on slide 12. we're tracking well against this plan starting with strong cash flow generation we've deployed a total of 3.4 billion dollars over the last four years allocating it in line with our long-term plan. And clearly, our current leveraged position gives us ample capacity to continue investing organically as well as through strategic acquisitions while continuing to return cash to shareholders in a disciplined way. Now let me turn to the fourth quarter. Overall, financial results were strong, with adjusted earnings per share of $2.27, up 31% versus prior year. reflecting better than expected top and bottom line performance in each of our segments. We grew sales by 12.3% or 3.2% on an organic basis. In currency translation, increased reported sales growth by 2.3 points. In the extra week in the fourth quarter, increased reported sales by 4.9%. Adjusted operating margin increased by 160 basis points to 13.5%. reflecting significant margin expansion in each operating segment. Our tight near-term cost controls in this environment, combined with the flow-through benefit from a volume surge late in the quarter, as well as our ongoing structural productivity actions and a benefit from the 53rd week drove strong margin expansion in Q4. And we realized $18 million of restructuring savings net of transition costs in the quarter. due in part to the long-term actions that we accelerated into 2020, particularly in RBIS. And for the year, we generated $548 million of free cash flow, up 7% compared to 2019. Total capital and IT spending came in at $219 million, higher than recent expectations, as we accelerated investment in our high-value categories, particularly in RFID. And as mentioned previously, our balance sheet remains strong with the net debt to adjusted EBITDA ratio at year end of 1.7. And as we've proven our ability to manage through the compounding global crises we face this year, we've been putting that leverage capacity to work. For the year, we deployed $350 million for strategic acquisitions, as well as returned $301 million to shareholders through the combination of share repurchases and a growing dividend. Now let me turn to segment results for the quarter. Label and graphic material sales increased by 3.6% on an organic basis, driven by the net effect of volume and mix. And sales improved sequentially across all regions. Label and packaging material sales were up mid-single digits organically, benefiting from a late quarter pandemic-related surge in demand. And specialty and durable label categories grew high single digits, with low to mid-single-digit growth in the base business. Graphics and reflective sales were down mid-single digits, reflecting modest sequential improvement after rebounding significantly in Q3 following the sharp decline in Q2 as a result of the government-mandated lockdowns then. Looking to segment sales trends by region in Q4, in North America, LGM sales were up mid-single digits organically for the quarter, with LPM up high single digits while graphics declined modestly. In Europe, LGM sales for the quarter were roughly flat on an organic basis, reflecting strong sequential improvement. LPM was up low single digits, while graphics declined by high single digits. And in Asia, LGM was up low single digits for the quarter on an organic basis, with relatively consistent growth across the countries. LGM's adjusted operating margin increased 210 basis points to 15.4%, as the benefits of productivity, favorable volume and mix, and raw material deflation net of pricing more than offset higher employee-related costs. Shifting now to retail branding and information solutions, RBIS sales were up 11.6% ex-currency and up 3.1% on an organic basis. reflecting continued improvement in both the high value categories and the base business as retailers geared up for the holiday season early on in the quarter. High value categories were up nearly 20% organically with enterprise-wide RFID sales up 55% ex-currency and up 21% on an organic basis. And the base business was down low to mid single digits. Looking at the total apparel business, the value channel outperformed all the other channels and was up 40% organically for the quarter. An adjusted operating margin for the segment increased 210 basis points to 15.7%. The significant margin expansion was driven by productivity initiatives, including accelerated structural actions and temporary cost controls, along with the better than anticipated volumes. These benefits were partially offset by higher employee-related costs. Turning to the industrial and healthcare materials segment, sales increased by 0.7% on an organic basis. As a high single-digit increase for industrial categories, reflecting continued sequential improvement in trends for automotive applications in particular, was partially offset by a mid-single-digit decline in healthcare categories. Adjusted operating margin increased by 210 basis points to 12.3%, as the benefits from higher volume and productivity more than offset higher employee-related costs. So turning now to our outlook for 2021, we anticipate adjusted earnings per share to be in the range of $7.65 to $8.05. We've outlined some of the key contributing factors to this guidance on slide 18 of our supplemental presentation materials. we estimate that organic sales growth will be approximately 3% to 7%, with the midpoint of that range reflecting continued recovery in our end markets across the segments. The extra week in the fourth quarter of 2020 will be a headwind of little more than a point to reported sales growth, and a roughly 15-cent headwind to EPS for the full year. We anticipate Q1 will benefit by roughly 10 cents based on the shift in the calendar, more than offset by roughly 25 cents a headwind then in Q4. Based on recent rates, currency translation is a roughly two-point tailwind to reported sales growth with an estimated $25 million benefit to operating income. And we estimate incremental pre-tax savings from restructuring net of transition costs of roughly $70 million in 2021. Given we previously accelerated some 2021 actions into the second half of 2020, The vast majority of the savings represent the carryover impact from actions that we initiated last year. And we also expect the majority of the approximately $135 million in temporary cost savings we delivered in 2020 to be a headwind as markets recover. Moving to our outlook on the tax rate, based on current regulations, we expect both the GAAP and adjusted tax rates will be in the mid-20s for the full year. And we expect free cash flow to be more than $600 million in 2021. And finally, we estimate average shares outstanding, assuming dilution of 83 to 84 million. In summary, despite the challenging environment, we're pleased with the strategic and financial progress we made against our long-term goals in 2020. And we're confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. And now we'll open up the call for your questions.

