Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in listen-only mode. And afterwards, we will have a question-and-answer session. Welcome to Avery Dennison's Earnings Conference Call for the Second Quarter ended June 27, 2020. This call is being recorded and will be available for replay from noon Pacific Time today through midnight Pacific Time July 30th. To access the replay, please dial 800-633-8284 or +1-402-977-9140 for international callers. The conference ID number is 21930679. I'd now like to turn the conference over to Cindy Guenther, Avery Dennison’s Vice President of Investor Relations and Finance. Please go ahead.

Thank you, Maladin. 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 A-4 to A-9 of the financial statements accompanying today's earnings 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 maybe required by law. On the call today, dialing in from different locations are Mitch Butier, Chairman, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. And I’ll now turn the call over to Mitch.

Thanks, Cindy, and hello, everyone. Our teams have come together extraordinarily well in navigating one of the most challenging periods we've experienced as a company. The compounding effects of the health, economic and societal crises are having a significant impact on our teams, our markets, and our communities. Our focus continues to be on ensuring the health and welfare of our employees, delivering for our customers, supporting our communities and minimizing the impact of the recession for our shareholders. And I'm pleased to report that we were making solid progress on all fronts. Since the early days of the pandemic, we quickly adopted and then adapted best practices to keep our employees safe and our plants operational while also taking steps to reduce the financial impact to employees affected by necessary furloughs and layoffs. Despite our best efforts to protect employee health, unfortunately, we have identified roughly 225 confirmed cases of the virus within our workforce of over 30,000, with the majority of cases apparently reflecting community spread rather than a work-based source of infection. Now before I shift to our operating results, I'd like to take a moment to comment on one other critical issue. In response to heightened awareness of the profound societal issues of racial and other sources of inequity, we are sharpening our focus on diversity and inclusion, starting with significant efforts to listen to and learn from the experiences of employees who represent racial minorities and other marginalized groups. We are incorporating these learnings into concrete plans to further support our organizational values. Now turning to business results. While both our top and bottom lines were down in Q2 compared to the prior year, results came in better than we expected just a quarter ago. Following a sharp decline in April, total company sales improved sequentially in May and June. A key focus of ours in this lower growth environment is on protecting our overall profitability, which we accomplished in the first half of the year. Year-to-date, adjusted EBITDA margin was up 30 basis points and in the second quarter, we reported an adjusted EBITDA margin of 14% despite the significant overall volume decline. This relatively strong margin performance reflects the successful execution of our strategies over recent years and the team's fast actions in implementing temporary cost saving measures, as well as lower costs from incentive compensations. Now drilling a little deeper into our trends by business. Both LGM and RBIS came in better than our expectations on both revenue and margin, while IHM revenue was a bit short of our forecast. Our label and packaging materials business, the largest component of LGM, which serves a critical role in packaged goods and supply chain globally, remains substantially open to serve customers as the pandemic unfolded across the world. Our sites in Europe and North America experienced significant surges in orders from mid-March through April, driven by both increased consumption and inventory build, resulting in backlogs that carried us into early June. In some cases, our lead times were longer than usual due to pockets of disruption in some of our plants located in COVID hotspots. Overall though, by leveraging our strong operational excellence, the team delivered record levels of output for the better part of two months, all while keeping their colleagues safe. Then in June, LPM sales slowed in both Europe and North America with a portion of the slowdown reflecting inventory destocking. In China, LPM sales improved sequentially, following relatively steep declines in January and February, while the balance of the emerging markets, particularly India, deteriorated as lockdown spread across the globe and continued through much of Q2. That said, demand across most emerging markets countries improved sequentially in June as the lockdowns continued. In contrast to the surge we saw in LPM in the early stages of the pandemic, we experienced a significant drop in demand for RBIS and the graphics portion of LGM, with April sales down more than 50% organically for both businesses. These businesses then improved sequentially faster than expected in both May and June. Enterprise-wide, RFID was up over 10% in the quarter on a constant currency basis, reflecting the contribution of the recent Smartrac acquisition, which more than offset a 20% organic sales decline related to COVID’s impact on apparel demand. With 75% of the RFID business still tied to apparel, we expect RFID sales in 2020 will grow more than 30% excluding currency and will be roughly comparable to prior year on an organic basis. Our project pipeline continues to expand with customer engagements now up more than 35% since just the start of this year. As these projects continue to move through the pipeline, we continue to expect 15% to 20% growth of our intelligent label platform over the long term. As you know, we have been continuing to invest to expand our intelligent label business, including through acquisition. The integration of Smartrac is on track to accelerate the growth and value generation of this now $500 million revenue business. By leveraging the combined channel access, global footprint, and innovation capabilities of the two organizations, in terms of product portfolio, process technology and larger R&D and business development teams, we are positioned extremely well to develop solutions that meet rapidly expanding customer needs with a particular focus on apparel, beauty, food, grocery, and logistics. And COVID-19 has served to further strengthen the key drivers of RFID adoption, with new supply chain models demanding better speed and visibility, the need to reduce staffing levels, increased demand for food, product sourcing and handling traceability, and the increased importance of reduced contact at checkout, not to mention an acceleration for omnichannel retailing for apparel. Now returning to the total company. As we've said before, we've entered this crisis from a position of financial, operational and commercial strength. Our business is resilient across economic cycles, so the nature of the macro challenges is different today than in past recessions. Historically, our businesses have continued to deliver solid free cash flow in periods of economic downturn, and sales and earnings have rebounded quickly in the 12 months following. We're doing more than just weathering the storm. Our teams are adapting quickly to new commercial and operational norms, responding decisively with best practice safety measures and prudent cost reduction, protecting our profitability in the lower growth environment and are positioned well to capture demand as conditions improve. Our strategic priorities are unchanged. We are preserving our investments to expand in high-value categories, particularly our intelligent label platform, while driving long-term profitable growth of our base businesses. And we remain confident in our ability to continue to create significant long-term value for all of our stakeholders. I'll now hand it over to Greg.

