“Our first priority in this crisis has been and will continue to be protecting the health and welfare of our teams, followed immediately by continuing to deliver industry-leading product quality and service for our customers,” adds Butier. “I am proud of the actions we are taking to protect our team of 30,000-plus employees while meeting our customers’ needs in this challenging environment. I want to thank the entire team, especially those in our plants, for their tireless efforts to deliver for our customers through this crisis while keeping each other safe, bringing a whole new level of agility and dedication to address the unique challenges at hand.
“While earnings exceeded our expectations in the first quarter, the early stages of this downturn are playing out differently than past recessions. Label and Packaging Materials, our largest business, serves essential categories that are experiencing higher demand during the pandemic. In contrast, RBIS, which primarily serves apparel markets, is seeing a significant decline in demand, reflecting widespread retail store and apparel manufacturing closures.
“As a result, we anticipate a decline in organic growth and earnings for the year, as strong volume in essential label categories is more than offset by declines in categories serving apparel and industrial end markets. We are actively managing this dynamic environment, updating our scenario plans to reflect the unique nature of this global health crisis.
“We entered this crisis from a position of financial, operational, and commercial strength. Though the nature of the macro challenges is different than in past recessions, our business is resilient across economic cycles, as we serve diverse end markets. Past scenario planning has ensured that we have ample liquidity and a strong balance sheet, and we’re targeting free cash flow to be comparable to what we delivered last year."
Market / Operations Update
The company’s Label and Packaging Materials (LPM) business, which serves a critical role in supply chains globally, remained substantially open to serve customers as the COVID-19 pandemic unfolded across the world. The company’s operations in Europe and North America experienced a significant demand surge late in the quarter, resulting in backlogs that carried into the second quarter, driven by food, hygiene, and pharmaceutical product labeling, as well as variable information labeling related to e-commerce. Strength in Europe and North America has been more than offsetting relatively soft demand in Asia, driven by declines in China early in the first quarter, and now in South Asia due to country shutdowns.
In contrast, late in the quarter, the company began to experience a significant decline in demand for RBIS tickets, tags, and labels for apparel, reflecting the widespread closure of retail stores and apparel manufacturing hubs, as well as a decline in demand for graphics and products serving durable and industrial end markets. These trends are expected to have a significantly more pronounced impact in the second quarter.
Meeting Customer Needs / Mitigating Supply Chain Risk
The company continues to provide industry-leading product quality and service to its customers.
To meet the surge in demand for Label and Packaging Materials in Europe and North America, the company took a number of steps to address the backlog, including leveraging its scale advantage and global footprint to maximize production capacity; providing pay premiums to hourly employees in certain plants delivering record production levels; and temporarily allocating a portion of graphics capacity to manufacture material for labels.
Overall, the company has had negligible disruptions to its supply chain. As the largest customer for many of its suppliers, the company has been able to secure continuity of material supply, while benefitting from its global footprint and dual sourcing for most commodities. The company has also strategically built inventory of some key products to enhance its ability to meet customer needs during this period of supply chain uncertainty.
First Quarter 2020 Results
Net sales were $1.72 billion, down 1.0%. Sales were up 1.0% ex. currency. On an organic basis, sales grew 0.3%.
First Quarter 2020 Results by Label and Graphic Materials
- Reported sales increased 0.2 percent. Sales were up 2.5 percent ex. currency. On an organic basis, sales grew 1.8 percent, as volume/mix more than offset raw material-related price reductions.
- Sales increased low-single digits on an organic basis in Label and Packaging Materials, with volume up mid-single digits for the quarter, and up high-single digits in March. Sales decreased mid-single digits on an organic basis in the combined Graphics and Reflective Solutions businesses, and increased low-single digits in Specialty and Durable labels.
- On an organic basis, sales were up mid-single digits in North America, relatively unchanged in Western Europe, and up low-single digits in emerging markets.
- Reported operating margin increased 280 basis points to 14.6 percent, including the benefit of lower restructuring charges. Adjusted operating margin increased 220 basis points to 14.7 percent driven by the benefits of higher volume and raw material deflation, net of pricing and unfavorable product mix, as well as planned net restructuring savings.
As the impact of the pandemic on global demand for the company’s products cannot be reasonably estimated at this time, the company has suspended its annual EPS guidance provided in January.
The company is prepared for a range of possible macro scenarios and how they might impact each business. In general, the company expects the LPM business to fare relatively better and RBIS and Graphics Solutions to fare worse than these businesses did during 2008-2009. The company currently expects sales and earnings to decline in 2020 on lower demand, with a disproportionate impact to its second quarter results, with an organic sales decline of 15 percent to 20 percent vs. prior year in Q2, followed by sequential improvement in the second half. Historically, the company’s businesses have rebounded quickly in the year following a recession.
As previously stated, the company has initiated cost control and cash management actions to partially offset the decline in demand for certain of its businesses, and is targeting to deliver free cash flow of at least $500 million in 2020 and 2021.