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Avery Dennison Corp (NYSE:AVY)
Q3 2020 Earnings Call
Oct 21, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Avery Dennison's Earnings Conference Call for the Third Quarter ended September 26, 2020. During the presentation, all participants will be in a listen-only mode. This call is being recorded and will be available for replay from noon Pacific Time today, through midnight Pacific Time, October 24. To access the replay, please dial 800-6 33-8284 or 1-402-977-9140 for international callers. The conference ID number is 21930680.

I'd now like to turn the call over to Cindy Guenther, Avery Dennison's Vice President of Investor Relations and Finance. Please go ahead.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

Thank you, Frank. 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 A4 to A9 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 may be required by law.

On the call today are Mitch Butier, Chairman, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Mitch.

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Thanks Cindy and hello everyone. Once again, we are proving our resilience across business cycles. Revenue came in significantly better than we anticipated at the start of the quarter, which, combined with our cost reduction actions, enabled us to deliver 15% growth in adjusted earnings per share, and strong free cash flow in the quarter, despite lower sales. We said coming into this year, that a key focus of ours in a lower growth environment, was to protect our overall profitability. We're delivering on that promise.

Margins expanded significantly in the third quarter, reflecting the successful execution of our long-term strategies, as well as the team's fast response in implementing temporary cost saving actions, in a better than expected volume environment.

Even with the sharp drop in volume in the second quarter, our year-to-date adjusted EBITDA margin is up 80 basis points to 14.9%. Our strong performance reflects the agility of our teams, which have come together extraordinarily well in navigating one of the most challenging periods we've experienced as a company. In this environment, our focus continues to be on ensuring the health and well-being of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders, and I'm pleased with the progress we are making on all fronts.

Now, despite our best efforts to protect employee health, we have identified roughly 350 confirmed cases of the virus, within our 30,000 plus workforce, with the majority of cases apparently reflecting community spread, rather than a work based source of infection. Fortunately, about three quarters of the employees impacted have already recovered. While all sides were operational throughout Q3, the recent surge in confirmed cases in a number of the regions in which we operate, highlights the continued uncertainty of the current environment, as well as the importance of remaining vigilant, with respect to safety and agile in meeting customers' needs.

Now a quick summary of the business trends. All three segments came in better than expected at the start of the quarter, on both sales and margin. LGM sales, though still down in the third quarter compared to prior year, improved sequentially, due to a faster than expected pickup in the global Graphics business. Overall, our label and packaging materials businesses moderated sequentially as expected, with North American emerging markets having picked up a little faster than we expected, while Europe came in a bit weaker.

From the start of the pandemic until now, volume trends for Label and Packaging Materials has varied by region. From March through September, volumes in North America were up mid-single digits, while volumes in Europe were up low-single digits. In both regions, we experienced significant volume surges during the early stages of the pandemic, followed by a moderation of growth, due principally to destocking.

Now as we look across this period overall, our North American business has been trending faster than the long-term average for the region, while Europe had been trending a bit below the region's long-term average.

The Emerging Markets picture has been different. Asia Pacific volumes have been flat overall from March through September, with volumes of rising to mid single-digit growth in the third quarter. While, it's good to see the recent pickup in demand here, this is still below the long-term trend for the region.

As for RBIS; demand improve much faster than anticipated back in July. Down only 5% organically for the quarter, compared to the roughly 35% decline we saw in Q2. Enterprise wide RFID sales grew by 65% in the quarter on a constant currency basis, reflecting 20% organic growth, and the contribution of the Smartrac acquisition. The strong growth of our RFID business, was primarily driven by apparel, particularly within the value segment of the market. Outside of apparel, we continue to see increasing interest in new applications within logistics, as well as food and grocery. Specifically, we are working with logistics companies to assess the technology in light of the accelerated shift to e-commerce, with many providers operating holiday like peak volumes throughout the pandemic.

Given the stress that this has put on supply chains globally, we're now working with several companies that demonstrate how RFID and related solutions can drive an increase in both the throughput and accuracy of their operations. We're active on multiple pilots in this area, and have some smaller deployments already under way.

The momentum in food-related end markets likewise continues, with increased pilot activity among quick service restaurants, as well as retail, both in the U.S. and emerging markets. These applications are focused on driving labor efficiency and improved availability of products. Similar to apparel, the migration to e-commerce for food delivery is strengthening the used case for RFID in this market.

Overall, we continue to expand our RFID product pipeline. Customer engagements are now up close to 45% since the start of this year. As these projects continue to move through the pipeline, we continue to expect long-term growth of 15% to 20%, as we build RFID into a broader Intelligent Labels platform, which is now a more than $500 million business.

Returning to the total company; we entered this crisis from a position of financial, operational and commercial strength, and as I mentioned earlier, our businesses are once again, proving their resilience across economic cycles. Our teams are adapting quickly to new commercial and operational norms, responding decisively with best practice safety measures, protecting our profitability in a lower growth environment, and positioning us well to capture demand, as conditions improve. 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.

Our strategy remains clear; we are continuing to invest to expand in high value categories, particularly our Intelligent Labels platform, while driving long-term profitable growth of our base businesses. We remain confident in our ability to continue to create significant long-term value for all of our stakeholders.