Thanks, Mitch, and hello, everybody. Though this past quarter was one of the most challenging ever for the company, we are executing extremely well. We delivered adjusted earnings per share of $1.27 for the quarter, which was better than our expectations, as the pandemic-driven decline in sales was not as severe as our April outlook assumed. Specifically, sales declined by 12% excluding currency or 13.7% on an organic basis. Currency translation reduced reported sales by 2.9 points in the quarter. As Mitch noted, despite the drop in revenue, we reported an adjusted EBITDA margin of 14%, down 60 basis points, and an adjusted operating margin of 10.7%, down 140 basis points. We realized $15 million of net restructuring savings in the quarter, with close to half of that representing carryover from prior year projects. We recorded approximately $39 million of restructuring charges. These charges relate to the acceleration of actions that teams are taking this year in the businesses most impacted by COVID-19. We are now targeting between $60 million and $70 million of incremental net savings from restructuring this year, with roughly half of that in RBIS. We also delivered roughly $75 million in net temporary savings in the quarter, made up of belt-tightening actions such as travel reductions, reductions in overtime and temporary labor and furloughs, as well as lower incentive compensation accruals. Turning to cash generation and allocation. Year-to-date, we realized $109 million of free cash flow with $144 million generated in the second quarter. We expect free cash flow to accelerate in the second half, reflecting normal seasonality, as well as higher net income and a continued focus on working capital productivity. With regard to the latter, our main focus this year has been the management of receivables. Collections in the quarter were in line with our expectations. We are now turning our attention to reducing inventory levels, which have ticked up, reflecting the timing of sales at the end of the quarter, some strategic sourcing decisions, as well as a little less focus given other priorities in the quarter. We expect inventory ratios to be back in line with our normal levels in the second half. Our balance sheet remains strong with a net debt to adjusted EBITDA ratio at quarter end of 2.1, below our long term target range of 2.3 to 2.6. We have ample liquidity with $800 million available under our revolving credit facility and more than $250 million in cash at quarter end. You may recall that we drew $500 million from our revolver back in March in light of the uncertainty of commercial paper markets at the time. In June, as it became clear that CP markets have stabilized, we repaid those loans. As you know, our long term priorities for capital allocation support our primary objectives of delivering faster growth in high-value categories, alongside profitable growth of our base businesses. These priorities are unchanged in the current environment. In particular, we continued to protect our investments in high-value categories while curtailing our original capital spending plans for the year by approximately $55 million in the other areas of the business. As noted last quarter, we are maintaining our dividend rate during this period of uncertain global demand. We've not yet resumed share repurchase activity following our decision in March to pause this program as the crisis unfolded. Turning to segment results for the quarter. Label and graphic material sales were down 4.9% on an organic basis, driven largely by volume and mix. Sales were unchanged organically in label and packaging materials, as modest growth in the base label and specialty labeled categories was offset by mid-teens decline for durable label categories, reflecting the general slowdown in durable goods production. Looking at LPM’s organic sales trends by month and region. North America and Europe went from low double-digit growth in a combined March and April to high single-digit growth in May and then declined in June as Mitch indicated earlier. The trend in China was a bit choppy with a low single-digit decline overall for the quarter. South Asia saw mid-teen declines in both April and May, reflecting the widespread closures, particularly in India, with a significant sequential improvement in June, which came in nearly even with prior year. Finally, results in Latin