Avery Dennison Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the third quarter ended September 28, 2019. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. This call is being recorded and will be available for replay from 12 p.m. Pacific Time today through midnight Pacific Time October 26th. To access the replay, please dial 800-633-8284 or plus 1-402-977-9140 for international callers. The conference ID number is 21896770. I would now like to turn the call over to Cindy Gunther, Avery Dennison's Vice President of Investor Relations and Finance. Please go ahead, Madam.

Thank you, Ash. Today we'll discuss our preliminary unaudited third quarter results. 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 pages A4 to A8 attached to the financial statements accompanying today's earnings release and the appendix of our supplemental presentation materials. 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. On the call today are Mitch Butier, Chairman, President, and Chief Executive Officer, and Greg Loven, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Thanks, Cindy, and good day, everyone. We delivered solid profit growth in the third quarter, despite softer than usual market demand, with EPS once again up double digits over prior year on a constant currency basis. Our focus in this slower growth environment has been to protect, even expand our margins in the base business, while driving faster than average growth in high value categories like RFID. We're executing well on both fronts. We appear to have recaptured most of the share we recently lost in LGM, Our intelligent labels platform continues to drive over 20% growth from RFID-enabled solutions, and IHM's commercial execution continues to improve. At the same time, a relentless focus on productivity was again a key driver of margin expansion for the company this quarter. In sum, we are making good progress against our key strategic priorities and are on track to deliver our long-term financial targets. Label and graphic materials posted strong profitability on roughly a point of organic growth for the quarter, driven primarily by volume. High-value categories again grew faster than the base. As I mentioned, though all of the market data isn't in yet for the third quarter, we have good reason to believe that by the end of the quarter, we had recaptured the bulk of the share we seeded at the tail end of the inflationary cycle. In terms of global market trends, it appears that the soft market conditions that we saw in the first half of the year largely continued into the third quarter, with a modest improvement in Europe, offset by a moderation of demand in South Asia. Retail branding and information solutions delivered solid organic growth driven by ongoing strength in RFID and external embellishments, which more than offset declines in the base apparel business. As we mentioned in July, we saw trade-related uncertainty impacting orders in the second quarter. This uncertainty was reinforced when additional tariffs were announced in August. Now, while trade-related issues are causing near-term uncertainty, we are well positioned in the base business given our global footprint and differentiated product and service capabilities. As for RFID, the growth trajectory continues to be resilient. with continued strength in apparel and even faster growth from other promising verticals, though obviously off of a small base. Our total pipeline of customer engagements continues to expand, up more than 40% from just the beginning of this year, driven primarily by categories outside of apparel. As the leader in ultra-high frequency RFID, we are positioned extremely well to capture these opportunities with industry-leading innovation and manufacturing capabilities and the best, most experienced team in the space. We continue to increase our level of investment in business development and other resources to drive this growth as we build out our intelligent labels platform to enable a future where every item can have a digital twin and digital life. In industrial and healthcare materials, sales growth was relatively strong on an organic basis due in part to lapping the slowdown in China's automotive market last year. That said, given the high proportion of this segment's portfolio that is focused on industrial and markets, I'm pleased with the solid top-line performance the team delivered. And, importantly, we made excellent progress in the quarter towards achieving our operating margin target for the business. In short, another solid quarter overall in the midst of a challenging environment. Our strategies to deliver outside growth in high-value categories are working. And our relentless focus on productivity continues to enable us to increase our pace of investment in these categories, increase our competitiveness overall, and grow profitably in our base businesses while, importantly, continuing to protect and expand offering margin. While we lowered the high end of our near-term outlook for top-line growth due to recent market trends, and currency shifts caused us to reduce the high end of our EPS guidance for the year, we are confident in our ability to achieve our long-term objectives, including GDP plus growth and top quartile returns. We will continue to seek opportunities to leverage our positions of strength commercially, operationally, and financially, and, as you've heard Sidney say before, be prepared to lean forward even as others may pull back. Now I'll turn the call over to Greg.

