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Text: Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures.
We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results.
On the call today are Mitch Butier, Chairman, President and Chief Executive Officer; Greg Lovins, Senior Vice President and Chief Financial Officer; and Deon Stander, Vice President and General Manager, RBIS.
We delivered another strong quarter ahead of our expectations, raised our outlook for the second half and announced an agreement to acquire Vestcom, a leader in shelf-edge pricing and branded labeling solutions in the U.S. Vestcom has roughly $400 million in revenue with a consistent history of strong growth and above company average margins.
Vestcom will further expand our position in high-value categories, while adding channel access and data management capabilities that have the potential to further advance our Intelligent Labels strategy.
Deon will tell you more about the acquisition, both the strength of the company and how it will accelerate our strategies, in a moment.
In the second quarter, earnings rebounded significantly as sales grew 29% on a constant currency basis, reflecting a strong rebound in RBIS and IHM and continued strength in LGM.
The quarter was even more impressive relative to 2019, with revenue up 14%, EBITDA margins up 80 basis points and earnings per share up 30%.
Now while we are pleased with the results, our strong performance comes at a time of continued uncertainty, given the global health crisis and constraints within supply chains.
While the rate of new cases among our team remained stable, many parts of the world are experiencing an increase in COVID-19 cases.
Certain countries, particularly in South Asia, have experienced a significant rise in infection rates leading to the recent disruptions at a few RBS manufacturing locations.
While this is impacting July, we don't anticipate these disruptions will impact demand in the back half of the year.
In addition to the effects of the pandemic, supply chains remain constricted, affecting end markets and adding to inflationary pressures.
This constraint on the availability of raw materials, freight and in the U.S., labor, continues to impact the industries in which we operate.
Despite these constraints, we've been able to deliver record volumes as our team continues to leverage our global network and scale to minimize disruptions to our customers.
The current environment further reinforces our determination to remain vigilant in protecting the health and well-being of our team and agile to ensure we continue to meet customer needs.
Now a quick update by business.
Label and Graphic Materials posted strong top line growth for the quarter and demand for consumer packaged goods and e-commerce labels continued to drive strong volume in our Label and Packaging Materials business, while our Graphics and Reflective Solutions business rebounded significantly off prior year lows.
As for profitability, LGM margins remained strong despite increasing inflationary headwinds, including costs in the quarter from the supply chain constraints.
Given the increasing inflationary pressures, we are redoubling our efforts on material reengineering and again raising prices.
We are targeting to close the inflation gap relative to mid last year by the fourth quarter.
Retail Branding and Information Solutions delivered robust growth in the quarter and expanded margins significantly compared to prior year lows.
Compared to 2019, margins expanded further as the segment grew 25% on a constant currency basis and 14% organically, driven by strength in both high-value product categories, particularly Intelligent Labels as well as the core apparel label business as retailers and brands continued to gear up for a strong rebound in end demand.
Enterprisewide, Intelligent Labels sales were up 40% compared to 2019.
As expected, the strong growth in our RFID business was primarily driven by apparel.
While outside of apparel, we continue to see strong momentum building for new applications in all key geographies.
In the food segment, for example, a North American restaurant chain recently began rolling out RFID across their network after a successful pilot over the past year.
And in logistics, we saw positive momentum, including the adoption of an Intelligent Labels solution at a large global player in the transport of hazardous materials, such as batteries, which requires special shipping protocols.
These are just two examples of programs of what will be many in the years to come.
In the Industrial and Healthcare Materials segment, sales rebounded off prior year lows, showing positive growth compared to 2019 as the segment is on pace for its fourth consecutive year of margin expansion.
Given our strong performance in the second quarter and our increased expectations for the rest of the year, we have raised our full year outlook for the company, both on the top and bottom lines.
Overall, I am pleased with the continued progress we are making toward the success of all of our stakeholders.
Our consistent performance reflects the strength of our markets, our industry-leading positions, the strategic foundations we've laid and our agile and talented team.
We remain focused on the consistent execution of our five key strategies to drive outsized growth in high-value categories, grow profitably in our base businesses, focused relentlessly on productivity, effectively allocate capital and lead in an environmentally and socially responsible manner.
We are confident that a consistent execution of these strategies, both organically and through M&A, such as the Vestcom acquisition, will enable us to achieve our long-term goals, including consistently delivering GDP+ growth and top quartile returns.
Turning to slide 14.
Vestcom is a market-leading provider of pricing and branded labeling solutions for the retail shelf-edge powered by advanced data management capabilities.
It's a high-growth, high-margin business generating rough $400 million in annual revenue.
Vestcom is a highly synergistic adjacency to RBIS, building on our pricing and data management capabilities in adjacent markets and increasing our presence in high-value categories.
Vestcom, led by an excellent management team, has been consistently growing at a high single-digit rate organically over the long term with strong track records across cycles and highly accretive EBITDA margins.
As you may recall back in March at the Investor Day, we outlined RBIS' key strategies, which include delivering outsized growth in high-value categories, unlocking growth in value in food and logistics, growing profitably in the base business and strengthening our digital capabilities and solutions.