I'll now turn it over to Greg.

Greg Lovins -- Senior Vice President and Chief Financial Officer

Thanks Mitch and hello everybody. This year has certainly been very challenging. We're executing extremely well, as evidenced by our financial results this quarter. We delivered adjusted earnings per share of $1.91, up 15% over prior year, and significantly above our expectations, as the end market demand picked up faster than we had assumed in July. Our tight near term cost controls in this environment, combined with the flow-through benefit of the better than expected volume, in addition to our ongoing structural productivity actions, drove strong margin expansion in Q3.

Sales declined by 1.3% ex-currency or 3.6% on an organic basis, and currency translation reduced reported sales by 0.5 point in the quarter. Despite the drop in revenue, we reported an adjusted EBITDA margin of 16.1%, up nearly 2 points and an adjusted operating margin of 13.1%, up 140 basis points. And we realized $13 million of net restructuring savings in the quarter, most of which represents the benefit of projects initiated this year, and we recorded approximately $11 million of restructuring charges, roughly half of which relate to non-cash asset impairments. And we continue to target between $60 million and $70 million of incremental net savings from restructuring this year, with roughly half of that in RBIS. And we're also on track to deliver roughly $150 million in temporary savings from short-term cost reduction actions this year, which will be a headwind for us, as markets recover.

Turning to cash generation and allocation; year-to-date, we've realized $342 million of free cash flow, up roughly 5%, with strong growth in the quarter, driven by lower capital spending and higher net income. And I'm pleased to report, that we achieved our targeted sequential improvement in working capital productivity, particularly with respect to inventory turns. Our balance sheet remains strong, with a net debt to adjusted EBITDA ratio at quarter end of 1.9, below our long-term target range of 2.3 to 2.6. As we've proven our ability to manage through the compounding global crisis we face this year, we've begun to again put that leverage capacity to work, including increasing our level of distributions to shareholders, in line with our long-term capital allocation strategy. And we announced today, that the Board approved a 7% increase to our dividend rates, and we resumed our share repurchase program late in the third quarter.

Turning to segment results for the quarter, Label and Graphic Material sales were down 2.6% on an organic basis, driven by volume and mix, as well as deflation related price. And sales were down roughly 2% organically in Label and Packaging Materials as growth in Specialty and Durable Label categories was more than offset by a decline in the base business, while Graphics and Reflective sales were down about 8%.

As Mitch mentioned, our Graphics performance represented a strong sequential improvement, compared to the roughly 30% decline we saw in Q2, with steady improvements monthly throughout the quarter. As expected, the overall trend for the label and packaging materials business moderated sequentially, following the Q2 demand surge in the mature markets. With improvement over the course of the quarter in all regions.

As Mitch touched on the overall volume trends by region for the Label and Packaging Material business since the start of the pandemic, when looking at the segments -- the total segments sales trends by region in Q3, in North America, LGM sales were up low single digits organically for the quarter, with a strong rebound in Graphics and LPM inventory destocking, largely behind us by the end of July. In Europe, where destocking began about a month after we started to see it in North America, LGM sales for the quarter were down high single-digits on an organic basis, with a fairly steady improvement in the trend, as the quarter progressed.

In the Asia-Pacific region, which grew modestly for the quarter on an organic basis, likewise, saw a fairly steady improvement in the sales trend through the quarter, which was led by growth in China and India. And finally, we've been very pleased with the resilience of LGM's business in Latin America, which delivered mid-single digit organic growth for the quarter. LGM's adjusted operating margin increased 170 basis points to 15.2%, as the benefits of productivity and raw material deflation net of pricing more than offset higher employee-related costs on unfavorable volumes.

Shifting now to Retail Branding and Information Solutions; RBIS sales were up 5.2% ex currency and down 4.7% on an organic basis, as strong growth in our high-value categories was more than offset by a roughly 12% decline in the base business, driven by overall lower apparel demand.

Looking at the total apparel business, based in high value categories combined, the value channel outperformed all other channels, up nearly 50% for the quarter. As Mitch indicated, ex-currency enterprisewide RFID sales were up 65% and up 20% on an organic basis. Adjusted operating margin for the segment increased 60 basis points to 12.1%, as the team's productivity and cost control actions more than offset unfavorable volumes.

Turning to the Industrial and Healthcare Materials segment, sales declined 7.6% on an organic basis, compared to the 21% decline in Q2. Reflecting sequential improvement in trends for automotive applications, particularly in China and North America. And adjusted operating margin increased 110 basis points to 12.1%, due to favorable product mix, productivity and deflation net of pricing, which more than offset the impact of lower volume.

Now shifting to our outlook; given the continued uncertainty regarding global demand, we are not resuming annual guidance at this time. As we've done since the pandemic started, we will arrange an update call in December, to let you know how things are playing out. In the meantime, I'll highlight some of the key pieces of the equation that we have reasonable visibility to now.

