Graphic Materials Demand Grows Due to COVID-19
As the COVID-19 pandemic progresses in both North America and Europe, Avery Dennison's label and packaging materials segment has seen orders jump 40% to 80% from the last week of March through the third week of April, driven by demand for food, hygiene and pharmaceutical products as well as variable information labeling related to ecommerce.
"Right now, the volumes within our labels business, LPM, are quite strong," CEO Mitchell Butier explained. "When you look at all the inventory stocking that's happening and just the move towards packaged goods, food labels, cleaning — labels for cleaning products like hand sanitizer and cleansers, and obviously, a lot of supply chains operate on use of barcode labels, for which we provide the base material."
However, Avery Dennison's graphic materials segment LGM suffered a roughly 50% drop in demand from the pandemic. "People aren't wrapping their cars as much right now as you'd expect," Butier acknowledged. "But quite a bit of graphics also go on emergency vehicles and so forth. But that's obviously the minority."
Overall, LGM makes up about 20% of Avery Dennison's revenue.
Avery Dennison has also seen some areas of raw material deflation, but that savings is more or less offset by things like increased overtime for workers.
In RBIS, Avery Dennison’s retail branding segment, growth in high-value categories was offset by a roughly 7% decline in volumes due to shutdowns early in the quarter in China, as well as shutdowns late in the quarter in other countries as the pandemic spread.
"While China is getting back to normal, the industrial side is not yet,” Butier noted.
Overall, sales in April were down about 18% year-over-year. The company expects that Q2 sales will be down 15% to 20% on an organic basis, as continued strength in pressure-sensitives and adhesives is offset by declines in RBIS and, to a lesser extent, graphics, industrial and healthcare segments.
“… we expect RBIS to be down around 40%,” CFO Gregory Lovins said. “We're seeing the biggest impacts of that, we think, in April, where we're down closer to 50% or around 50% in the month of April. And that's really driven by the extended retail closures that we've seen and a number of areas in our factories are closed.”
However, Butier expressed faith in RBIS to rebound. “…similar to the last recession, we would expect a bounce once the recovery begins. People still need apparel, and we would expect that there would be a resurgence once things get back to "normal."
Butier also has a positive outlook toward Avery Dennison's RFID segment, which was up “mid-teens” for the quarter enterprise-wide. “This business has great high-value segments around RFID and external embellishments, where we see tremendous growth opportunities. RFID, actually, its strengths of enabling quicker supply chain and lower inventories, and we just think it's going to be further reinforced by a more strained environment."
“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.”
Following the recession, Butier also expects “strong growth linked to the various end markets as well as the penetration tapes are having as [they replace] mechanical fasteners."
The primary source of this article is the transcript of an Avery Dennison investor call on March 24, 2020, and a Q1 earnings call on April 29, 2020.