And thank you very much. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. 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 for the first question. Our first question comes in line of Ghanshyam Punjabi with Baird. Please go ahead.

Hey, guys. Good day. Hope everyone's doing well.

Yes. Hello, Ghanshyam.

Yeah, I guess first question, just on the LGM strength in the fourth quarter, 37% incremental margins year over year. I know you mentioned that there was a late quarter surge, but GNR also got weaker, which is higher margin, I think, for that segment. So just curious if you can give us a little bit more color on the margin strength. And then on the strength in LPM from a volume standpoint in both November and December, was that just a function of expanded lockdowns in Europe and the U.S. or just a much better e-commerce season or – whatever details you could provide there would be helpful also.

Yeah, thanks, Ganshan. This is Greg. So on the last part of your question, certainly as you said, you can see in the backup slide with the monthly numbers that we saw a pickup in the LPM side of the business in November and December. And yeah, we think that's a function similar to earlier in the year as there are more lockdowns, particularly in Europe and in parts of the U.S. We saw more consumption of packaged goods late in the fourth quarter. So that was part of what's lifted the volume growth in Q4. And that also then helped drive part of the Q4 margins for LGM. As we've talked about in the past, we've been driving the temporary cost savings with volumes coming in better than expected in the quarter that helped deliver stronger margins overall. At the same time, we did have the extra week in Q4. That extra week turned out to be a pretty strong week, and we did see that also have about a 30 basis point margin impact in LGM as well as the total company level.

Great. And then for my second question on the 3% to 7% core sales growth for 21, how does that disaggregate between volumes and price the way you see it at current in context of pulp prices going up and petrochemicals and so on? And where in that range is 1Q tracking thus far on a consolidated basis? Thanks again.

Yeah, I think high-level, Ganshama, when we think about the range that we have for 2021, so the 3% to 7%, there's a couple – overall big drivers. One is we talked about intelligent labels. We still expect to grow in that 15 to 20% pace as we've talked about over the years. And as we demonstrated, certainly in the back half of 2020, that by itself, given the size of the IL business now would add about a point to a point and a half of overall growth for the company. At the same time, when we look versus 2020 and we see the quarters that were hit the hardest Q2, and then a little bit of Q3, if we fully recovered that, we think that would be somewhere in three to four points of growth for the year. on a full year basis. We've built in about two to three points of growth on recovering some of that volume decline that we saw in those most hit quarters in 2020. So those are a couple big drivers of the growth that we see year over year. At the same time, we would expect in the businesses that were hit the hardest in 2020 to have the biggest growth rates as we see that recovery come through in those segments.

Our next question is from Adam Josephson with KeyBank Capital Markets. Please go ahead.

Mitch and Greg, good morning, and congrats on a really good end of the year. Greg, just one on your margin expectations for the year. It seems like you're expecting roughly slattish margins. I assume you would expect notable expansion in IHM and RBIS and perhaps some degradation in LGM margins, given how good a year you had in 20 in LGM. Can you just talk about your margin expectations, either consolidated or by segment?