We expect that underlying sales trends, that is organic growth and the benefit of Smartrac acquisition will be similar to or better than what we saw in the third quarter. In addition, as announced back in January, we benefit from an extra week in the fiscal year, which is expected to add roughly a point to our full-year growth rate or about 4 points to the fourth quarter. And this should add roughly $0.10 of EPS to the fourth quarter and full year, which obviously represents a comparably sized headwind to 2021 revenue and earnings.

The anticipated headwinds from currency translation have diminished, as the year progressed. The negative impacts from currency now stand at roughly one point of sales growth and $9 million in operating income for the full year, based on recent rates. And as mentioned, we expect to generate restructuring savings, net of transition costs of $60 million to $70 million this year. And we're targeting roughly $150 million of net temporary savings, which includes reductions in accruals related to incentive plans, and note that more than 80% of the full year estimate for temporary savings have been realized year-to-date. And again, the vast majority of the temporary actions that we've taken, are expected to be a headwind for us, when markets recover.

As Mitch said, protecting our margin is a key focus for us during this period of slower growth. Assuming we continue to see stability in our end markets, we're now targeting to deliver an adjusted EBITDA margin for 2020, that exceeds prior year. You may have noticed also, a modest benefit in the quarter from a lower tax rate, which reflects our current full year adjusted tax rate estimate of approximately 24%, in line with our long-term expectation for tax rate in the mid 20% range.

And finally, given the strength of Q3 results, we are now targeting to generate over $500 million of free cash flow this year, and this 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're very well positioned to navigate this challenging environment, and we look forward to coming out even stronger, when our markets fully recover. And while there certainly continues to be macroeconomic uncertainty, looking ahead to next year, assuming a modest recovery in sales, we're targeting to maintain our EBITDA margins and to once again generate over $500 million in free cash flow.

Now, before we open the call to questions, I have a special announcement to make. As some of you already know, Cindy Guenther, our Head of Investor Relations for most of the last 20 plus years, has decided to retire at the end of December. After supporting nearly 100 earnings calls, this will be her last. Over her 25 years with the company, she has been a valued partner and resource to me, Mitch and the rest of the leadership team, as well as the investment community, and we're very grateful for her so many contributions over the years. And while of course we will miss Cindy, we're happy to welcome John Eble back to the corporate team to lead Investor Relations. John has served in a variety of important financial roles over his time with the company, both in the businesses and in corporate, including a few years working with Cindy in Investor Relations. So he will definitely hit the ground running. I do want to thank Cindy for her years of partnership and support to me, as well to the organization at large. So it has truly been a pleasure Cindy, and I and the entire organization, and I am sure the investment community are very thankful for your years of leadership, partnership and support. So thank you again.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

Thank you, both.

Greg Lovins -- Senior Vice President and Chief Financial Officer

And with that we'll open up to questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from George Staphos with Bank of America. Please proceed.

George Staphos -- Bank of America -- Analyst

Thank you. Hi everyone, good day. Cindy, congratulations. It's the end of an era. And John, congratulations to you as well.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

Thanks George.

George Staphos -- Bank of America -- Analyst

Yeah, it has been fun. So I guess the first question I had, I want to go back to slide 8, where you're showing the 2019 sales by product category, and you show that 15% of revenue for last year was roughly driven by logistics shifting and other variable information. Given what we've seen this year and obviously the pickup in e-commerce, is there a way to update us on how much that portion of the pie represents now for 2020? And if there is any incremental you can give us, in terms of how you think e-commerce is both benefiting RFID and variable information for that matter?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah George, I think you're asking about just what the new mix of revenue from slide 8 for 2020 -- I mean, 2020 is actually not going to be a great baseline, just given what happened within Q2 overall. But clearly, you would expect with the significant growth in RFID, as we build out the Intelligent Labels platform, both organically and with the Smartrac acquisition, as well as a big piece of that being toward logistics as well and you could see those pieces of the various pies across these slides increase. So we will update all this at year-end, but I will say that, even 2020 won't be a great baseline. So we will give you probably a bit of a more rounded out view going forward, how we expect it to evolve, similar to what we had in the past.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

George, I'd also point out, if you're assuming that all of the RFID is in that 15%, that would not be correct. We've captured apparel related RFID in the 21% on that chart.

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Thank you, Cindy.

George Staphos -- Bank of America -- Analyst

Yeah Cindy, I wasn't. I was just using it as a stepping off point for discussion. But is there a way to comment, maybe just a quick follow-on here, on how much growth you've seen in variable information, and how much of that you would attribute to e-commerce?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

We are growing faster than average, within volumes in the variable information categories within LGM, and clearly within RBIS, it's a big driver now. Within RBIS it's mostly apparel still. So that is the largest category. But as far as the pipeline, the pipeline is still growing quite significantly in other areas, such as food and logistics, as I mentioned.

George Staphos -- Bank of America -- Analyst

Okay. And then my other question, I'll turn it over, question number two is, you've obviously done a -- so far a very, very good job on the temporary cost saves. Certainly you've had really strong margins. How should we expect that temporary cost save and that spending to be metered back into the business, as volumes pick up? Do we have to worry about a quarter sometime in 2021, where you're looking at a particularly negative earnings comparison, because you've got the cost saves coming in, maybe more -- or excuse me the spending coming in more quickly than the volume ramps up? How would you have us think about that reintroduction of spending into the mix? '21 and ultimately I guess, '22 as well? Thank you.

