Avery Dennison Corp. recently announced preliminary, unaudited results for its first quarter ended March 28, 2020. Net sales were $1.72 billion, a decrease of 1% compared to the 2019 first quarter. On an organic basis, sales grew 0.3%.

“The coronavirus is having a substantial impact on our teams, our markets and customers, our communities, and, of course, our shareholders,” said Mitch Butier, chairman, president, and CEO. “The situation has been evolving in unpredictable ways, and the team is doing a tremendous job adapting to the new reality, anticipating and planning for various scenarios.

“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. 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 [Retail Branding and Information Solutions], 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.

“Our strategic priorities remain unchanged. We are protecting our investments to expand in high value categories, including RFID, while driving long-term profitable growth of our base businesses, and remain confident in our ability to create significant long-term value for all our stakeholders.”

In the Label and Graphic Materials segment, reported sales increased 0.2% in the 2020 first quarter. On an organic basis, sales grew 1.8%, 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 sales declined 0.9% for the Retail Branding and Information Solutions segment in the 2020 first quarter. On an organic basis, sales declined 1.1%, reflecting a mid-to-high-digit decline in the base business driven by apparel manufacturing site closures, as well as lower apparel demand late in the quarter. High-value categories were up mid-teens on an organic basis, with RFID solutions up low-double-digits, below expectations due to lower apparel demand. The company completed its acquisition of Smartrac’s transponder business, and integration is proceeding well.

The Industrial and Healthcare Materials segment saw sales decline 9.7% in the first quarter of 2020. On an organic basis, sales fell 7.8%, reflecting a mid-single-digit decline in industrial categories driven by automotive, which was down over 10%, and a low-single-digit decline in healthcare categories.

Avery Dennison reports that the safety and well-being of its employees has been and will continue to be the company’s top priority during this global health crisis. The company has taken steps to both ensure employee safety, as well as help mitigate the financial impact to employees resulting from mandated facility closures and necessary layoffs.

Following its early experience in responding to the outbreak of the virus in China, the company leveraged its learnings to develop safety protocols for other countries (e.g., employee temperature checks, social distancing, masks, etc.). The company also implemented work-from-home policies for office workers. These actions have been effective as, to date, fewer than 10 confirmed cases of the virus have been reported within the company’s 30,000-plus workforce.

During the initial weeks of mandated closures affecting certain Avery Dennison facilities, the company reports that it ensured that employees continued to receive full pay. Where closures were later extended in jurisdictions with weaker social safety nets, particularly in RBIS, the company offered longer periods of salary continuation to employees. In addition, the Avery Dennison Foundation is significantly increasing its grant-making to provide employee assistance.

Employees throughout the company have identified ways to leverage the resources of the organization to support their communities during this crisis. Through their innovative efforts, Avery Dennison shifted resources to produce personal protective equipment and hand sanitizer, most of which has been donated to the local communities in which it operates.

The company’s Label and Packaging Materials (LPM) business 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.

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.

As the impact of the pandemic on global demand for Avery Dennison’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 15-20% vs. the prior year in the second quarter, followed by sequential improvement in the second half.

Additional details are available at www.averydennison.com.