Yeah, so I think in total, you know, when we look at the year as we're headed into 2021, just as we were when we were headed into 2020, you know, we targeted and we talked about a year ago in a lower growth environment, we were targeting to hold margins. And that would still be our expectation this year. If we're in a lower growth environment, continue to target holding margins. When you think, just like you said, across the company, the range of our guidance assumptions includes a number of different factors, depending on the environment and the macro. We would expect to see, certainly when you look at the second quarter, when we had the trough in some of the businesses that had a margin impact there, we would expect to see a larger recovery, particularly in Q2. When we look more broadly, as you know, when we've talked about in the past, our overall focus over time is balancing our top-line growth, with strong margins and strong capital efficiency in order to drive long-term growth in EVA. And that's how we'll continue to think about it. So margins continues to be a big factor, of course, in continuing to drive margins, but we're looking at the balance of those three things to drive long-term EVA growth over time.

Thanks, Grant. Just one more on the margin issue. So if I look at from 2015 onward, all of the company's margin expansion has come from the SG&A line. I think SG&A's percentage of sales has gone from almost 19 to down to 15, whereas gross margins have been basically flat over that period. This coming year and thereafter, do you think more of your margin expansion is likely to come from the gross margin line or the SG&A line, and perhaps why? Thank you.

Yeah, I think when you look over that long of a period of time, certainly we had a number of initiatives, and we've talked about few years ago in RBS, the acceleration and turnaround there, and that included some reductions in SG&A and other areas. So there was some focus on that. I think when we look at even 2020, we started to see our gross margins improve quite a bit from the inflationary cycle that we had a couple of years before that. So we expect to continue driving strong productivity in SG&A over time, but we would also expect to continue to see gross profits improve over time as well.

And our next question is from Neil Kumar, Morgan Stanley Investment. Please go ahead.

Hi, thanks for taking my question. Can you just discuss how your LGM volumes in the fourth quarter compared to the industry? And were there any specific regions you would call out where you've gained or lost some market share?

Yeah, so Neil, overall, if you look at our, if you're asking a share question for our LPM business, so labels specifically, We don't have all the market data in for the two regions where we get it. But generally, for the full year, share positions are pretty comparable for 2020 versus 2019. If you look at where we are specifically in the fourth quarter, in Europe, we are our share positions where we want it to be. In North America, we're a little bit behind where we want to be. So that's overall for the year. Our share positions have been pretty constant and where we are for fourth quarter.

Thanks. That's helpful. And then just for RFID, you talked in the past about the addressable market and apparel being 30% or so penetrated. Where do you think that penetration rate can go over the next several years? And then more generally, in terms of your 15% to 20% long-term RFID growth guidance, do you think there's upside to that range given the potential acceleration in adoption rates? Or is the RFID basis already pretty large such that it'll get incrementally harder to see that?

yes overall two questions there as far as the apparel adoption right so apparel continues i mean the pandemic has really what we've seen is a second inflection point if you will an acceleration of activity not just tier one but a lot of tier two retailers and brands in addition to tier one so a significant amount of our pipeline is also apparel growth we have traditionally said we're roughly a third penetrated It's clearly a bit more than that, but we also said over time we expect the addressable market to increase a bit over time as well. So that's where we are in addressable market. Still quite a bit of upside overall within apparel, and we see obviously huge opportunities outside of apparel. And so to your question of 15% to 20%, do we see upside to that? Yeah, I mean, we see a huge opportunity for us. It's really around developing market opportunities and then capturing those opportunities. We see significant long-term potential here. The 15 to 20% we've created because there's a certain level of just pace of adoptions that we go through. And given the size of this business being over $500 million now, as Greg said, it's now adding one of that one and a half points to our overall growth. So that's a pretty significant amount of dollar growth every year if you look at it from that perspective. We're clearly not limiting ourselves to what the upside can be. I think 15% to 20% is the right target. We're clearly aspirations are to develop this into a much larger business than it is today, and we see it having a very long runway ahead of it. And in general, to your questions about addressable markets and everything else, we'll definitely be updating all of that at our investor call, investor day next month.

Our next question comes from the line of Josh Spector with UBS Securities. Please go ahead.

Yeah, hi, thanks for taking the question. Just within RBIS and the base ticket and label business, I mean, there's obviously been some uncertainty on how first half of 21 would play out given some of the weakness we saw kind of early last year. I guess you mentioned you'd have more visibility on that kind of after the holiday season. Just curious if you can give us an update on what customers are saying about order patterns and kind of inventories here over the next six months.

