AVY
#Thanks Mitch, I appreciate that, and I’m really excited to be in the role and I’m looking forward to continue in partnering with you and the rest of our leadership as well
And hello to everybody in the call, and with that let we jump into the quarter
As Mitch mentioned, we delivered another solid quarter with earnings coming in ahead of our expectations
We grew sales by 7%, excluding currency and 3% on an organic basis and we delivered a 20% increase in adjusted earnings per share
Strong operating performance and a lower tax rate both contributed to the year-on-year change
Currency translation reduced reported sales by about 1% in the second quarter, was an approximately $0.02 negative impact to EPS
Our adjusted operating margin in the second quarter of 10.8% was up slightly versus the prior-year, as productivity and higher volumes more than offset higher employee related costs and a modest headwind from the net impact of pricing and raw material costs
Productivity gains this quarter included approximately $15 million of net restructuring savings, most of which benefited the RBS segment
Our adjusted tax rate was 26% in the quarter, down from 30% in the first quarter and reflective of our revised expectation of 28% for the full year
The reduction to the full-year tax rate is driven by continued favorable geographic income mix and a net favorability from discrete items
We now expect our sustainable tax rate to be in the upper 20s large reflecting that continued favorable geographic mix
Year-to-date we’ve generated free cash flow of $93 million, $59 million less than the same period last year as 2016 included a significant improvement in our working capital ratio
While we’ve largely sustained last year’s working capital efficiency gain, the cash flow benefit from that improvement doesn’t repeat
Higher capital spending also contributed to lower free cash flow relative to prior year, and we continue to expect free cash flow conversion for the year of nearly 100% of GAAP net income
Our balance sheet remains strong
We have ample capacity to invest in the business including funding our M&A strategy, as well as continuing to return cash to shareholders in a disciplined manner
Our net note in late April released our quarterly dividend rate by 10%, and received authorization from our board to repurchase an additional $650 million of stock
In the quarter, we repurchased approximately 400,000 shares at an aggregate cost of $36 million, and our share count declined modestly
We also paid $40 million in dividends in the quarter
On the acquisition front, we closed the previously announced Yongle deal in June, and the integration of that business is underway
While we expect this acquisition to have an immaterial impact on EPS for the full year, one-time transition cost will have a meaningful impact on margins in the IHM segment in the third quarter
As Mitch mentioned, we also acquired Finesse Medical, an Ireland based wound care manufacture with approximately €15 million in annual revenue
And we continue to expect that Mactac will contribute close to $0.10 of EPS improvement in 2017. And we expect the newly completed deals to contribute more than $0.10 to EPS next year
Following the acquisitions, our net debt-to-EBITDA ratio temporarily increased, and is now closer to the high end of our target range
With that said, we have ample capacity to continue pursuing our disciplined capital allocation strategy
So let me turn to the segment results for the quarter
Label and Graphic Material sales were up 7% excluding currency, bolstered by the Mactac and Hanita acquisitions
Organic sales growth was 2% in the quarter, with high-value categories up mid-single digits and modest growth in base categories
As Mitch indicated, this represented a moderation of our performance over the last few quarters, largely reflecting timing effects, including the Q1 benefit from the pull forward of sales to the price increase in China, which we discussed last quarter, as well as the timing of various holidays between quarters and inventory destocking related to implementation of the new goods and services tax in India
And looking at the regions, in North America, we grew in low single digits, which we believe was due to modest pickup in demand and some share gain
This represents an improvement of our trend from previous quarters
Growth in emerging markets moderated to a low single-digit rate in the quarter as well, largely reflecting the timing issues that I outlined as well as the challenging prior-year comparison for Eastern Europe
So while we did see some softening of our growth rate and pockets of our business in Q2, we are confident in the return to roughly 4% organic growth for this segment in the third quarter
LGM’s adjusted operating margin of 13.6% was unchanged from a relatively high level we saw last year, as the benefits from productivity and higher volume offset higher employee-related cost in a modest negative net impact from price and raw material costs
As we anticipated, aggregate commodity costs increased sequentially than ease towards the end of the quarter on a global basis
Of course, we see raw material costs trend to differ across regions and individual commodities, and we continue to monitor these movements within each market and adjust our prices as necessary
So let me shift to retail Branding and Information Solutions
RBS sales were up 6% organically, driven largely by the performance athletic in Premium Fashion segments within the base business, as well as strong growth of RFID with RFID products up more than 20% in the quarter
We continue to see volume growth outpace apparel unit imports and at the same time the headwind from strategic price actions we started implementing over a year ago, which was designed to improve competitiveness in our base business are largely behind us
RBS' operating margin improvement reflected the benefits of productivity initiatives and higher volume, which are partly offset by higher employee-related costs