Thanks, and hello, everybody. As Mitch said, we delivered another solid quarter, with adjusted earnings per share of $1.66, up 14% despite the currency headwind. We grew sales by 2.1% on an organic basis, And currency translation reduced reported sales growth by two points in the quarter. And our adjusted operating margin increased by a full point to 11.7%. We realized $18 million of restructuring savings net of transition costs in the quarter to impart to LGM's restructuring in Europe that was largely completed as of the end of Q2. And our cash generation has been strong. We've delivered $327 million of free cash flow year-to-date, up $67 million compared to the same period last year. As we've discussed, we've increased our pace of fixed capital and IT-related spending for a few years to support our long-term organic growth and margin expansion plans, with capital spending expected to be up by about $20 million this year. And we continue to return cash to shareholders. In the first three quarters of the year, we repurchased roughly 2 million shares at an aggregate cost of $204 million, and paid $141 million in dividends, for a total of $346 million of cash returned to shareholders. Importantly, our balance sheet remains strong, with net debt to adjusted EBITDA ticking down slightly in the quarter. Our current leverage position gives us ample capacity to continue executing our disciplined capital allocation strategy. including investing in organic growth and acquisitions while continuing to return cash to shareholders. We are well positioned to take advantage of any dislocations in the market should they occur over the next few years. Turning to the segment results for the quarter, label and graphic material sales increased by 1.2% on an organic basis, driven primarily by higher volume, as we've now lapped the bulk of last year's price increases. Growth in LGM's high-value categories, led by specialty labels, continued to outpace the growth of the base business. In breaking down LGM's organic growth in the quarter by region, North America was roughly flat, while Western Europe was up low single digits. Emerging markets also grew at a low single-digit rate, with China up low single digits and South Asia up mid single digits. Adjusted operating margin for the segment was strong at 13.5%, up 120 basis points compared to the prior year, reflecting the benefit of productivity initiatives, including restructuring and material reengineering, partially offset by higher employee-related costs. The net effect of changes in price and raw material and freight input costs was neutral for the quarter. Shifting now to retail branding and information solutions, RBS delivered solid top-line growth of 4.1% on an organic basis, driven by faster growth in high-value categories with RFID sales up roughly 20%, and external embellishments growing even faster. Our base business, adjusted for the migration of products to higher-value RFID solutions, was down low single digits. Adjusted operating margin for the segment increased 10 basis points to 11.5%, as productivity gains were largely offset by long-term growth-related investments, primarily related to RFID. Turning to the industrial and healthcare material segment, sales were up 3.7% on an organic basis, reflecting both volume growth and higher prices. Sales for industrial categories were up low to mid-single digits, driven by solid growth in auto-related categories. And healthcare categories grew even faster, up high single digits, with medical up in the high teens. And we made excellent progress on the margin front in IHM. Adjusted operating margin increased by 180 basis points to 11%, as a benefit from higher volume and productivity more than offset higher employee-related costs. Though normal seasonality does call for sequential easing in margin for the fourth quarter, I'm confident we'll achieve the 10% we targeted for IHM for the full year. Focusing now on our outlook for 2019, we have lowered the high end of our guidance range for adjusted earnings per share, reflecting incremental currency translation headwinds, largely offset by stronger operational results and a modestly lower tax rate compared to our previous expectations. We have reduced our outlook for full-year organic sales growth to a range of 2.0 to 2.3%, which implies 2% to 3% growth for the fourth quarter. As you know, in our short-cycle businesses, visibility to demand is very limited, and we've seen increased variability in order patterns from month to month. So the low end of our organic growth outlook assumes a continuation of the 2% we've seen year-to-date, including the first few weeks of October. while the high end reflects the fact that comparisons do get easier for us over the balance of the quarter. We've outlined some of the other key contributing factors to our guidance on slide nine of our supplemental presentation materials. In particular, and just focusing on the material changes from our assumptions in July, at recent exchange rates, currency translation represents a roughly three and a half point headwind to reported sales growth for the year. with the pre-tax operating income hit of $37 million, an incremental $9 million headwind relative to the $28 million we were anticipating in July. Partially offsetting this, we now estimate that incremental pre-tax savings from restructuring net of transition cost will contribute approximately $50 million. As the teams have been executing very well against our plans, and we look to deliver at the high end of our previous expectations. We realized about $35 million of these savings in the first three quarters of the year. And the tax rates should come in slightly lower than our previous outlook, which had assumed 25% at the midpoint of our guidance range. In summary, we delivered another solid quarter in a more challenging environment, and we remain on track to deliver on our long-term objectives. To achieve GDP plus growth and top quartile returns on capital, which together drives sustained growth in EVA. And now we'll open up the call for your questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. To accommodate all participants, we ask that you please limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. One moment, please, for the first question. And our first question comes from the line of Ganshan Punjabi with Robert W. Barrett and Company Incorporated. Your line is open. Please go ahead.

Hey, guys. How are you? Morning. How's it going, John? Morning. I guess first off on LGM, you know, maybe you can just give us a little bit more color, Mitch, how volumes kind of played out through the course of the quarter, which regions, you know, did you capture or share within from a geographic standpoint? Sure. What's your sense from customer as it relates to the outlook for 4Q in 2020? Are they kind of managing inventory very tightly? More optimism, less optimism? How would you sort of characterize that dynamic?

So a lot in there, Gangshan, specifically within the quarter. So basically, if you look within July, growth started out relatively soft, softened further in August, and then came back in September 2020. We're now seeing a bit of a moderation, as Greg talked about, early October again. So a little bit more of the chalkiness that we've talked through. In North America, so just from a market perspective, in the markets, we've seen pretty consistent low single-digit growth between last year and this year. Our growth, of course, was lower than that in the first half of the year because of the share losses, which we've since believed we're on the solid path to recapturing. And in Europe, we saw low to mid-single-digit growth last year, as you know, in the first half, really no growth, pretty flat environment, and we're now seeing a little bit of a pickup, low single-digit growth in Q3, mostly in southern Europe, not in north or central Europe overall. And then in, I think, China, we saw low-mid-digit last year growth, and we saw flattened first half of this year, and... We started to see some positive growth here in Q3, mid-single digit. And South Asia, as we called out, that's where we saw a shift, and it's really ASEAN. So India continues to have strong growth, high single digits. And ASEAN, specifically Malaysia and Thailand, where we're seeing some softness, which we attribute broadly to just softer market conditions and the link between the China and U.S. trade matters. So as far as sentiment within the customer, basically the sentiment reflects those market trends overall. So generally the customer sentiment, we just had a little expo recently. It was well attended by customers, particularly from Europe. The ones in southern Europe and eastern Europe sounded a little bit more confident about the near-term outlook than the ones from northern and central Europe specifically. Overall, a lot of excitement, though, about the innovations there. and a lot of interest coming from customers of what we can bring to the table to help together grow the market.