America were down low single-digits overall for the quarter. As Mitch mentioned, in the combined graphics and reflective solutions business, sales declined by approximately 30% organically but improved through the quarter. LGM's adjusted operating margin increased 100 basis points to 14.8% as the benefits of productivity, including material re-engineering and net restructuring savings, as well as raw material deflation net of pricing, more than offset unfavorable volume and mix. Shifting now to retail branding and information solutions. RBIS sales were down 28% excluding currency and 36% on an organic basis, reflecting an approximately 40% decline in the base business driven by site closures and lower apparel demand. As Mitch noted, excluding currency, enterprise-wide RFID sales were up more than 10%, driven by the Smartrac acquisition but down 20% on an organic basis. Note that while LGM represents a separate and distinct channel of access to printers and converters purchasing our RFID inlays, for simplicity during the integration, in the second quarter, we decided to recognize the results associated with the Smartrac acquisition solely in RBIS. Overall, results in RBIS reflect strong sequential improvement in demand every month since April. Looking at the base apparel business, the value channel held up best for the quarter though still down close to 30% on an organic basis, while premium fashion deteriorated the most. Adjusted operating margin for the segment declined to roughly 1%, reflecting reduced fixed cost leverage in this high-variable margin business, which was partially offset by aggressive cost control measures. Turning to the industrial and healthcare materials segment. Sales fell 21% on an organic basis, reflecting an approximate 30% decline in industrial categories driven by automotive. Adjusted operating margin decreased 370 basis points to 6.8% due to reduced fixed cost leverage, partially offset by productivity. And now shifting to our outlook. Given the uncertainty regarding global demand, we're not resuming annual guidance at this time. As we did in March and June, we will arrange an Update Call in September to let you know how things are playing out. In the meantime, I'll highlight some key pieces of the equation that we have reasonable visibility to now. We expect in our third quarter sales will be down 5% to 7% on an ex currency basis and 7% to 9% organically. So far in July, total company sales excluding currency are down about 5% or roughly 7% on an organic basis with LGM down about 6%, RBIS down about 5%, and IHM down about 14%. Our organic sales outlook for the third quarter assumes that LGM will be down mid-single digits, RBIS will slow down relative to July and be down mid-teens, and IHM will show a modest sequential improvement compared to July. As mentioned, we also expect to generate restructuring savings net of transition costs of $60 million to $70 million this year, up $10 million from our view in April, and we're targeting roughly $150 million of net temporary savings, which includes reductions in accruals related to incentive plans. Note that over half of the full-year total for temporary savings has been realized in the first half of the year, with much of that in the second quarter. Keep in mind, the vast majority of the temporary actions we are taking are expected to be a headwind for us when markets recover. As Mitch said, protecting our margins is a key focus for us during this period of slower growth. Assuming we continue to see sequential improvement in demand trends through the second half, we are targeting to deliver an adjusted EBITDA margin for the full year in line with prior year. Finally, we are targeting to generate roughly $500 million of free cash flow this year, roughly comparable to what we delivered last year, with our target including an increase in cash restructuring costs associated with new initiatives and a higher cash tax rate related to the repatriation of foreign earnings. Our free cash flow target includes an expected $165 million to $175 million of spending on fixed and IT investments, and another roughly $60 million in cash payments associated with restructuring actions. In summary, we are very well positioned to navigate this challenging environment and we look forward to coming out even stronger when our markets recover. And now we'll open up the call for your questions.