Yeah, so generally holiday was a bit stronger on the average, if you will, than retailers were expecting. So that bodes well. As far as it's too early to say how things are playing out post the holiday, just the timing of the Lunar New Year. We have really easy comps this past week or so. So too tough to tell. We'll have a better read after January and February to comp through the Lunar New Year. Overall, what you're seeing, though, is The North American market doing better than Europe. If you look at just apparel import trends alone, apparel imports in the U.S. for the full year, they were down close to 20%. If you look at the last six months where the data is available, it was down 11%. And it's up a couple percent if you look at the last few months. So that does show an improving trend here in the U.S. Europe, however, continues to be down quite significantly, down around 20% or so the last few months. So A bit of a decoupling between U.S. and Europe is what we're seeing right now. And generally, holiday was a bit better than people had anticipated. And we're really going to need a little bit more time than just right after the holiday to get a good sense of where things play out. And I'd say Europe is the bigger question for us.

Thanks. So that's helpful. I guess going back to the RFID side of things, I think there's generally a view that with COVID, some of the impact might be some acceleration of adoption there. I guess I was wondering if you could give us a general view of what typically the timeline looks like until a customer first engages with you about the idea, you guys work with them to develop it, and then it actually rolls out. So we actually might see some of that kind of flow through your earnings a bit more.

Yeah, with an apparel, the timeline has shortened quite a bit from where it was a few years ago just because there's a number – Technology is proven. Everybody knows it. The business case is very robust. As far as learnings, you can translate from one retailer brand to another. So that's fairly quick. The average isn't that great, but say six to nine months is what I would give as an estimate. Within other categories, it can vary quite a bit. It obviously is longer than that. Um, as far as the pipeline, when it starts from just the business case and then moves into pilot and, uh, testing and so forth. Uh, so that takes a bit longer, I would say, you know, the biggest area of the pipeline growth that we're seeing. We talked about, uh, apparel having good, uh, increases within apparel overall, but outside of that, and we could look at food, our pipeline is up quite significantly as well as with logistics up quite significantly. And, uh, we're seeing a number of pilots that we. uh expect in the pilot phase will give us you know million dollars of revenue or so here in 2021 and uh assuming they're successful and convert which we sure confident they will they would turn into you know five million dollar programs uh each individual one so that's where we are the food we've been working for a while they've accelerated a bit in the pandemic along with logistics we'll see a bit more revenue here in 2021 and we expect that to be a base for more growth going into 2022.

Our next question is from Anthony Pettinari with Citigroup Global Markets. Please go ahead.

Good morning. Just a follow-up question on RFID and SmartTrack. You know, I think when you acquired SmartTrack, I think you indicated it could be sort of modestly dilutive in 2020 given integration and interest expense costs. And I think you said margins would be sort of in line with the base business by 2022. Just wondering if that's still sort of accurate, you know, how the business has performed relative to expectations and the growth rates that you called up for RFID. Is there any way that you could differentiate between RFID and sort of the NFC technology that you acquired with SmartTrack?

Well, overall, we look at it as a combined business and it is integrated. So as far as how we how we go to market and everything else. So the growth is basically on the combined of the two we have talked about. Specifically, if you look at SmartTrack, they had about 50% to apparel retail and 50% to auto food and other categories. So we will discuss it more about what the market trends are for those end markets, but we won't be calling out a separate growth rate for SmartTrack versus the overall RFID and Intelligent Label platform. So that's as far as your first question. We actually was not dilutive in 2020. We actually, if you look at our adjusted EPS, it was actually modestly accretive in 2020. So we were able to execute quicker than expected. We do expect the margins to be comparable to the overall margins for the IL platform, which were above the company and divisional averages for EBITDA margins.

Okay. Okay. That's very helpful. And then just, you know, it seems like COVID has pulled forward a lot of technology adoption and you've talked to, you know, how that's impacted RFID. I'm just wondering on the LVM side, has COVID changed the adoption of pressure sensitive versus glue applied versus shrink, you know, customers delayed some CapEx projects or pulled them forward. I'm just wondering if you've seen, or if you anticipate any, any impact.

from covid really on on the lgm side i think the biggest impacts are really just what we've been talking about it's more around just the resurgence of consumer packaged goods so we're seeing strong demand in the market and for our business in package decoration particularly in film categories and then also just the e-commerce so e-commerce growth has been quite significant, and our business linked to that is growing similarly. So, yes, we're seeing those are the two trends overall. We think the e-commerce trends, while there was a big surge, we think that will be just a new baseline for continued accelerated growth and packaged goods. I think everybody is, you know, COVID is a good reminder not just with stay-at-home, but the importance of packaging for decoration, sanitation, and everything else.

