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Avery Dennison Corp (NYSE:AVY)
Q2 2020 Earnings Call
Jul 27, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. [Operator Instructions] 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 30. 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 call over to Cindy Guenther, Avery Dennison's Vice President of Investor Relations and Finance. Please go ahead.
Cindy Guenther -- Vice President of Investor Relations and Finance
Thank you, Maladin [Phonetic]. 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 may be 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 now, I'll turn the call over to Mitch.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Thanks Cindy, and hello, everyone. Our teams have come together extraordinarily well in navigating one of the most challenging periods we have experienced as a company. The compounding effect of the health, economic and societal crises are having a significant impact in 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 are 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 30,000 plus workforce, 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 in 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 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 slower 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 compensation.
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 chains globally, remained substantially open to serve customers as the pandemic unfolded across the world.
Our sites in Europe and North America experienced significant surges in orders mid-March through April, driven by both increased consumption and inventory build, resulting in backlog 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 the COVID hot spots. 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 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 eased.
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.
Enterprisewide, 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% ex-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 Labels platform over the long term.
As you know, we have been continuing to invest to expand our Intelligent Labels business, including through acquisition. The integration of Smartrac is on track to accelerate the growth in 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 and beauty, food and 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 increased importance of reduced contacted checkout, not to mention an acceleration of omni-channel 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. Though 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 a 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 Labels 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.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
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% ex-currency, or 13.7% on an organic basis. And 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. And we realized $15 million of net restructuring savings in the quarter, with close to half of that representing carryover from prior year projects. And we recorded approximately $39 million of restructuring charges. These charges relate to the acceleration of actions the teams are taking this year in the businesses most impacted by COVID-19. And 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've realized $109 million of free cash flow, with $144 million generated in the second quarter. And 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, and collections in the quarter were in line with our expectations. We are also 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. And we have ample liquidity with $800 million available under our revolving credit facility and more than $250 million in cash at quarter end. And you may recall that we had drawn $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 had 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 continue 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. And as noted last quarter, we are maintaining our dividend rate during this period of uncertain global demand, and we have 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 Materials 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 label categories was offset by a 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 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. And 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. And 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 reengineering and net restructuring savings, as well as raw material deflation net of pricing more than offset unfavorable volume and mix.
And shifting now to Retail Branding and Information Solutions, RBIS sales were down 28% ex-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, ex-currency, enterprisewide RFID sales were up more than 10%, driven by the Smartrac acquisition, and down 20% on an organic basis. And 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 are 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 of the key pieces of the equation that we have reasonable visibility to now.
We expect that 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 ex-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 cost, 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 as noted, includes reductions in accruals related to incentive plans. And 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. And 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. And 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 cost associated with new initiatives and a higher cash tax rate related to 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. We look forward to coming out even stronger when our markets recover. And now, we'll open up the call for your questions.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from the line of George Staphos with BofA Securities. Please go ahead.
George Staphos -- BofA Securities -- Aanlyst
Hi, everyone. Good morning. Thanks for all the details. 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 saving and restructuring. Should we assume that you should be able to maintain the same level of year-on-year comparison in profit dollars for the key segments in third quarter, assuming volume trends don't deteriorate from what you saw in 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 mix of the business as we look out into '21 and '22? And as much as if we are working less in 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.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Thanks George. This is Greg. I'll take the first part of that question, at least. As I mentioned at the end there, we expect our EBITDA margins -- assuming obviously we come in the range we talked about for Q3 and things continue to improve as we move through the back part of the year, so 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 and we 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 that really kicked in in the third quarter 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.
Operator
And our next question comes from the line of...
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Just on the...
Operator
Please go ahead.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Sorry, I wanted to answer the second question. 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 RBIS overall toward the higher-value segments. We expect that to continue as it has been, maybe even accelerate. So, if you look at Intelligent Labels, within that business, we expect 15% to 20% growth over the long term. External embellishments, it's now a $100 million business, we expect that could be growing well above average in that range as well. So, that would be one overall conclusion we have of mix of business in general.
And then, as far as impacts of, as you mentioned, maybe less formal settings around clothing, there are discussions obviously about maybe the capitalization of the workplace and people working from home could be a benefit to 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 in 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.