Our first question comes from George Staphos with BofA Securities. Please go ahead.

I guess my question to start is around margin cadence to the extent that you can comment either quantified or qualitatively. You've done a remarkable job so far generating temporary cost savings and restructuring. Should we assume that you should be able to maintain the same level of year-on-year comparisons in profit dollars for the key segments and third quarter, assuming volume trends don't deteriorate from what you saw on July, or would there be any reason why the year-on-year comparisons might be more negative in 3Q versus 2Q? That's question number one. Question number two is on RBIS, can you talk to what, if any, at this juncture, conclusions you have on the mix of the business as we look out into ‘21 and ‘22 and as much as if we are working less than formal settings and more away from the office. Does that have any effect on from what your customers are saying, premium apparel versus other types of apparel and then in turn, the margin and price point that you're selling at within RBIS? Thank you, guys.

I'll take the first part of that question. As I mentioned at the end there, we expect our EBITDA margins, assuming we come in range we talked about for Q3 and things continue to improve as we move through the back part of the year that we would expect our EBITDA margin for the full year to be in line with prior year. So we're slightly better than prior year in the first half. We've started to see margins pick up last year in the second quarter. So largely for the second half, we're targeting to be roughly in line with margins that we had in the back half of last year. I think you asked about any comp differences versus prior year. The only major difference would be the European restructuring, which kicked in in the third quarter of last year, so that was a benefit year over year still in Q2. It wouldn't be a year over year benefit in the third quarter, but largely replaced with some of the new actions that we've talked about already. George, you asked a few questions around RBIS and conclusions on mix of business going into next year. I would say right now we're not conclusive on various general areas of mix other than the trend of continuing to improve the mix of RBS overall towards the high-value segments. We expect that to continue as it has been, maybe even accelerate. If you look at intelligent labels within that business, we expect 15% to 20% growth over the long term. External embellishments is now a $100 million business, and we expect that to be growing well above average in that range as well. So, that would be one overall conclusion we’ll have on mix of business in general. And then as far as impacts of, we mentioned maybe less formal settings around clothing. There are just discussions obviously about maybe the casualization of the workplace and people working from home; it could benefit athleisure at the expense of more formal wear. For us, should that hold true, we're well positioned. A good portion of our sales is with performance athletic businesses now that's not hitting already. There's quite a bit of inventory in the system. And athleisure in general isn't as seasonal as other categories. So that's down a good amount for us in Q2. But we think that it's a very durable segment of the market where we are extremely well positioned. And for us, just overall what we're seeing with COVID, a lot of near-term disruptions, but we think it actually plays to our strengths, both as far as market access, global footprint, and technological advantage, particularly around intelligent labels.

And our next question comes from the line of Anthony Pettinari with Citigroup Global Markets. Please go ahead.

For LGM, is it possible to quantify or characterize any benefits from lower raw materials net of price in 2Q, and how you just generally would expect price costs to play out in the second half as you lap some pricing headwinds, but also pet chem prices are coming back up, but things paper are coming down? Just how would you kind of characterize second half price cost?

So I think we've had, as I talked about last quarter, low single-digit benefit sequentially from where we ended last year. Through the first quarter, another, I guess, low single-digit benefit from Q1 to where we were Q2 from a raw material basket perspective, and as you said, started out earlier in the year in paper. Early Q2, some benefit from films and chemicals. We are looking at a little bit of pressure in the back half, potentially depending on where the macro goes and where oil goes, etc. So I think we may see, given some of the sequential deflation we've had in the first couple of quarters, a little bit of a modest price-cost headwind in the second half sequentially from where we are at the end of the second quarter.

And then do you think your LGM volumes in 2Q were consistent with what the industry was seeing, or you may be picking up some share or giving up any share? And I guess negative volumes in 2Q. Did you see any change in kind of competitive dynamics, maybe in terms of pricing or other behavior?

So overall, if you look at, we clearly think we thought at the time that we were, some of the surge we saw speaks specifically to the mature regions, North America and Europe. Some of the surge we saw was inventory building, and we think renouncing the industry. We are seeing inventory destocking. If you look at our growth going back March through July, the mature regions grew 6% over that period. That's above what we've historically seen, which we think is not through the cycle yet, obviously. Clearly, that's above the average consumption within that business, and I'm talking volumes right now. As far as within the, you asked the share question specifically. So we don't have all the share data in yet. So we don't yet know the answer where we do see it, we do believe, we did perhaps lose some very modest amounts of share early on in the cycle we were, our plants, a couple of our plants were in position where there were COVID hotspots, as I mentioned earlier. As we are ramping up production and so forth, ultimately, got to the point of having record output. But in that early part, we think we didn't see a bit of share. Overall, within the range that we would expect over time, and we're confident that we'll be able to recapture anything that we did lose.

And the next question comes from the line of Ghansham Panjabi from Robert W. Baird and Company. Please go ahead.

So Mitch, just to follow up to Anthony's question on the LPM tail-off, if you will, in terms of demand. Are there any specific verticals that you're seeing incremental weakness in LPM as it relates to your destocking comment? Just asking because of the, most of the CPG companies that reported thus far have been pointing towards still healthy demand. I guess which end markets are you seeing that destocking?

We're actually seeing it across the board. The surge we saw was in all product categories, and we're further back in the supply chain. The compounding effect of pantry loading, which is what the end users would see, but then you've got those end users and the consumer packaged goods companies have and then the converters as well. Our converter customers are telling us, yes, they did build inventory, and they are now reducing inventory now that they are comfortable across the network that there will be a continuity of supply. We don't have a good read on exactly how much of it will be destocking versus end consumption. As I mentioned over that five months horizon, there is above-average demand for our products; that's what we're continuing to see. In the next month or two, I think we'll be able to sort out exactly how much is destocking and so forth. The market data is not yet in for particularly North America, so we don't have a good feel on that. Within, in general, we believe the market for film business in particular, because of just the household and personal care, particularly household has done well from a market perspective and we're continuing to see good growth in that category. And that's where you probably see the big most exaggerated increase in consumption.