Our next question is from Jeffrey Zakowskis, JP Morgan Securities. Please go ahead.

Thanks very much. How much on average were your raw material costs down in 2020 and how much on average do you expect them to be up in 2021? Yeah, Jeff, this is Greg.

So overall and across 2020, we saw kind of in the low to mid single digit range in terms of deflation across the year. Now, it was a little bit different as we moved through the year. More of that was earlier in the year as we got into Q4 and we looked sequentially from Q3 to Q4. Overall, it was relatively stable, but we did start to see some pressure midway or towards the tail end of the quarter, particularly on chemicals and films. So in propylene in particular and polypropylene, we started to see that pressure in the U.S. late in Q4. We see that continuing here in the first quarter and then starting to also rise in Europe at the same time here in Q1. So You know, right now, based on what we've been seeing, we would expect somewhere in the low single-digit inflation based on what we've seen so far without predicting what may happen as we go forward.

Okay, great. Yeah, and Jeff, just to add to that, we are right now evaluating. The big question is how much of this inflation is temporary versus sustaining. And so from a pricing standpoint, we are evaluating price increases and that's a surcharge in one region for propylene, polypropylene, sorry, and evaluating another region and so forth. That's probably one of the bigger questions around the guidance specifically for LGM is what's the volume environment and is the volume environment linked to overall consumption and what does that do to the commodities markets and our pricing actions that get linked to that.

Okay. And your industrial and healthcare businesses had really nice margins in the second half of 2020. That is, they were up above 12%. Is that a new level of margin for that business? And then secondly, you donated $10 million to a charity. Was there an earnings per share impact from that extra 10 million that you donated? And if there was, what was the EPS impact?

Sure, Jeff. So your second question first. So yes, that is the increase that you see the $10 million is on the corporate expense line in Q4. That's why corporate is higher than usual. And so that is in our numbers, including adjust that out or anything else. So that would be roughly a 9 cent impact, uh, to Q4. Um, and then as far as IHM, you know, we're still targeting our objective here for 2021 was 12 and a half percent, uh, operating margins, uh, or more for this business. We're not quite there yet. The team's done a great job, and I will say under Greg's leadership, Greg's been overseeing this group of divisions for the last couple of years. And our objective, if you look at the high end of our range, is to be within that targeted range by next year. So continued margin expansion is the goal.

Our next question is from George Staffos, Bank of America. Please go ahead.

Hi, everyone. Good day. Thanks for taking my questions. Congratulations on the year. Hey, I wanted to take a step back and talk a bit more about return on capital, Mitch and Greg. So Avery has a long, successful track record. You pointed to that at the beginning of your presentation in terms of capital allocation, return on capital. And that's all well and good. We have seen over the last three to four years, and it's not just the result of COVID, the return on capital for the company begin to tick lower. If you've evaluated that and you agree with that point, what do you think is driving that? And then, relatedly, it looks like COVID has really changed the growth outlook for a lot of your businesses, whether it's RFID or LPM. You're going to have to spend money, it sounds like. You've already begun to do so. I've begun. on capacity, how do you continue the return on capital trajectory that you'd been seeing longer term as you're now needing to spend behind this growth? And I had a follow-on.

Yeah, thanks, George. This is Greg. So I think when we look at our return on capital, when we set our targets back at the beginning of 2017, we'd come out of 2016 with about a 17% ROTC. And the last couple of years, there's been some of the pension impacts when you look at those in 17 and 18, and you can see the adjusted numbers in the appendix of our slides. But when you adjust out that, we're roughly 19% the last couple of years and in that 18% level here in 2020. So we feel like we have been continuing to expand ROTC above the baseline where we started at back in 2016. And that's what this year, of course, includes a couple acquisitions that we're in the first year of still. So I feel good about the progress we're continuing to make on a return perspective and continuing to be in the top quartile among our capital market peers there. And when we think about investments going forward, you know, we, and Mitch talked already about RFID overall as EBITDA margins above our average for the segments in the company. And that generates good returns for us. And we continue to invest in areas where we think we'll have strong returns. So a lot of our CapEx is in areas like RFID and And it's also in other high-value segments like specialty labels within LGM or industrial within IHM and also looking at some of the emerging regions. So we're investing in areas that we think are high return and where we can continue to generate strong return on capital.