Greg Lovins -- Senior Vice President and Chief Financial Officer

Yeah, thanks George. This is Greg. So again, as we've said, the $150 million of temporary cost savings made up largely of three buckets. Incentive comp being the smallest bucket there, and in addition to volume-related savings, as well as some belt tightening. And as we've said before, we would expect as volumes come back for the majority of that cost to return. Now how fast that returns, particularly that volume related piece will depend on how fast the volume returns. But even here at the end of the third quarter, of course, we started to see with volumes coming in better than we had expected, a little bit of increase in volume-related costs. And when we think of things like over time or temporary labor and those type of activities, we start to see that coming back with volume. So that's something we'll be managing with volume segment by segment, as it returns.

From an overall cost perspective, while we will expect to see that headwind from that temporary cost savings, we will also continue to see the benefit of the more structural cost reduction actions, the restructuring that we've done this year of $60 million to $70 million, and then a similar level of incremental restructuring benefit next year as well.

Operator

Our next question comes from Ghansham Panjabi with Robert W. Baird & Company. Please proceed.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Yeah. Thank you. And Cindy congrats. You're certainly leaving on a high note.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

Thank you, Ghanshyam. I planned it.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

It seems like it. Very well planned. So if we go back to slide 7, we have the monthly sort of organic growth throughout the course of the pandemic. It looks like you exited 3Q, down 2% or so. 3Q average was down 3.5% roughly, and it sounds like you're pointing toward that sort of average for the fourth quarter. So can you give us a sense as to how October has tracked, whether Western -- whether Europe has actually rebounded relative to what you saw in 3Q? And then is there something we should keep in mind apart from the extra week or so in the fourth quarter, that would get us to that average for 3Q, for 4Q?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Sure. So as we said earlier, we're looking at 4Q being at or better than the pace of sales growth or decline in the third quarter. And we're only a few weeks here into October. I think the last couple of quarters earnings call, it has been a little bit later, so we had a little bit broader view. But after only a few weeks, we have seen an improving trend, so far in the month. So we've seen slight improvements, particularly in developed regions, within LGM, and pretty favorable so far in RBIS as well, early on here in October.

Now what we think we've seen in the back part of Q3 as well as the early part of Q4 here for RBIS, is really brands and retailers have been gearing up for somewhat earlier and potentially longer holiday season. So we are starting to see that ramp up a little bit earlier in September, and we've seen a little bit of that at the beginning of October here as well. And I think what we see as we're going forward is, not really sure how that will play out, as we enter the back half of the quarter. So when we look at RBIS, how retail sales flow through, I think will help shape how that picks up later this year.

At the same time as we talked about last year, when the pandemic hit, is when the spring season was starting to get in under way in much of retail shut down. So it's uncertain yet exactly how it will play out and how those orders will play out for the spring season, as it comes in later this year and at the beginning of next year. So we started out stronger in RBIS, but we see a little more uncertainty, especially as we go through the back part of this quarter.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Got it. And then in terms of your comment on margins for 2021, I think you said EBITDA margins roughly comparable to -- or at least maintaining 2020 levels. Can you give us some of the buckets of that, because $150 million of temporary cost savings is a very, very big draw, in terms of the headwind. What would be the major offset?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah. So like you said, that is a big drop and if we see, that will be partially dependent on how volume goes, right. So with volumes being still uncertain, we will layer that back in, as we mentioned a minute ago. As volumes come back, we would start to see those costs come back. At the same time, one of the bigger offsets is the incremental restructuring we've talked about as well, which we expect to be about $70 million next year. And that's why in my comment, when we look this year to next year, with a little bit of modest volume growth, we'd expect to be able to maintain the strong margins that we're seeing this year.

Now part of the other way we're thinking about it, it is also comping to 2019, so kind of the pre-pandemic target. So looking at where we were in 2019 to 2021 or beyond, when markets recover, we will have a significant benefit from the couple of years' worth of restructuring savings that we've been doing and the structural cost reductions over that multi-year period. But that would be offset over a couple of years of wage inflation, and obviously investments in the business and things like that. But when we look at '19 to '21, that's why we expect to continue to see margin expansion over that multi-year period.

Operator

Our next question comes from Neel Kumar with Morgan Stanley. Please proceed.

Neel Kumar -- Morgan Stanley -- Analyst

Great, thanks for taking my question. So in terms of RFID, are you still seeing evidence that your RFID engagements are accelerating? How much of this is driven by non-apparel markets versus apparel? And in general, do you see this business as a post-COVID winner, as companies pushed more omnichannel sales strategies?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah. So overall, we continue to see momentum build within RFID and related solutions, as part of our Intelligent Labels platform. And apparel, continuously see it in the numbers of the results, but even from our pipeline apparel, we actually saw a pretty big tick up in early stage pipeline development as well. So in addition to companies moving through the pipeline, there is a lot more jumping into that mouth of the funnel, if you will, as the case for RFID is getting stronger and stronger, because of COVID as you mentioned, but just everything else that's sort of related to driving more and more omnichannel, and just the increased efficiency automation, lower labor content that retailers and e-commerce players are looking for.