And then in terms of RFID, I mean, obviously, the apparel markets are quite challenged at current. You mentioned that about 75% of RFID. Can you just touch on what you're seeing for the other end markets? And then just related to that, the 40% decremental you recorded for RBIS in the second quarter. Is that the right number to think about going forward? Thanks.

Yes. I’ll let Greg answer the decremental margin question in a moment. So specifically around RFID. Yes, 75% of the business now, with the Smartrac acquisition, is linked to apparel. Obviously, for existing programs, when their volumes are down of our customers, the existing programs will decline. We expect ultimately apparel, as it has in the past, to rebound. People are still going to consume clothes, and we think we're well-positioned within that. So that's really what drives overall the RFID decline. What we're seeing as far as activities, both in apparel and outside of apparel, those who knew they wanted to drive more automation, increased their speed and were looking at RFID are accelerating their efforts. Those where it was maybe more earlier in the pipeline discussions definitely have a lot more interest. So as I commented, our pipeline for intelligent label programs is up more than 35% just from the beginning of this year, and it's up close to 60% since last year. So a significant increase. About half of the pipeline growth that we’re seeing is in logistics, so that area in particular is standing out. Apparel and food, we're still seeing a 20% increase in both of those categories in the pipeline since the beginning of the year. The one where we're obviously not getting much traction right now and it's slowed down is aviation. There hasn't been any growth really in the aviation pipeline over the last, well, since the beginning of the year for obvious reasons. Generally, we are very excited about the opportunities, not only in apparel, but there's a lot of runway ahead of us on that, particularly driving within food and logistics. Greg, you want to take decremental margin?

And the second question there. So overall, when we look at the full P&L for the company, our decremental margin was around 20%. If I break that down, as we talked last quarter, we expected the volume impacts net of the short-term actions to be around 30% for the year. That was about 40% in Q2, and we were expecting that to be a bit higher than normal, just given the bigger decline in the quarter. We offset part of that volume net of the short-term actions 40%. We offset part of that with restructuring savings, as well as incentive compensation adjustments. From an RBS perspective, obviously, given the size of the sales decline, their impact was bigger, and given the fact that they generally have higher variable margins as well. And they had an impact in the second quarter from the incentive compensation accrual impact as well. We wouldn't expect that to change too much for RBIS as we move through the back half, just given the higher variable margins there and not repeating the adjustment on incentive compensation as well.

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

Mitch, Greg, and Cindy, good morning, and kudos on that monthly sales trend fly by; it really clarifies the monthly trend. Thank you for putting that in there. Along those lines, a question on July. So you said July sales were down 7% organically. Obviously, from April to June, it went from down 17% to down 11% and then down just 7% in July. So just at a high level, Mitch. Could you talk about why you're not assuming further sequential improvement from July? Because based on your Q3 guidance of down 7% to 9%, if anything, you're assuming modest deterioration from that down 7%. I'm just trying to get a better understanding as to why.

We anticipate ongoing improvement in LGM and IHM, but the main focus is on RBIS. Looking at July, it doesn't fully capture our insights into the apparel and brands based on our conversations with them. There seems to be a significant recovery in July, especially in South Asia, which is catching up on some late back-to-school and early fall season sales. However, it’s important to note that July is typically one of the weakest months in the apparel business, so it’s not a reliable benchmark. While we expect continued gains in LGM and IHM, July should not be the baseline for evaluating the entire quarter for RBIS. As we move forward, the focus turns to the back-to-school and fall seasons, which are almost complete and do overlap. The holiday season is crucial for us, spanning September, October, and potentially early November, and it will serve as a significant indicator of overall confidence in the retail sector heading into the holidays. This will be an important area to monitor, and we will provide updates as we progress.

And just one other on the temporary cost savings of $150 million. I think you said in the presentation that you expect the vast majority of those to come back next year under the assumption that sales recover. Do you expect that to be the case irrespective of the magnitude of the sales recovery next year? Or just if sales don't come back, might hardly any of those savings come back next year? And then just relatedly, you said in the last call that assuming this recession is comparable to the great recession, you’d expect ‘21 earnings to be above ‘19. I'm just wondering how this temporary cost issue fits into that outlook, if you can talk about that? Thanks very much.

So I think, as you said on the temporary cost actions, we're looking at about $150 million this year. If I break that down a little, more than a third of that is kind of the most volume impacted piece, the things like overtime, temporary cost furlough type of benefits. About a third of it is a little bit more is belt-tightening, and that's something that if volume doesn't come back, we could continue to manage. If volume comes back, sorry, on the more volume-really pieces, obviously, that part will go up. Then somewhere around 25% to 30% of it is incentive compensation adjustments as well, both short term annual incentives as well as long-term incentives that are this year. So that part wouldn't repeat in 2021 as well.