Operator
And our next question comes from the line of Anthony Pettinari with Citigroup Global Markets. Please go ahead.
Anthony Pettinari -- Citigroup Global Markets -- Analyst
Hi, good morning. For LGM, is it possible to quantify or characterize any benefit from lower raw materials, net of price in 2Q? And how you just generally would expect price cost to play out in the second half as you lap some pricing headwinds, but also petchem prices are coming back up, but other things like paper coming down? Just how would you kind of characterize second half price cost?
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah, Anthony, this is Greg again. So, I think we've had a, 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 in 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. And 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 raw [Phonetic] headwind in the second half sequentially from where we are at the end of the second quarter.
Anthony Pettinari -- Citigroup Global Markets -- Analyst
Okay, that's helpful. And then, do you think your LGM volumes in 2Q were consistent with what the industry was seeing? Or are you maybe picking up some share, giving up any share? And I guess, with negative volumes in 2Q, did you see any change in kind of competitive dynamics, maybe in terms of pricing or other behavior?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yeah. So, overall, if you look at -- we clearly think -- we thought at the time that there were -- some of the surge we saw speak specifically to the mature regions, North America and Europe, some of the surge we saw was inventory building, and we think we're now seeing -- the industry and we are seeing inventory destocking. If you look at our growth over really just going back March through July, the mature regions grew 6% over that period. So, 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 a 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 hot pots, as I mentioned earlier. And so, as we were ramping up production and so forth and ultimately got to the point of having record output, but in that early part, we think we didn't cede [Phonetic] a bit of share, but 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.
Operator
And the next question comes from line of Ghansham Panjabi from Robert W. Baird & Co. Please go ahead.
Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst
Yeah. Thanks, and hi, everyone.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Hi, Ghansham.
Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst
Hey. So, Mitch, just as a 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 demand -- 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 toward still healthy demand. I guess, which end markets are you seeing that destocking?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
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. And so, you have the compounding effect of pantry loading, which is what the end users would see, but then you've got the end users the consumer packaged goods companies have and then the converters as well. And so, our converter customers are telling us, yes, they did build inventory and they are now reducing inventory now that they all are comfortable across the network that there will be a continuity of supply. So, we don't have a good read on exactly what it -- how much of it would be destocking versus end consumption. As I mentioned, over that five-month horizon, there is above-average demand for our products. That's what we're continuing to see. And over the next month or two, I think we'll be able to sort out exactly how much is destocking and so forth. And again, the market data is not yet in for particularly North America yet. 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. Just -- and that's where you probably see the big -- most exaggerated increase in consumption.
Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst
Got it. And then, in terms of RFID, obviously the apparel markets are quite challenged at current. You mentioned that's 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.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yeah. So, 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. So, obviously, for existing programs -- when their volumes are down of our customers, the existing programs will decline. We expect to ultimately apparel, as it has in the past, to rebound. People are still going to consume cloth. And we think we're well positioned within that. And then -- so, that's really what the driver is overall of 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, increase their speed and were looking at RFID, are accelerating their efforts. And those where it was maybe more earlier in the pipeline discussions, definitely 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. And 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 those categories in the pipeline since the beginning of the year. The one where we're obviously not getting much traction right now and has slowed down is aviation. So, there hasn't been any growth really in the aviation pipeline over the last -- well, since the beginning of the year for obvious reasons. So, generally, very excited about the opportunities, not only in apparel, a lot of runway ahead of us on that, but also particularly driving within food and logistics.
Greg, do you want [Speech Overlap] decremental margin?
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Sure. Yeah, 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 would have expected that to be a bit higher than the normal, just given the bigger decline in the quarter. And then, we offset part of that -- volume, net of short-term action, 40%, we offset part of that with the restructuring savings, as well as incentive compensation adjustments. So, from an RBIS 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 of course the incentive compensation accrual impact as well. So, 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.