We anticipate continued margin expansion in the back half of the year as the team continues to execute the business model transformation, and we benefit from the reduction and amortization that we’ve previously discussed
Sales in our Industrial and Healthcare Materials segment were up 10% excluding currency
While sales were flat on an organic basis, they actually came in better than expected, due largely to the strength in industrial categories, which were up low double digits for the quarter
Our operating margin declined in this business largely as expected due primarily to the decline in healthcare categories, including the impact of certain contractual payments we received last year that did not repeat
Acquisition integration costs in a modest negative effect in the net impact of price from raw material cost consistent with what we’re seeing in LGM also contributed to the decline
As I mentioned earlier, acquisition related costs such as inventory step up, amortization and other transition cost related to the Yongle acquisition will temporarily reduce IHM margins in the back half of this year
We’re focused on improving our profitability in this segment, while investing to support growth and expect to see operating margin expand to LGM’s level or better over the long term
So let me now turn to the balance for the outlook of the year
We have raised the midpoint of our guidance for adjusted earnings per share by $0.25 to an updated range of $475 million to $490 million
Roughly $0.10 of this increase reflects stronger operating results and $0.15 comes from the combination of a lower tax rate and a modest net benefit from currency and share count
We outlined some of the key contributing factors to our EPS guidance on slide 9 of our supplemental presentation materials
Focusing on the factors that have changed from our previous outlook, we now expect reported sales growth of 7% to 8% for the full year, reflecting the impact of Yongle and Finesse acquisitions and a smaller currency headwind
At recent foreign exchange rates, we estimate the currency translation will reduce net sales by less than 0.5%, and reduce pre-tax earnings by roughly $4 million
We now also expect incremental restructuring savings from $45 million to $50 million at the high-end of the previously communicated range
And as discussed, we’re now expecting a tax rate of approximately 28% compared to our previous assumption of 30%, again reflecting our new anticipated annual run rate
And we expect average shares outstanding, assuming dilution of approximately 89.5 million to 90 million shares
Our other key assumptions remain unchanged from what shared last quarter
So to wrap up, we’re pleased to report another solid quarter of continued progress against our long-term strategic and financial objectives
And with that, we’ll now open the call for your questions
Question-and-Answer Session
Yes, during the quarter, as Mitch mentioned overall Europe also picked up as we move through the quarter, overall our growth rate in Europe was in the low single-digit range similar to North America
But Europe was impacted a little bit more by the holidays with the Easter timing as well as, as Mitch mentioned some of the Muslim holidays at the end of the period as well
So we do expect to see that return a little bit closer to where we have been previously as well
Yes, so overall, our guidance increased to $0.25, roughly $0.10 of that is due to operations, and the other $0.15 again is the net impact of tax currency and share count
Overall, I think it is a little bit of mix improvement, and a little bit of productivity improvement
We did range or did raise the outlook on restructuring, as we continue to execute very well on the restructuring initiatives, particularly within RBIS
We continue to drive productivity as we always do in the LGM business as well
So overall, we feel good about the margin outlook and the trends that we’ve been seeing
We're not really seeing any real material moves in across different - across the overall in our commodities
As we mentioned a quarter ago, we were seeing some increases in chemicals going into Q2 that we expected to be somewhat short-lived, and it looks like those will be somewhat short-lived
We do see some increases in paper and pulp as we go into the back half, and there’s a couple of areas or regions where we see that, and in those areas we'll be increasing prices accordingly, but overall relatively immaterial impact across the different commodity categories
As far as on the RBS side, I think that rule of thumb is a good one
It may shift down a little bit as the mix of business shifts more to RFID, those have high gross profit dollars per unit, but the variable margins, especially at the pace that we’re investing in business development that the variable margin might be somewhat lower, the absolute margins are higher than the average, but that would be one subtle shift over time, and I’m talking about over coming years
As far as what we’re seeing within the business, within the margin profile that incentive comp element is a - would make up the difference for what you’re looking for year-over-year <UNK>
Yes, I think the geographic mix is driven largely by the growth in emerging markets as well as the good growth that we’ve seen in Europe over the last number of quarters
And as we continue to do acquisitions, much of that is based outside of the U.S
at this point, with a lot of it being in Europe and some of it being in Asia as well, which typically have lower overall corporate tax rates as well
So, some of that all contributes to the favorable geographic mix that we’ve seen so far this year and that we expect to continue to see going forward
I think year-to-date - I mean, our margin performance continues to be driven by a number of things
Some of which Mitch mentioned is well around the growth in higher value categories
So, we have higher single-digit growth in specialty and durables, which typically - as we’ve said, with our higher value product categories have typically higher margin for us as well
So, that continued mix benefit we saw in the first or in the second quarter, and that’s part of where we expect to continue driving growth and improvement in our margins overall in the LGM side as well