The other part of your question just about expecting things to come back; we've seen in past recessions we bounced back quickly in the year following the recession. And so I said that again I just said in the 12 months following whenever the recession ends, we're not foreseeing and everybody has their own assumptions about when this period will conclude, but we still expect that bounce back that you mentioned, Adam.

And our next question is from Neel Kumar of Morgan Stanley Investments. Please go ahead.

In IHM, it looks like decremental margins came in around 23% in the quarter. Was it generally around expectations, and are the kind of flow-through margins what you think about for the third quarter as well?

Yes, similar to the rest of the company, I think. I mean, I assume overall, the bigger declines we saw were in industrial, particularly in the automotive categories, just given automotive productions in the quarter. Those are the areas we had the biggest declines. I think when we look forward, we would expect automotive to maybe get a little bit better as we move through Q3. Still expecting to be down. I think we talked about before, we're down kind of mid-teens in July and expect that to get a little bit better as we move through the quarter, or modestly better as we move through the quarter. Where we expect decremental margins to be at a similar level, I think overall, IHM and the total company we talked about last quarter, volumes net of short-term actions is roughly 30%. Areas like RBIS, IHM are a little bit higher than that, and areas like LPM a little bit lower than that.

And then just one on your corporate expense; it came down pretty significantly to $11 million this quarter, versus the $19 million to $20 million level in the last few quarters. Is that a reasonable basis to think about sort of second half of the year, and how much of that is coming from permanent versus temporary cost savings?

A big part of the decline sequentially is related to the incentive compensation adjustments that I talked about. We would expect the back half incentive compensation accruals to remain low but not to have the catch-up that we saw in the second quarter. We would expect corporate costs to go back up closer to where they were, I think maybe still slightly better than where they were in Q1, but certainly higher than what they were in the second quarter.

And next question is from Josh Spector, UBS Securities. Please go ahead.

Just on free cash flow. I mean, you reiterated your target for $500 million for this year. Just curious when you feel like you could be comfortable deploying some of the cash, since your balance sheet is in relatively good shape here. Assuming things get better through the second half, will improve through the second half of the year?

As we said, we're still expecting to deliver roughly $500 million in free cash flow for the year. At the same time, our debt position and our balance sheet remains strong. We continue to feel comfortable about our ability to continue investing in the business organically, continuing to look for M&A targets, which we're continuing to do as well, and then also continuing to return cash to shareholders, which we've done by maintaining the dividend throughout this crisis period so far. We have share buybacks as we've talked about, and that's something that we'll continue to monitor and evaluate as we move through the back part of the year.

And just on Smartrac, I mean, you now own that a little bit more than a quarter, and I know last quarter wasn't exactly normal. But are there any things you could point towards in terms of incremental positive surprises since you've owned it or where we should see perhaps more upside versus what you were thinking when you acquired the business?

Overall, the integration is going extremely well, and actually ahead of schedule for us, the synergy opportunities, and most of that are growth synergy opportunities, are on track is what I'd say. The business in the quarter was down from prior year; it's got it linked, tied to apparel as well but down less than the average overall. We’re seeing quite a bit of opportunity, both in the apparel and logistics space combining the two strengths of the two businesses. Overall, pleased with what we're seeing from a capability standpoint, the link of their R&D capabilities with our process technology capabilities, and the footprint and just the complementary channel access that we bring.

Our next question is from Jeff Zekauskas, JP Morgan.

What was the rate of change in volume in your LPM business in July versus your graphic apparel business?

From a sales perspective, in July, overall, LGM is down about 6%. That's with the LPM business being down kind of in the low to mid-single-digit range and graphics being down roughly in the mid-teens.

Avery is usually a company that has a good look on economic growth, sort of an early indicator of all kinds of trends. But it's a little bit difficult for you, I guess, to see those trends because of some destocking. Do you have a feeling of your business in general getting better exclusive of the destock, or is it just too hard to tell given the markets you sell to?