Yeah, George, and just to reinforce the overall theme here is GDP plus growth and top quartile returns on capital. And these levels were both. and that is our continued focus and that's a recipe for superior value creation over long term and when we had set out the 2021 objectives back in 2017 we did say that in capital efficiency we'd gotten into the top decile of efficiency and that we would go through a period of recapitalization both organically and be looking for m a and when we haven't done m a for a while and then started doing M&A over the last four years. It takes a while from a returns perspective for the returns to match the invested capital base that you have in there. And once we have a series of these in the years going forward and so forth, and it all starts comping in and the returns are catching up on acquisitions you've done a few years ago, you'll see that continue to flow through.

Okay. Understood on that. I guess the other question that I had My questions were answered earlier. If you think about where you're applying capital going forward and trying to grow the business, are these areas that you would expect would have higher margin, higher return on capital? Are they areas where in some ways you're applying capital defensively because you don't want to see some of these markets move towards your peers? In terms of share, I know that's a broad question and hard to answer in a sentence or two, but how would you have us think about it? Is it likely to generate higher margin, higher return on capital over the next two to three years and lead to share gain? Thanks, and I'll turn it over.

Yeah, so we're investing – I mean, if you look at both our high-value segments and our base, we look at EVA and returns. We don't look at just the average, but we disaggregate it. And for us, it's continuing to invest in businesses where we have good EVA potential, and that's in both the high-value segments and the base. It would be disproportionately in high-value categories, particularly in RFID. So that's been a significant part of our growth investments. And as far as the base goes, what you've seen in our investments, if we just go back over the last five years, When we need to invest for growth, we also concurrently invest for productivity. So if we look at the investment we did in Europe a few years ago, we did a significant expansion where we needed capacity to one of our plants, and we subsequently were able to take offline some capacity to drive productivity. So both enabled growth for that market at the same time as lowering our cost base. So a very good return outcome from that perspective.

Our next question is from John McNulty, BMO Capital Markets. Please go ahead. Mr. McNulty, your line is open. And moving on to the next question is Christopher Kapsch with Loop Capital Markets. Please go ahead.

Yeah. Hi. So I had to follow up on the RFID business. And if I look back, it looks like you closed on SmartTrack early March. So it was probably just weeks before the pandemic lockdowns ensued. And it sounds, you know, generally the consensus has coalesced around this idea that the pandemic has increased your addressable market opportunities in RFID. But I'm curious to peel that back a little bit more. If you look at the apparel and food applications, It looks like what's happened is the behavioral changes have maybe accelerated the adoption in those applications. But I'm curious about in the case of logistics, because you're talking about having traction in logistics, it sounds like maybe the pandemic influenced the business case there. So I'm just wondering if that's a good characterization. Because if I think back to early days of item level apparel adoption, the business case was very clear, right? It was inventory accuracy, preventing stockouts, a consequential sales lift, and eventually that dovetailed into this transition to omni-channel and e-commerce. But help me understand, like, what's the business case in this logistics opportunity? It sounds like it's compelling. It sounds like there's more visibility in and around your traction there. So I'd be interested to hear your thoughts on that. Thank you.

Yeah, so Chris, the business case is really around increasing productivity, becoming more touchless in your operations. And that's some of the fundamental base case of what you add for apparel you have in these other categories. And that's specifically why we targeted these other categories. We looked for end markets that shared some similar characteristics and some challenges as what apparel is going through, albeit in a different form. So Absolutely. Pandemic accelerated a lot of the activity within the pipeline. You say adoption has not yet really had a significant mover on adoption levels because it takes some time to work through the pipeline. I commented earlier about some of these programs, you know, more moving into pilot. The pandemic during the height of it in the spring or the early phases of it, I should say, we commented it actually slowed down the amount of activity when restaurants were closed. As an example, there was a Fewer opportunities for some pilots. Those have all re-ramped up again here in the second half. And I talked about the momentum going into 2021. So the use case is really around just becoming more touchless as far as interactions, driving productivity, wanting increased visibility, reducing waste. RFID is a huge opportunity to reduce waste, so enabling companies to meet their own sustainability objectives. Those are all included within that, and we see tremendous opportunity here. So that use case you should think about is very similar to apparel, albeit in a different form.