So seeing that within apparel, seeing that within food, same used cases as I mentioned before, that's more business case and pilot activity what we're seeing largely in food and then within logistics, we have a few early stage deployments, as well as quite a bit of pipeline activity. And again quite a bit more even early stage engagements. So COVID definitely reinforces the strength of RFID, and you really just need to think why, it's really around more automation, more contact less, not contact free, but contact less activity, whether that be in retail, whether that be in the restaurants, whether that be just in accelerating, make more efficient logistics and supply chain. So we are seeing continued reinforcement across the board.

Apparel, as we've said, we'll continue to be the main driver of growth over the coming couple of years. Our focus over the last couple of years has been to continue to drive penetration within apparel, while seeing opportunities in other end markets, as we've called out, and that activity is progressing well.

Neel Kumar -- Morgan Stanley -- Analyst

Great, that's helpful. And then if you could just talk about what you're seeing right now, in terms of your chemical and paper raw material costs? How do you see your price cost relationship playing out in the fourth quarter, and then into 2021?

Greg Lovins -- Senior Vice President and Chief Financial Officer

Yeah. So we still saw a little bit of sequential deflation in the third quarter, really driven by paper and in the back part of the third quarter, really starting to see some, some inflation in a couple of areas. One is in chemicals, particularly in North America, when we look at chemicals and films. And also, we're starting to see some pressure in freight, particularly in North America as well. So we see that kind of moderating a little bit of a headwind, as we go from Q3 to Q4, from an inflationary perspective. Hard to call what that's going to look like I think for 2021 at this point, it will be somewhat dependent on the macro and where volumes end up going. But we had some -- still some favorability in Q3, we see that turning to a little bit of unfavorability from overall basket of raw materials and freight in the fourth quarter.

Operator

Our next question comes from Adam Josephson with KeyBanc Capital Markets. Please proceed.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning everyone and Cindy. It's been a real pleasure working with you and hope you won't miss us too too much in retirement.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

Thanks Adam. I will.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Mitch or Greg, in the context of your comments about 4Q organic sales being similar to or better than the 3Q pace, are you surprised that sales trends are progressing as well as they are, considering another wave of COVID cases across developed markets? Not to mention, high unemployment and otherwise. I'm just wondering what exactly you think is going on? I know I saw P&G reported blockbuster volume growth yesterday. Also I know CPG demand remains quite elevated. But just talk about more broadly, what you think is happening, why you think sales are holding up, as well as they are, just given everything going on?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah. So specifically with -- I will talk about the components. LGM tend to be relatively stable business across the cycles, and so it's not as sensitive as some of the big shifts that you see, even COVID; one; and two, you'd expect it to -- actually to be growing faster than overall consumption, because of what's going on migration to more packaged goods, as well as e-commerce trends that we've been talking about in the past. And if you look at what's going on with overall -- just general GDP growth trends, personal consumption and non-durable consumer goods, our revenue trends across the pandemic, that's why I stepped back and commented, you know, that the March to September timeframe have been better than some of those macro categories, as you would expect.

Within the -- if you look month to month, we clearly experienced something different than we've seen in past recessions, because of the health crisis, where we saw inventory building earlier and then destocking later. But across that [Phonetic], we would expect our businesses, our markets to grow faster within LGM, than what you're seeing on end consumption. End consumption is still the key overall, as you look going forward, what your own individual assumptions are around that.

We do not expect, with the new resurgence of coronavirus cases in the regions in which we operate, for it to create the panic buying and the amount of surge activity that we saw early in the stage. I think by and large, ours and -- just in general supply chain has proven resilient to be able to meet customer demand. So we wouldn't expect that kind of lumpiness going into Q4 next year. So that's basically what we attributed to overall, within that business. And within RBIS, clearly came back much quicker than anticipated, and essentially, after everything coming to a halt for a couple of months, retail and apparel arms decided -- realized they needed to have goods in time for holiday.

And so there has been a big shift in ramping up orders dramatically to have goods for holiday, and that's what we're seeing, and they're looking to spread it out. And I think some of the uncertainty there is just -- some of it is having more sales before traditional Black Friday, starting earlier, because it will be at a lot slower burn if you will, and then still got to be seen, what happens at the consumer level. But even the post-holiday period, over the last 10 years has been a shift to more and more gift cards, which actually has improved January sales, as well, and so that could play out. So you could see this going multiple different directions. And our view is on -- for RBIS, holiday is key, how the consumers come out, what that does to retailer sentiment, as they go into the following seasons.

And then last is, what Greg mentioned earlier, there is a lot of product manufactured between December and February, that ultimately, the retail stores were closed for in the mature markets in the spring. Some of that was ultimately sold through. Spring garments took a lot like summer, were sold through just a few months later. Others may have been stored in warehouses. We're hearing stories of that, and maybe pull back out. So for us, there is a number of questions both about holiday, with a better retailer sentiment, but also just the spring season is in question.