As we said, we had a little bit of a net headwind from pricing raw material cost in Q2, but overall, relatively modest and relatively modest going forward at the back half of this year
But I think, longer-term, it’s really driven by the strategy around focusing on higher value categories as well continue to get more disciplined in the base and continue to drive productivity in our base business
Both of those things in combination and what - continue driving our margins in LGM
Overall, relatively flat in balance of the year sequentially
As we said, we saw a little bit of pickup in chemical costs in the second quarter
We expect that to moderate a bit at the kind of tail end of the Q2 and into Q3. And we are seeing a little bit of a paper increase and really dependent on the region
In Europe, we’re seeing a little bit more of an increase in paper than maybe some of the other regions
But overall, relatively flat in total
But again, chemicals are coming down a little bit, paper going up a little bit
Overall, I guess, I will start
We continue to have with where we are in our debt ratio as I mentioned ample capacity to continue to fund M&A and to continue returning cash to our shareholders
On the M&A front, as we said on capital allocation, we do look at the pool of funds for M&A and share buybacks somewhat fungible, and we had a little bit more M&A in the quarter than we obviously did in the previous couple of quarters
But overall, we did continue buying shares back in Q2 and we’ll continue doing so in a disciplined manner
Overall, I think, our approach isn’t changing, our strategy isn’t changing there
We’re going to continue both being disciplined on the M&A front as well as on the share buyback front
But our strategy is not changing towards continuing to return cash to shareholders overall
Overall relatively flat to low-single digits year-over-year
Generally no and our impact in Q2 is relatively modest sequentially Q1 to Q2 largely driven by the chemical inflation we started to see in the back half of the first quarter
But again most of that we expect to have been moderated
We are seeing some pockets as I mentioned before in paper in particular, but we’ll look to manage that through productivity and/or pricing where necessary
I think there is also variation by region as we’ve talked about before as well
Some of the chemical costs are part of what led us to the price increase in China in the first quarter and to a lesser extent some increases in North America for chemicals weren’t is a bigger factor, it’s small overall anyway but not a bigger factor in Europe, where Europe we’re seeing paper go up
So it is different by region and by commodity across the regions as well
So I think, comment I made earlier was more about where we had ended the year before - year-to-date last year, our levels of working capital are relatively similar
And in Q2, we’re relatively similar to where we’ve been over most of the last year or two
It’s just the starting point for this year
At the end of last year it was a little bit lower than it had been the year before, which led to a different free cash flow impact year-over-year
I think overall when we continue to look at working capital, we do have some pressure some of the acquisitions we’ve made typically have higher working capital ratios than what we have
Such part of the improvements, we’ll be looking to drive from some of the acquisitions as well as we go through the back half of this year and into next year also
But overall, not much - I wouldn’t expect much significant change one way or another in terms of our overall working capital ratios as we go across the next number of quarters
Yes, I think, we’ll start out at a little bit higher level, and then over the course of a few quarters, we’ll be continuing to working to bring those levels back down towards what more like what our average would be
It really depends on the business as well
Certain businesses have different levels of inventory, depending on the type of business, but overall, we’re continuing to drive inventory in other working capital components more towards our average
So two questions there <UNK>, so within LGM specifically, I think, what you’re asking is broader trends specifically and as things moved to e-commerce, was that having effect on labels? And we’ve talked about one of the big advantages of our products are the shelf appeal
But if you think about household and personal care and so forth, one of things just pure e-commerce companies are looking for, to still have that moment of truth and people having some type of attachment to the brands that they’re buying
And so the physical decoration of the product is still an important aspect and we’re actually working with some of the e-commerce companies for how to further improve that moment of truth, so it’s not just a dirty poly bag being thrown on your porch, when you’re buying something that - a brand that you’re trying to connect with
So, those are works in progress, but overall we’re not seeing a big shift or impact on the branding side of labels, variable information labels, we see this is a tailwind and will continue to be a growth driver for us as we we're talking about earlier
Then industrial and healthcare materials, like many of our business is competitive, the difference is within that segment, it’s large, we're Tier 2 player and it’s growing well ahead of GDP, and it tends to be specified category
So, when you get specked in, you’re specified on your own or you’re one of two that are qualified for a particular program
And that - I wouldn’t say there is, it’s a competitive environment as every industry that we’re in is, but I wouldn’t specifically call that, I’m seeing some large competitive response
This is a type of industry where we still see lots of niche players even as an industry is growing like this, these ones are that we’re going after, you tend to still have new entrants and a number of companies, but there is plenty room for everybody to win, so that’s more how it characterize that broader space