Vestcom is an accelerator for all of these strategies.
In particular, Vestcom provides an opportunity to help accelerate our Intelligent Labels ambitions in food through their additional access to end users in retail, grocery, drug and dollar in particular, and to consumer packaged goods companies, who are key decision makers in the food ecosystem as well as their sophisticated and complementary data management capabilities.
Turning to how Vestcom delivers for its customers.
As you can see on slide 15, Vestcom solutions create real value for retailers and brands, and they do so by combining data management with outstanding customer service delivery.
Vestcom solutions start with taking multiple data files, including price, promotion, planogram and brand content files and merging these to create uniquely integrated shelf-edge labels that have impacts at the point where the majority of consumers make their purchase decisions.
Their solutions, which provide both productivity and consumer engagement benefits, include stats which delivers integrated price and promotion labels to each store in time for store associates to label the shelf with the latest pricing and promotion updates in walk sequence that is sorted and ready to walk and tag based on the exact planogram layout for that particular store.
As slide 16 indicates, the reduction in store labor time to execute these weekly price and promotion changes so efficiently is significant.
And in addition, the improved level of pricing and planogram compliance drives greater consumer impact and commensurate higher sales lift for the retailer.
Vestcom then builds on this effective productivity and pricing solution by uniquely leveraging the same label real estate to add branded content from CPGs or the retailer to support their time-specific marketing campaigns.
These consumer engagement solutions include shelfAdz, which allows for highly effective in-store shelf-edge advertising with the unique advantage of combining all three elements in front of the consumer, the price, the promotion and the brand message of content.
This solution provides real value in both sales lift and return on advertising spend for both CPGs and retailers.
The strong return on investments delivered by both their productivity and consumer engagement solutions positioned Vestcom as a strategic partner to their customers, reflected in the deep relationships they have across the grocery, drug and dollar segments they serve.
It is these relationships and solutions in combination with our own that will help complement our strategy to accelerate IL adoption beyond apparel.
This is particularly true in food, where we are already investing in our IL and digital capabilities and where the need for visibility and problems through the supply chain, inventory and date freshness accuracy on shelf, pricing effectiveness and managing an increasingly omnichannel environment are key success factors for retailers.
Additionally, the combination of our businesses provides the opportunity to create a unique end-to-end inventory management and pricing solution for retail in the next evolution of our data solutions and digital journey, building on the acquisition of ZippyYum and the launch of our atma.io platform.
Lastly, we are pleased to add this high-performing business to our portfolio.
And I am personally looking forward to both welcoming the Vestcom team and the future prospects of the combined businesses.
And with that, I'll hand the call over to Greg.
I'd like to first add a few points about Vestcom, and I'll be referring to the transaction summary on slide 17 of our supplemental materials.
As Mitch and Deon already mentioned, Vestcom's annual revenue is roughly $400 million, with strong historical growth and EBITDA margins above our company average, including synergies.
The purchase price of $1.45 billion represents an EBITDA multiple below our overall company multiple, and we expect this deal to be accretive to earnings per share by 2022.
We're currently planning to fund the acquisition through a combination of cash and debt.
If the deal closes in Q3, as anticipated, we expect our leverage ratio to be near the low end of our target range at the end of this year, giving us ample capacity to continue executing our capital allocation strategy.
Now jumping back to our Q2 results.
As Mitch said earlier, we delivered another strong quarter with adjusted earnings per share of $2.25, which was above our expectations by about $0.10 and roughly $1 per share above prior year, driven by significant revenue growth.
Sales were up 29% ex currency and 28% on an organic basis compared to prior year, driven by strong, broad-based demand and the benefit from easier comparisons, given that the pandemic had the biggest impact on our results in Q2 of last year.
Compared to 2019, our growth has also been strong with organic sales up 11% versus Q2 2019.
Our strong growth, combined with productivity gains, more than offset the headwind of last year's temporary cost reduction actions as well as an increasing inflation and new organic investments to deliver an adjusted operating margin of 12.8%, up 210 basis points from last year.
We realized $17 million of net restructuring savings in the quarter, the majority of which represented carryover from projects we have pulled forward into 2020.
We also recorded two items, which largely offset each other in our GAAP results in the quarter.
The first is a gain related to the recovery of Brazilian indirect taxes paid in previous years, and the second is a liability related to the previously disclosed ruling in the ADASA legal matter, which the company disputes and remains confident in the prospects of a more favorable outcome upon appeal.
Now as Mitch mentioned, supply chains remained tight and input costs have been increasing.
Both raw material and freight inflation were above our initial expectations, and we have continued to see costs rise as we entered the third quarter with expected sequential inflation in Q3 at a mid- to high single-digit rate with variations by region and product category.
We are addressing the cost increases through a combination of product reengineering and pricing and have announced additional price increases in most of our businesses and regions across the world.
Turning to cash generation and allocation.
Year-to-date, we've generated $388 million of free cash flow with $206 million in the second quarter, up significantly compared to previous years.
In the first half of the year, we paid $108 million in dividends and repurchased over 500,000 shares at an aggregate cost of $95 million, for a total of $203 million returned in cash to shareholders so far this year.