So that's near term lumpiness. I think overall if you just look at our categories, tied to consumer goods, we expect the markets to continue to be resilient over the long term, and our position is very strong to continue to win and capture significant value there.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I appreciate that Mitch. And just one other one, at the outset of the pandemic, you talked about next year, under the assumption that, this turned out to be a normal recession, or at least similar to the last one. And obviously that hasn't been the case. This has played out much differently, such that you now expect full year earnings to be up from a year ago. I mean what lessons, if any, would you draw from this experience, as it relates to looking out into next year, or thereafter? I know you already said, you expect your margins to be comparable next year. But any thoughts about next year, just given how this year has played out, and what you've been surprised by, what you haven't been surprised by, and how you think this may unfold?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah. So I think the biggest lesson is, just the importance of and strength of our scenario planning. We've talked about this in past earnings calls and so forth. This is something we do. I think it's often looked at by investors from just a financial scenario planning. But we embed this within our businesses to be prepared for multiple environments. And have we -- we never predicted a human health crisis pandemic globally. And so while the root cause was different, we had to, I'd say, sharpen up different elements of our scenario planning. But we were able to pretty quickly go into deployment mode, and the team was already used to being able to do this. And so I think that -- it just reinforces the value of scenario planning, and we learned that in a big way coming out of the last recession, and that's something that I, and we have continued to make sure as a key priority, which I think maybe a lot would -- many people would maybe take their foot off the gas a little bit on scenario planning, when you have a long steady expansion like we've experienced. We did not. And I think it's proving out right now.

And so going into next year, our focus here is on protecting margins, even in a low-growth environment, and as Greg commented earlier, that's our focus and there is lots of variables around restructuring costs, temporary cost savings, what's going to happen with volume, raw material costs, everything else. There is lots of variables. You got to think about just -- our overall drive here, is to continue to make sure we have a business that can sustainably deliver GDP plus growth in top quartiles over the long run. That is our focus and, I guess, our biggest lesson is to keep doing what we're doing.

Operator

Our next question comes from Josh Spector with UBS Securities. Please proceed.

Josh Spector -- UBS Securities -- Analyst

Yeah, hi. Thanks for taking my question. And let me reiterate my congratulations to Cindy, and thanks for all your help. Much appreciated.

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

You're welcome.

Josh Spector -- UBS Securities -- Analyst

Thanks. So just on the quarter. Looking at some of the monthly trends, specifically just thinking about RBIS, it's kind of impressive how stable each month was. I was wondering if you can give us a little bit more color on maybe some of the undercurrents behind that? Was RFID stronger earlier or later? Or base, label and tag stronger earlier or later? Or was it as smooth, as it looks, based on what you show on slide 7?

Greg Lovins -- Senior Vice President and Chief Financial Officer

Yeah Josh. So there is some movement between months. I think the other thing is, September was actually a tougher comp for us as well, it was a very strong month for us last quarter. So even being down 5% in the month of September is still -- from a pace perspective, a bit better than what we saw earlier in the quarter. So I think we -- as we've talked about, on the base apparel business, it has really been gearing up for holiday, that's starting to impact us, as we move through the quarter. And then RFID, as Mitch has talked a fair amount about, has been strong pretty much across the quarter. So all of that continuing to progress, as we move through, into the very early part here of October.

Josh Spector -- UBS Securities -- Analyst

Okay, thanks. And just on the free cash flow side and cash deployment. I mean, you did a small amount of share repurchases this quarter. I think if you look at, perhaps forecast, you know, leverage comes down pretty quickly over the next couple of quarters, as you move past the tougher 2Q comp. How do you think about cash deployment here, over the next couple of quarters? You think share repurchases play a bigger role, and along with that, the M&A pipeline active and rebuilding. Is it possible to do deals, given what you might see in terms of tougher performance through 2020, in terms of targets you may be looking at?

Greg Lovins -- Senior Vice President and Chief Financial Officer

Yeah. So I think overall, as you said -- I mean, our balance sheet has continued to strengthen here through this time period this year. We've got ample capacity to continue managing across all the levers of our capital allocation. So continuing to invest organically in the business, we're continuing to work the M&A pipeline, just as you talked about. We haven't seen much flow through there yet, well, after the Smartrac acquisition, that we just closed in March of this year. Well we are continuing to work that pipeline. I wouldn't say that we've seen big changes in valuations this year, but continuing to work that. And of course continue to return cash to shareholders, with a growing dividend and continuing share buyback. So our focus is on continuing the same capital allocation priorities, I think that we've had over time. We took a bit of a pause on buybacks for a little while. Of course, with the early part of the pandemic here, we would expect to return to our overall capital allocation strategies and priorities going forward.

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

And the only thing I'll add is, we did comment in the past, we had an active M&A pipeline, mostly bolt-ons and so forth. But there was a pause in -- just in the amount of activity engagements, as every company was working to manage through the depths of the crisis. So there is just normally a bit more pickup in activity overall. So that's what we're seeing. But we're in a good position from a balance sheet perspective, and we are finding the leverage here.

Operator

Our next question comes from Jeffrey Zekauskas from JP Morgan Securities. Please proceed.