Operator
Next question is from Adam Josephson with KeyBanc Capital Markets. Please go ahead.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Mitch, Greg, Cindy, good morning, and kudos on that monthly sales trends slide, by the way. It really clarifies the monthly trends. So, thank you for putting that in there. Along those lines, a question on July. As 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 3Q 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.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yeah. We're expecting continued improvement in LGM and IHM. But it's really around RBIS. And we don't -- if you look at July itself, it doesn't fully reflect what we just think is going on within apparel and brands from our discussions with them. There seems to be a good amount of catch-up in July, particularly as South Asia started to ramp back up and doing some catch-up on maybe some late back to school, early fall season. For us the key thing to watch -- and by the way, July is one of the lowest month seasonally in the year for the apparel business. So, it's not a good a good benchmark overall is what I'd say. So, we're being -- we're basically expecting continued improvement in LGM, IHM, but July not being a good baseline for how to think about the entire quarter for RBIS. As you look through it, the key next area -- so, back to school and fall largely getting behind us and these seasons obviously overlap, holiday is a key season for us, and that's really September-October and maybe early November. That will be a key test for us about just overall confidence in the retail sector and confidence going into the holiday season. So, that will be the key next area to watch, and we'll be giving updates as we go through that.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Thanks Mitch. 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 in other words, if sales don't come back, might hardly any of those sales -- costs, excuse me, come back next year? And then, just relatedly, you said in the last call that assuming this recession is comparable to the Great Recession that you would 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.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. Thanks Adam. 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 are kind of the most volume impacted piece, so things like overtime, temporary costs for those 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 can continue to manage. If the volume comes back, sorry, on the more volume-related pieces, obviously, that part would go up. And 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 there this year. So, that part wouldn't repeat in 2021 as well.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
And then, the other part of your question, just about expecting things to come back, yeah, we've seen in past recessions, we bounce 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.
Operator
And our next question is from Neel Kumar of Morgan Stanley Investments. Please go ahead.
Neel Kumar -- Morgan Stanley Investments -- Analyst
Great. Thanks for taking my question. In IHM, it looks like decremental margins came in around 23% in the quarter. Was this generally in line with expectations? And is this the kind of flow-through margin which you think about for the third quarter as well?
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. Similar to the rest of the Company, I think -- I mean, IHM overall, the bigger declines we saw were in industrial, particularly in the automotive categories, just given the automotive productions in the quarter. So, 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. So, we would expect decremental margins to be at a similar level. I think, overall, IHM -- in the total Company, we talked about last quarter, volumes net of short-term actions is roughly 30%. Areas like RBIS, IHM, a little bit higher than that, and areas like LPM, a little bit lower than that.
Neel Kumar -- Morgan Stanley Investments -- Analyst
Great. That's helpful. 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 for the second half of the year? And how much of that is coming from permanent versus temporary cost savings?
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. So, a big part of the decline sequentially is related to the incentive compensation adjustment that I talked about. So, we would expect the back half incentive compensation accruals remain low, but not to have the catch-up that we saw in the second quarter. So, we would expect corporate cost 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.
Operator
And next question is from Josh Spector, UBS Securities. Please go ahead.
Josh Spector -- UBS Securities -- Analyst
Yeah. Hey, guys. Thanks for taking my question. Just on free cash flow, 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 and assuming things get better through the second half, will improve through the second half of the year?
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. Thanks Josh. So as you 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 remain strong. So, 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. And we have paused 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.
Josh Spector -- UBS Securities -- Analyst
Okay, thanks. And just on Smartrac, you've now owned 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 toward 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?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Overall, the integration and just -- is going extremely well and actually ahead of schedule for us. The synergy opportunities and most of that 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. And we're seeing quite a bit of opportunity both in the apparel and logistics space, combining the two strengths of the two businesses. So, overall, pleased with what we're seeing from a capability standpoint, the link of their R&D capabilities with our process technology capabilities, the footprint and just the complementary channel access that we bring.
Josh Spector -- UBS Securities -- Analyst
Okay, thank you.
Operator
Our next question is from Jeff Zekauskas with J.P. Morgan. Please go ahead.
Jeff Zekauskas -- J.P. Morgan -- Analyst
Thanks very much. What was the rate of change in volume in your LPM business in July versus your Graphic Materials business?
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. From a sales perspective, in July, as we talked about a minute ago, 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.