Yes, Jeff, it's tough to sell when you talk about being an early indicator. In the past, it was often going into a downturn. We had a good feel for it before, and we actually would experience it a quarter or two before everything else. There's no other reason other than I would just say it was kind of collective wisdom across the value chain as people being having a little more uncertainty rash down inventory levels, and because we're further back would have a compounded effect for us. On the flip side of your point when things were stabilizing and getting better and inventories were starting to rebuild, we would see the exact opposite effect in the surging demand. This is obviously playing out differently where the surge came first, and everybody was concerned about just what would their continuity of supply look like. Even in our industrial categories within IHM, we actually had pretty healthy growth still in March and April, which were just automotive supply chain, making sure they had enough product of all the various categories because people were worried about running out. So this is playing out differently across the businesses, particularly the two materials businesses, and we've seen in the past. There is a lack of clear visibility of what's happening around and inventory levels, obviously, at the pantry level and everything else. From everybody we speak to, the census consumption of packaged goods continues to remain strong on a relative basis, particularly consumption. If you think of packaged foods, think of packaged household care, personal care is kind of on the normal growth rate. There was inventory stocking earlier on but people aren't shampooing their hair anymore in this environment than they were before. But they're cleaning their counters more in this environment than they were before. So, we do see some clear signs of some different paths for different end markets, but it's tough for us to tell right now, and we got to get through the next few months to have a clearer view on that overall, Jeff.

And our next question comes from the line of Paretosh Misra with Berenberg Capital Markets. Please go ahead.

So question on your RFID business. So you're generating about half a billion dollars in sales currently, and you mentioned customer engagement is up, I think, 35%. How should we think of your revenue opportunity from this pipeline? And trying to see if what's typical revenue per customer or for adoption and these future customers, potential customers could represent an even bigger opportunity than what you currently have?

So overall, with the pipeline growth that gets to our 15% to 20% average growth that we're expecting going forward, and we've delivered at the high end of that organically in the past. So that's what that comes from specifically. As far as size of programs, there's a lot, all different sizes of programs. We have smaller specialty programs in some categories and then very large volume programs in others, so it actually runs the gamut, if you will, across. Our confidence and our ability to grow this business at the 15% to 20% level is reinforced by the pipeline and just the increased level of insights we have by the investments we've made in business development and marketing development teams over time and just finding more and more use cases.

And then maybe as a follow-up on that. So, you're selling some of these RFID products through converters and some are directly to customers. Is that only a function of the end-market or the kind of customers you have, or is there some different strategy or value addition that you're providing to customers?

From a channel standpoint, so roughly 75% of the business is direct to the end users, and 25% goes through converters. Most of that converter leverage is coming through Smartrac, and that's where we're looking to combine it with the strengths of LGM, but most of the business is direct to end customers is where the sale happens.

And our next question is from Chris Kapsch with Loop Capital Markets. Please go ahead.

So I had a question about LGM margin trends and expectations for how that metric may play out over the balance of 2020 and maybe setting up for next year. So in the quarter, operating margin was up 100 bps. You called out some of the variances that contributed there. But some of the re-engineering benefits and restructuring savings could be viewed as structural or stickier at least. You were able to deliver that margin improvement in spite of arguably adverse mix with your higher margin graphics and reflective volumes being down pretty dramatically more than the strength in the label business, which is now sort of not reversing but moderating. So I'm just wondering if that mix inflect, how does that set up for the margin trends over the balance of the year? How do you think about the margin potential for that segment on a more normalized basis looking forward? Thanks.

So again, overall, I talked about our EBITDA margins; we expect to be roughly flat to prior year assuming the top-line plays out as we've discussed for the whole company. We are not providing EBITDA margin targets by business. When we look across the trends, as I mentioned earlier, we have had some positive net price and raw materials in the first half in LGM, where we see raw materials generally stabilizing a bit right now and a little bit of a modest headwind, as I mentioned earlier on net pricing as we move into the back half in LGM. Otherwise, I don't really see significant changes. Normally, we have a seasonal Q2 to Q3 bit of a margin decline each year in LGM. So normally, you would expect to continue seeing that type of a trend as well. No other major trends I would see affecting margins through the back half.

And just to follow up on that. Just wondering the mix improvement, if there's inversion in terms of the negative sales variance that's tied to the graphic and reflective business being less negative over the balance of the year. Is that enough to move the needle on from a mix standpoint and therefore margin standpoint vis-a-vis the label business? Thanks.

Overall, there are a lot of factors going on. As Greg commented on our overall total company EBITDA margins, we expect for the second half and full year; we would reasonably estimate an actual pickup in margins in RBIS and IHM, particularly RBIS as revenue begins to rebound on a sequential basis from the trough in Q2. That will be partially offset by a moderation of some of the margins in LGM. Within LGM, you have some mix benefits potentially around graphics coming back, as you highlight. There are obviously a number of other factors. We really moved quite quickly on these temporary cost savings, which impacted Q2. So there are a number of factors going in different directions. Overall, the takeaway is we feel confident with total company margins. Even in this lower demand environment, we're going to be able to maintain our EBITDA margins for the full year in the second half, but we need to continue first half as a starting point and expect a little bit of moderation in LGM for various factors, particularly temporary cost savings timing, offset by benefits coming from RBIS and IHM, particularly RBIS.