Jeffrey Zekauskas -- JP Morgan -- Analyst

Thanks very much. In looking at your income statement, your SG&A costs year-over-year really don't change very much for all of the interim cost savings and the structural cost savings. The real changes in cost of goods sold, and that cost of goods sold is down more as a percentage. It's obviously a much bigger number than SG&A. And it's also a place where you've got negative volume leverage. Why is it that the cost savings are really located in cost of goods sold, and not in SG&A?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah. So I think over the course of the year, it's pretty well balanced between SG&A and cost of sales. Obviously a lot of those are volume driven, temporary cost reductions we have talked about are more in cost of sales, because those are things like over times and cost to some furloughs in the second quarter, etc. So that chunk is really more focused on cost of sales. I think there is some movement up and down between quarters, a little bit of incentive comp favorability we talked about in Q2. A little bit of unfavorability then from that perspective in Q3. So I think over time, it's fairly well balanced between the two, but moves around a little bit between quarters.

Jeffrey Zekauskas -- JP Morgan -- Analyst

Okay. In the Label business, I think you said that your European volumes were down 10% in the quarter. Was that because they were down a lot in July, and then they really improved, like what does the down 10% look like for each of the months, or can you frame it, so that we have an idea of where things stand in Europe? Or what were European volumes in October?

Greg Lovins -- Senior Vice President and Chief Financial Officer

Yeah. So they were down upper single digits volumes within Q3 for Europe, our Labels and Packaging Materials business. They were down almost 10% in July, and trended better throughout. And then in October, they are down low-single digits. So an improving trend.

Operator

Our next question comes from Paretosh Misra with Berenberg Capital Markets. Please proceed.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Thank you. Hey everyone and congrats to you, Cindy. Wanted to go back to your RFID pipeline size. I guess engagements are up 45%. So where does that put the number of engagements now? Is that close to 500 now? And how much of the revenue growth -- RFID revenue growth in the apparel business, you think is net -- net growth? Because I'm guessing you're missing on sales of the traditional base tax to some of these apparel customers. So just curious, what's the net incremental there?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

So most of it is net incremental. I don't have a precise number, and you have to also understand, because of what's going on in retail, some categories -- and just customer categories are down, and others up dramatically, and particularly value, as we have mentioned earlier. So as far as the pipeline, yeah, we're still seeing robust -- and we're not going to probably be disclosing, actually, there is number of activities within each of the pipeline overall, but it's continuing to ramp up at the pace that we've thought through.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Fair enough. And Mitch, can you talk about some of the sustainability and ESG related initiatives that you have currently going on in your organization? Any opportunities for Avery to really differentiate or stand out versus other packaging and specialty materials companies on that front?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Sure. Yeah, just quick comments. So we have two broad folks that wanted to just -- reducing the environmental impact of our actual operations. We've had a focus that we embarked on back in 2015, on reducing greenhouse gas emissions, buying more sustainably produced raw materials, such as paper and so forth. So we've had ongoing activities. We are on track or ahead of schedule on all those greenhouse gas emissions in absolute terms, and not relative terms. While we've grown, we've actually reduced our greenhouse gases by more than 30% already, and are ahead of track of our targets. So that's one category. Second is really around, how do we create more sustainable products, enabling more circular economy around recyclability and so forth. We launched CleanFlake a number of years ago, specifically with that in, which helps in more efficient and effective recyclability of plastic containers. We are now looking at how to roll that out and broaden the specific number of the product portfolio all around CleanFlake, as this is starting to take more hold within the market. So our focus here is, continue to reduce the environmental impact of our operations, as well as more sustainable products. We're seeing a lot more opportunity there, and plan to -- are [Phonetic] and plan to continue to leverage our innovation strength to go after it.

So we will, early next year, lay out more of our strategies we've had on the sustainability front. We laid out some 2025 goals back in 2015. We're going to land a new set of horizon goals through 2030, early next year, and we'll be talking about it more fulsomely with all of you.

Operator

Our next question comes from Christopher Kapsch with Loop Capital Markets. Please proceed.

Christopher Kapsch -- Loop Capital Markets -- Analyst

Yeah, hi. Thank you. And I'll throw in my congrats to Cindy as well. Actually have been following the company long enough to remember that Cindy sort of tried to retire once before, and so hopefully this one sticks, right?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

We wouldn't let her retire before.

Christopher Kapsch -- Loop Capital Markets -- Analyst

Got it. So my questions are focused on LGM, and you mentioned sort of the disparate trends by geography, contrasting particularly North America and Europe. And you talked about those trends -- Europe lagging North America, maybe as we progressed sequentially through the quarter. But you also mentioned this trend, which I'm hoping there is an explanation for, where North America is sort of trending above its long-term characteristics and Europe has been lagging that for some time now. So wondering if there is something different about the competitive dynamic, or something structurally about the markets that are different now, that could help explain that trend?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah so, I think there's two factors. One is as we look over the seven months from March through September what we commented. The biggest one is just consumption in Europe is below the U.S., that is one clear thing. Can't really tell the difference between destocking levels, inventory levels relative to the two, but the other one is, we did comment and we felt we lost some share in Europe in Q2. We've been recovering that here in Q3, and will continue over the next couple of quarters, but we've covered a good portion of that here in Q3 already. So as you look over the March to September timeframe, that is part of the impact, but the majority of that we believe is tied -- is just differentials in the end consumption.