Jeff Zekauskas -- J.P. Morgan -- Analyst
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. Like, 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?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yeah, Jeff, it's tough to tell. When you talk about being 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. And no other reason other than I would just say it was kind of collective wisdom across the value chain of people being -- having a little bit more uncertainty rationing down inventory levels. And because we were further back, it would have a compounded effect for us. And then, on the flip side, to your point, when things were starting to stabilize and get 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. And even in our industrial categories within IHM, we actually had pretty healthy growth still in March and April, which were just automotive supply chain was making sure they had enough product of all the various categories because people were worried about running out. So, this is playing out different across the businesses, particularly the two materials businesses, than we've seen in the past. And there is a lack of clear visibility, what's happening around and inventory levels, obviously, at the pantry level and everything else. From everybody we speak to, the sense is, consumption of packaged goods continues to remain strong on a relative basis, particularly consumption if you think of packaged foods, if you 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, if you will, more in this environment than they were before. So, we do see some clear signs of some different paths for different end markets, but a little bit tough for us to tell right now. And we've got to get through the next few months to have a clear view on that overall, Jeff.
Jeff Zekauskas -- J.P. Morgan -- Analyst
Okay, good. Thank you so much.
Operator
And our next question comes from the line of Paretosh Misra with Berenberg Capital Markets. Please go ahead.
Paretosh Misra -- Berenberg Capital Markets -- Analyst
Thanks, and hello, Mitch, Greg and Cindy. So, a question on your RFID business. So, you're generating about $0.5 billion in sales currently, and you mentioned customer engagement is up, I guess, I think 35%. So, how should we think of the revenue opportunity from this pipeline? I'm trying to see what's the typical revenue per customer or per adoption, and these future customers, potential customers could represent even bigger opportunities than what you currently have.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yeah. So, overall, it's 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 is 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. So, our confidence in 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 market development teams over time and just finding more and more use cases.
Paretosh Misra -- Berenberg Capital Markets -- Analyst
Got it. And then, maybe as a follow-up on that, so you're selling some of these RFID products through converters and some directly to customer. 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?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yeah. So, there is -- 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 strength of LGM. But most of the business is direct to end customers is where the sale happens.
Paretosh Misra -- Berenberg Capital Markets -- Analyst
Great. Thanks guys.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
You're welcome.
Operator
And our next question is from Chris Kapsch with Loop Capital Markets. Please go ahead.
Chris Kapsch -- Loop Capital Markets -- Analyst
Yeah. 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 -- so, some of the reengineering benefits and restructuring savings could be viewed as structural or stickier at least, and you were able to deliver that margin improvement in spite of arguably adverse mix with your highest -- 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 inflects, how does that set up for the margin trends over the balance of the year. And how do you think about the margin potential for that segment in a more normalized basis looking forward? Thanks.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. Thanks Chris. 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 talked about for the whole Company. We haven't given or not giving EBITDA margin targets by business. But 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 rolls [Phonetic] 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 a bit of a margin decline each year in LGM. So, normally, you would expect to continue seeing that type of a trend as well. But otherwise, not any other major trends that I would see affecting margins through the back half.
Chris Kapsch -- Loop Capital Markets -- Analyst
And just a follow-up on that is, the -- just wondering if the mix improvement -- if there is an 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.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. I think...
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Overall, there's a lot of factors going on. And I think what we should -- as Greg commented on our overall total Company EBITDA margins, what we expect for the second half and full year and what we would reasonably estimate is actually pickup in margins in RBIS and IHM, particularly RBIS, as the revenue begins to rebound on a sequential basis from the trough in Q2. And 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. And we really moved quite quickly on these temporary cost savings, which impacted Q2. So, there's a number of factors going different directions. I think overall takeaway, feel confident with total Company margins. Even in this lower demand environment, we are going to be able to maintain our EBITDA margins for the full year. And in the second half, there will be -- if you -- the first half as a starting point, a little bit of moderation in LGM for various -- particularly temporary cost savings timing, offset by benefits coming from RBIS and IHM, particularly RBIS.
Operator
Next question is from George Staphos, BofA Securities. Please go ahead.