And as I said earlier, our balance sheet is strong with a net debt-to-adjusted EBITDA ratio of 1.3 at quarter end.
This gives us ample capacity, even after the Vestcom acquisition, to continue executing our capital allocation strategy.
Now turning to the segment results.
Label and Graphic Materials sales were up 17% ex currency and 16% on an organic basis, driven by higher volume and pricing.
Compared to 2019, sales were up 11% on an organic basis.
Label and Packaging Materials sales were up roughly 12% organically, with strong volume growth in both the high-value product categories and the base business.
Graphics and Reflective sales continued to rebound nicely compared to the trough we saw in Q2 of last year and were up 49% organically.
Now similar to last quarter, we do believe that Q2 benefited from customers pulling forward some volume from Q3, ahead of new price increases.
Looking at the segment's organic sales growth in the quarter by region, North America sales were up high single digits.
In Western Europe, sales were up mid-teens as demand in both regions increased from Q1.
And emerging markets overall were up roughly 20%, continuing their strength from the first quarter.
The Asia Pacific region grew roughly 20%, led by significant growth in India, in the ASEAN region with easier comps, given the pandemic impacts we saw in Q2 last year.
And then low -- and then we had low double-digit growth in China.
And Latin America grew over 30% with particular strength in Brazil.
And while LGM's adjusted operating margin remained strong, it decreased slightly from last year to 14.5%.
This was partially driven by the impact of supply constraints, which led to both increase in inflation and some incremental costs in the quarter such as expedited freight and overtime to ensure we had supply to service our customers' needs.
Shifting now to Retail Branding and Information Solutions, RBIS sales were up 73% ex currency and 72% on an organic basis, as growth was strong in both the high-value categories and the base business due in part to lower prior year comps.
Compared to 2019, organic growth was 14%.
The apparel business continued its strength as retailers and brands prepared for increasing demand with particular strength in the value and performance channels and continued double-digit growth in external embellishments.
Intelligent Labels sales were up organically roughly 65% and up 40% compared to 2019.
Adjusted operating margin for the segment increased to 13.1% as the benefits from higher volume and productivity more than offset the headwind from prior year temporary cost reduction actions, higher employee-related costs and growth investments.
The RBIS team has continued to deliver, increasing their top line growth and margins significantly over the last four years with margin expansion of more than four points since 2016.
Turning to the Industrial and Healthcare Materials segment.
Sales increased 39% ex currency and 33% on an organic basis, reflecting strong growth in industrial categories, particularly in automotive applications, which more than offset a decline in personal care tapes due to tougher comps.
Compared to 2019, sales were up 6% on an organic basis.
Adjusted operating margin increased 490 basis points to 11.7% as the benefit from higher volume more than offset the headwind from prior year temporary cost reduction actions and higher employee-related costs.
Now shifting to our outlook for 2021.
We have raised our guidance for adjusted earnings per share to be between $8.65 and $8.95, a $0.20 increase to the midpoint of the range.
The increase reflects the strong performance in Q2 as well as an increased expectation for the rest of the year, driven by continued strong organic sales growth.
And as a reminder, this guidance does not yet include the impact of the Vestcom acquisition, which is expected to close later in the third quarter.
We now anticipate 14% to 16% ex currency sales growth for the full year above our previous expectations, driven by both higher volume and the impact of higher prices.
In particular, the extra week in the fourth quarter of 2020 will be a headwind of a little more than one point to reported sales growth and a roughly $0.15 headwind to earnings per share in 2021.
We estimate Q1 benefited by roughly $0.15 based on the shift of the calendar and then anticipate a roughly $0.30 headwind in Q4.
The anticipated tailwind from currency translation is now roughly 3.5 points to sales growth and $35 million in operating income for the year based on current rates.
And we now estimate that incremental pre-tax savings from restructuring, net of transition costs, will contribute $60 million to $65 million, down somewhat from our April estimate as the strong demand environment has led us to delay certain projects.
And given the increased outlook for earnings and working capital productivity, we are now targeting to generate over $700 million of free cash flow this year, which is up roughly 30% from last year and 40% from 2019.
Now given the distortion in our year-over-year comparisons due to the pandemic last year, let me provide you with some color on our second half outlook in relation to the first half of this year.
There are four primary drivers which are each worth roughly $0.15 plus or minus, in the second half compared to the first half.
First item is the calendar shift I just mentioned a minute ago.
Secondly is the impact from the prebuy of volume from Q3 into Q2.
Third, there is a sequential price inflation gap in the third quarter, which we expect to close in Q4, driven by the timing of passing new pricing increases through.
And lastly, given our continued confidence in our business, we are ramping up our pace of investments to drive our long-term strategies.
So in summary, we delivered another strong quarter in a challenging environment, and we remain on track to deliver on our long-term objectives to achieve GDP+ growth and top quartile returns on capital, which, together, drives sustained growth in EVA.

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compname posts q2 adjusted non-gaap earnings per share $2.25.
q2 adjusted non-gaap earnings per share $2.25.
sees fy 2021 adjusted earnings per share range $8.65 to $8.95.

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