Okay, thanks for that. And then just as a follow-up, the item level apparel is, you know, you're effectively backward integrated into inlays. I mean, I guess it's comparable in some of these other applications, but I'm just wondering if it's Given that there are different effective technologies and therefore maybe turnkey systems, I'm wondering if the margin profiles as these different applications evolve, are they similar or are you going to see more of a margin opportunity tied to the peril in food categories? Thanks.

Yeah, so really, for each end market, there's going to be elements of it where we are providing, as you say, just the base inlay, and then where we're actually providing a full solution set, managing the data, printing the data, working and supplying the solution around hardware and so forth. So in apparel, we actually sell just a base inlay as a minority of our sales through the SmartTrack channel and the LGM channel. without managing the information and so forth to some competitors of the apparel solutions division. And the vast majority, though, of course, is what our apparel business sells through. As we say, we're vertically integrated. We're managing the information. Food will be the same as an example. We're providing the full solution set in many areas, and I'd say the early adoption aspects will be more solution-based. And so I would expect it to evolve similar to what we see in apparel.

Next question is from John McNulty, BMO Capital Markets. Please go ahead.

Yeah, thanks for taking my question. Hopefully you can hear me this time. So I guess two things. One would be on the RBIS front, if I look at 2019 and I look at 2020, it looks like there was a geographic shift with the U.S. kind of gaining about five points and Asia actually losing about five points, which seems a little surprising just considering how Asia weathered COVID maybe better than better than some of the other regions. So I guess what's driving it? Is it just the RFID growth and where that's stemming from, or is there something else we should be gleaning from this?

It's RFID adoption. That's exactly it. And the RFID adoption is far ahead in the U.S. versus other regions.

Got it. Okay.

And continued, if you look at peer volumes, Asia, we're actually seeing, yeah, continued strength and penetration if you were to look at it just from a pure volume standpoint within RBIS.

Got it. Okay. No, that's helpful. And then I guess the other question was just in terms of the fourth quarter rate on the temporary savings, did you quantify that? I don't recall you saying it on the call, but I guess if not, can you quantify what those savings were?

Yeah, we didn't quantify the quarter. So I think we said, you know, for the full year, we had about $135 million of the temporary savings, a little bit lower than what we had projected for the last couple quarters, just given we'd said when volumes start to come back, some of those costs would return. So a little bit lower than we had projected before. So the fourth quarter, I think, was in the roughly $15 million range, something like that.

Next question is from Adam Josephson, KeyBank. Please go ahead.

Thanks so much for taking my follow-up, Mitch. Just one on the geographic situation for you, just including any observations thus far in the first quarter. You mentioned that North America was really strong, particularly in LPM in the last, I don't know, eight months of the year, much more so than was Europe, even though they both locked down much of that time. Can you just talk about what you're seeing geographically, if the trends differ much than what you saw in the fourth quarter and what your expectations are, if you can, by region, roughly speaking, as part of that 3% to 7% organic sales guidance. Thanks very much.

Adam, as far as what we're experiencing, yes, North America is definitely having a resurgence in the volume that we're seeing right now. It's just what I explained, and I think it's the drivers that you look at is due to consumer packaged goods consumption as well as e-commerce. It's hard to tell, as I talked about. Volumes have been a bit lumpy if you look across the various months by region. So there could be a little bit of inventory build within the current surge that we're seeing in North America and Europe. is definitely, you know, it came back stronger in Q4. And I'd say all the regions came back, had very solid growth within Q4. And North America, particularly strong. But even Amina, they finished the year strong. And now as we look at January, which might be some of your questions, we're continuing to see the strength in North America. Amina is softening a bit. And Asia is just too early to tell because of the Lunar New Year.

And, Mr. Boutier, there are no further questions at this time. I will now turn the call back over to you for closing remarks.

All right. Well, thank you, everybody, for joining the call today. I, again, want to thank our team for their commitment, dedication, and agility in delivering a very strong year from a bottom-line perspective and delivering for our customers in what was a very challenging market conditions. I do want to just encourage everybody to join us for our Investor Day next month, where we'll be sharing more about our long-term objectives and strategies. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.