George Staphos -- BofA Securities -- Aanlyst
Hi, guys. 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. So, 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 on RBIS, based on the growth that you're seeing in value-added and the mix enhancement 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?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yes. We expect -- this business is resilient, it will bounce back. The timing depends on what's going on in the macro and everything else. And we are -- RBIS, there's a lot of questions around retail and apparel. Overall, when we look at the mix of that business was below average, how much was in high value segments, if you go back six years ago, five, six years ago, even very recent -- more recent than that, a couple of years ago, it's mix of high-value segments, both Intelligent Labels and exterior embellishments, we see being well above average as far as it's mix. So, some very strong long-term secular growth. I won't call them tailwinds because the team is doing a phenomenal job navigating the environment. But that's what we expect. So, absolutely, and yes.
George Staphos -- BofA Securities -- Aanlyst
Thanks Mitch. And my other question on cash flow guidance. Prior, it was $500 million plus. Now, it's approximately $500 million, which is notable given everything that's been going on. You called out three things: accelerated restructuring, more taxes on repatriation and the inventory build early in the year. Is there anything else that would cause a slight decrement and free cash flow outlook for the year? Or did those three things capture it? Thanks guys and good luck in the quarter.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah. Thanks George. I mean those are the drivers. We just made, I guess, a modest adjustment to our expectations on cash flow for the year. Again, as you said, a little bit higher restructuring cost, given the higher savings we expect this year and next year, a little bit higher cash tax rates. And then, 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.
George Staphos -- BofA Securities -- Aanlyst
Thank you very much. Have a good one.
Operator
And our next question is from Adam Josephson, KeyBanc Capital Markets. Please go ahead.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Thanks for taking my follow-up. Just my last two questions. One on LGM sales trends. So Mitch or Greg, so in 2Q, 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 3Q.
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
Yeah, Adam, as I think I said a minute ago on 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. So, 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 had 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 or not. So, I think it'd be a few weeks or so until we really get a better view of the trends in Europe.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
And overall, I do think the thing to focus on is the -- is just the end consumption, what you think is going to be happening going in both Europe and North America, elsewhere as well, of course, because that's where the inventory piece will work its way through and we didn't expect that to permanently stabilize, stay at the higher inventory levels longer term. We're hearing a lot of the anecdotes, as well as hard evidence at some -- a lot -- 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 VI labels don't just go on e-commerce, they also just go on regular supply chain goods and help with the restaurant industry and everything else. So, I think that's the -- the bigger area to impact probably the second half is what your own assumptions are about end consumption. We know we are well positioned. We feel good that 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 is positioned well. We're obviously extremely well positioned within that market. The question is a little bit more just what your assumptions are around the macro and when do we -- when we come out of this.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Yeah. And just one on Europe. So, your primary competitor in Europe talked about the market being up 10% [Phonetic]. You guys were down mid-single. And I think Anthony asked about market share and you said you might have ceded a bit of market share early in the quarter. Was that in Europe specifically mentioned? And was that just related to the COVID cases you had and your inability to operate normally as a result?
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Yes, I was referencing Europe specifically. And our comments, so [Phonetic] reference point of mid-single digits versus comments of up 10% [Phonetic], we're talking revenue. The market is evaluated in terms of volume, primarily. And so, from a volume basis, we're up high-single digits, almost 10% within the quarter within Europe.
Operator
And there are no further questions at this time. I will now turn the call back over to you for any closing remarks.
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
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.
Operator
[Operator Closing Remarks]
Duration: 59 minutes
Call participants:
Cindy Guenther -- Vice President of Investor Relations and Finance
Mitchell R. Butier -- Chairman, President and Chief Executive Officer
Gregory S. Lovins -- Senior Vice President and Chief Financial Officer
George Staphos -- BofA Securities -- Aanlyst
Anthony Pettinari -- Citigroup Global Markets -- Analyst
Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Neel Kumar -- Morgan Stanley Investments -- Analyst
Josh Spector -- UBS Securities -- Analyst
Jeff Zekauskas -- J.P. Morgan -- Analyst
Paretosh Misra -- Berenberg Capital Markets -- Analyst
Chris Kapsch -- Loop Capital Markets -- Analyst
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Avery Dennison Corp (AVY) Q2 2020 Earnings Call Transcript - The Motley Fool
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