Christopher Kapsch -- Loop Capital Markets -- Analyst

And is that differential to the end consumption, is they have to do with economic activity, or is it something just nature of the way, packaging is trending in Europe, vis-a-vis North America?

Greg Lovins -- Senior Vice President and Chief Financial Officer

Economic activity in general, and the conversion to more e-commerce seems to have been slower.

Operator

Our next question comes from the line of John McNulty with BMO Capital Markets. Please proceed.

John McNulty -- BMO Capital Markets -- Analyst

Yeah, thanks for taking my question, and congrats Cindy, awesome career over the years. So when we think about the $150 million of temporary cost saves. I guess -- clearly, the management compensation one, like you can't cut it and hold it there forever. But have you learned anything through either the belt tightening side or the volumetric driven cost cuts that maybe don't reverse, and so that we could actually see some of the -- portion of the $150 million actually hold as a permanent cost cut? How should we be thinking about that?

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Yeah, we said that we'd expect the vast majority to come back, depending on volume environments. But clearly, the current environment I think has provided new opportunities for new ways of working and so forth. So we would expect some of it to be sticking through the long term, just around how to travel and everything else, and we were fortunate in the amount of technologies that we had already deployed globally. We could quickly go to virtual on everything. So it was a good catalyst for us, to kind of go that next step. But that's clearly not all sustainable to be running the business that way. So, some will stick. We haven't done the full assessment of exactly how much of it we will be doing that actually over the coming few months. But some of it will, but the vast majority will be coming back.

John McNulty -- BMO Capital Markets -- Analyst

Got it, OK. Thanks for the color.

Operator

Our next question comes from George Staphos with Bank of America. Please proceed.

George Staphos -- Bank of America -- Analyst

Hi guys. Thanks for taking the follow-on questions. So you already told us that next year, you would hope to keep EBITDA margins relatively constant with 2020. And correct me if I misphrased anything there? Is there a way to give us a bit more color, given you take a mile on what you expect for RBIS? You said half of the savings will be from restructuring will be going into RBIS. I guess sort of the question behind the question is, you're putting up margin RBIS, that years back would have been great in a normal volume environment, which we've not been in. So do you expect RBIS is flat or do you think RBIS margins actually have the ability to be up year-on-year? How would you guide us, if you could, as we think out to '21? And then the other question I had regarding RBIS, and I'll turn it over. You mentioned that retailers and brand owners are trying to position ahead of the holiday season. The season has maybe gone a little bit earlier than expected, could go on longer, recognizing there is going to be a bit of variability into '21? That level of activity by your customers right now, is that really going to drive your volume for the fourth quarter RBIS. A lot of those shipments would have already occurred, and is it really more -- we should be looking at it as a bellwether for what your orders will be late 4Q, 1Q, looking out to the spring season? Thanks guys and good luck in the quarter.

Greg Lovins -- Senior Vice President and Chief Financial Officer

Yes. And George, couple of questions, the first one, as far as RBIS margin outlook for next year. I think we're going to comment on that. Our overall point here of laying out the expectations for 2021 is that, with a modest amount of growth, modest recovery, we are going to be focused -- again, just like we've talked about the last two years, on a low growth environment to protect margins, and that will be a key focus of ours, and that's across the enterprise. When we start getting into individual components of the portfolio, it depends on what the volume environment is as well. So I think what you can see is, RBIS, despite significant challenges on topline, particularly in Q2, is managing those well, and if I remind you that in Q2 even, we could have even had better margins there, but we chose not to move on -- some actions at the time. So we deferred a number of restructuring and cost out actions and everything else at the depth of the crisis into Q3. So some of it was bunched up into Q3, and that's what you're seeing between the two quarters. But not going to comment on specific components of the portfolio for 2021 at this time. I think a lot of it goes to what your own assumptions would be around, how each of the individual markets respond to the environment, and what the environment is in general next year. But our focus here is doing, back what Greg laid out earlier.

As far as the timing of RBIS sales and some of the uncertainty. Again, the uncertainty is really late Q4 early Q1 around just what the impact is going to be around, the fact that retail was largely closed in the spring of 2020 and some garments weren't sold. So for that reason one, and two retailers and apparel brands will have seen early how holiday is performing and that impacts retailer sentiment, and what they're open to buy, is for the following season. So it's really -- I'd say watch closely on the consumer behavior and retailer brand communications here, mid to late Q4, and that will be a key driver for us.

Operator

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

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Okay. Well, I just want to thank everybody for joining the call and once again thank our team for their endless commitment in ensuring the success of all of our stakeholders. Thank you very much.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Cynthia S. Guenther -- Vice President of Investor Relations and Finance

Mitchell R. Butier -- Chairman, President and Chief Executive Officer

Greg Lovins -- Senior Vice President and Chief Financial Officer

George Staphos -- Bank of America -- Analyst

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Josh Spector -- UBS Securities -- Analyst

Jeffrey Zekauskas -- JP Morgan -- Analyst

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Christopher Kapsch -- Loop Capital Markets -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

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