Next question is from George Staphos, BofA Securities. Please go ahead.

My last two. I just wanted to first go back, partly to cover Adam’s question again and then also your comments on, to my question on RBIS, not looking for a guarantee but just want to make sure. At this juncture, your view of Avery's ability to snap back post this recession is no different. It's all just a question of when the recession ends that marks when that recovery starts. And in RBIS, based on the growth that you're seeing in value-added and the mix enhances that you get there. Looking forward, RBIS should have at least the same type of growth and margin potential as it did prior to COVID. Would you agree to both of those statements?

Yes, we expect this business is resilient, and it will bounce back. The timing depends on what's going on in the macro and everything else. In RBIS, a lot of questions around retail and apparel overall. When we look at the mix of that business with below average, how much was in high-value segments. If you go back six years ago, five or six years ago even very recently, a couple of years ago, the mix of high-value segments, both intelligence labels and exterior embellishments, we see being well above average as far as its mix. So some very strong long-term secular growth. I won’t call them tailwinds because the team's doing a phenomenal job navigating the environment, but that's what we expect. So absolutely, and yes.

And my other question on cash flow guidance. Prior it was $500 million plus, now it’s approximately $500 million, which is noble given everything that's been going on. You called out three things: accelerate restructuring, more taxes on repatriation, and the inventory build early in the year. Is there anything else that would cause a slight decrement in free cash flow outlook for the year, or did those three things capture it? Thanks guys, and good luck on the quarter.

I mean, those are the drivers. I mean, we just made, I guess, some modest adjustments to our expectations on cash flow for the year. So again, as you said, a little bit higher restructuring costs given the higher savings we expect this year and next year, a little bit higher cash tax rates. Operationally, we're largely where we had expected a quarter ago; a little bit more work to do on working capital, particularly inventory as we talked about.

And our next question is from Adam Josephson, KeyBank Capital Markets. Please go ahead.

Just my last two questions. One on LGM sales trend, so Mitch or Greg. So in Q2 down 5, July down 6, and then for the quarter you're saying down mid-single, so modest improvement, it sounds like sequentially. Within that, are you assuming the LPM destocking will be over, or are you assuming a continued drag from the LPM segment? Just trying to disaggregate those two in Q3?

Yes, Adam, as I think I said a minute ago, Jeff's question on July. We've seen in LPM kind of low to mid-single digits in July graphics down mid-teens, and that's really our expectation right now for the quarter is low to mid-single in LPM and graphics down in the mid-teens. We're looking at mid-single digit decline overall for LGM. We've already seen in North America an improvement in July versus what we've seen in June. I think in Europe, it's a question as Mitch already talked about a number of factors, just as well as the August holiday period and how things return there are not. It’ll be a few weeks or so until we really get a better view of the trends in Europe.

Overall, I do just think the thing to focus on is just the end consumption. What do you think is going to be happening going in both Europe and North America elsewhere as well; because that's where the inventory piece will work its way through. We didn't expect that to stabilize at the higher inventory levels longer term. Sharing a lot of the anecdotes as well as hard evidence that a number of categories with our labels do have increased consumption on a relative basis. But what's going on in the broader economy, because a lot of our labels don't just go on e-commerce, they also go on regular supply chain goods and will help with the restaurant industry and everything else. This is a bigger area to impact probably the second half which your own assumptions are about end consumption. We know we are well positioned. We feel good about what’s going on, and the focus around more hygiene is enhancing the focus around needing packaging and needing more disinfectants with which our labels go on and so forth. So on a relative basis, we feel that the market's positioned well. We're obviously extremely well positioned within that market. Questions a little more just what your assumptions are around the macro and when do we come out of this.

And Mitch just one on Europe. So I think your primary competitor in Europe talked about the market being up 10%; you guys are down mid-single and I think Anthony asked about market share, and you said you might have exceeded a bit of market share early in the quarter. Was that in Europe specifically, Mitch, and was that just related to the COVID cases you had and your inability to operate normally as a result?

Yes, I was referencing Europe specifically. Our comments, the reference point of mid-single digits versus comments of up 10% we’re talking revenue. The market is evaluated in terms of volume primarily. From a volume basis, we're up high single digits, almost 10% within the quarter within Europe.

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

All right. Well, thank you, everybody, for joining us. And once again, I want to thank our entire team for their tireless efforts to keep one another safe and continuing to deliver for our customers. I look forward to speaking with all of you later in this quarter when we provide an update. Until then, stay safe everyone.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. Everyone have a great rest of your day, and you may disconnect your lines.