Okay, and then just my second question, you know, sticking with LGM, it looks like price is starting to kind of flatten out year over year. You know, that's been pretty consistent with what you said last quarter as well. But just kind of looking at the next few quarters, how would you have this model price mix? Do you expect a negative sign in front of that, or do you think that that will be essentially flat just like it was in 3Q? Thanks so much.

Yeah, this is Greg. So overall, we've seen pretty neutral net price and inflation here in the third quarter versus prior year, and also relatively neutral sequentially. So we've seen a little bit of sequential deflation, largely coming from some easing in paper here in the third quarter. At the same time, we've got some pockets of price down as we've seen some sequential deflation over the last couple quarters. But overall, we're looking at kind of price inflation, relatively neutral year over year in Q3, as well as sequentially. Potentially a little more sequential modest deflation we think in Q4, but not a material impact overall.

Our next question comes from the line of Adam Josephson with KeyBank Capital Markets. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Mitch or Greg, just one question on Greg's comments toward the end of the prepared remarks. You talked about seeing increased variability in your order patterns from month to month, just hoping it could clarify what you attribute that to. And then you talked about the first couple weeks in October being up low twos, similar to what you had in 3Q. But I think for the For the quarter, you're thinking anywhere from two to three, I guess, because the comps get easier as the quarter goes along. So I'm just hoping to understand those two issues a bit better. Yeah, so quite simply, Adam, the volatility, we called it out a little bit more. We used the term choppiness in demand last quarter. We're continuing to see it. What do we attribute it to? It's basically just some of the uncertainty that's going on in the environment. If you look at political uncertainty around Brexit impacting Europe, if you look at what's going on in Hong Kong, and then the trade matters tariffs, on again, off again, on again. So those are what we attribute in general the more lumpiness to. Now, it's not uncommon in LGM in particular to have a few weeks of just growth above normal or below normal, but we're just seeing it more consistent and to a somewhat larger degree. And we're talking about still within a relatively tight band. It's not traumatic swings, but we are seeing more choppiness than we've traditionally seen, and that's in LGM as well as in RBIS. As far as the other part of your question about the, I think Greg explained, Q4.

Yeah. So, Adam, this is Greg. In Q4 of last year, our strongest volume month was in October, and then volume softened quite a bit in November and December. So, we do see a little bit easier comps in the back part of this quarter. whereas we started Q4 a little bit at the lower end of our range for the quarter.

Thanks, Grant. Just one on the raw material. I think Gancham asked about raw materials or price costs specifically. You said it was flat, and you expect similar trends thereafter. Can you talk about what exactly you saw with your paper costs and your chemical costs in 3Q? Obviously, there's been quite a bit of global paper market weakness, and we're just trying to get a sense of precisely how much your paper costs fell either sequentially or year over year in what you're seeing in terms of paper prices going down.

Yeah, so I guess as we moved through this year, in the first half of the year we'd seen some benefits in chemicals as we were moving across the quarters, and then paper started to be a benefit for us in Q3. Overall, though, still I think kind of low single-digit type of deflation sequentially, very little in total with a little bit heavier in paper. So still not a huge impact, but low single-digit deflation as we came into Q3, largely from paper.

Our next question comes from the line of George Staffos with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hi, everyone. Good morning. Thanks for all the color and detail, guys. My two questions to start are around margin. One question specifically with an RBIS and then kind of a broader question on that in terms of cost saves. With RBIS, the incremental margin was 10%. quite a bit lower than what we'd seen in prior quarters. It's not totally surprising given the cadence of restructuring and every quarter can't be phenomenal. And you also called out the spending on growth within RBIS. Would it be possible to give a bit more color in terms of what some of those incremental costs might have been in the third quarter or any other sources of deceleration in incremental margin within RBIS to the extent that you can comment?

Yeah, George, this is Greg. So just as you said, you know, the variable flow through we got from the top line growth was largely in line with what we would have expected from that. At the same time, as you mentioned, as Mitch mentioned earlier, we have been continuing to invest particularly in RFID, and we had investments in the quarter of a few million dollars versus where we were a year ago. So that offsetting some of that variable flow through, otherwise generally in line with what we would have expected at that level.

Okay, George, and I think just overall, just the margins you see for all of our businesses, in particular RBIS, the expansions we've been able to achieve are, you know, I think even more impressive when you consider how much we've invested, particularly in intelligent labels, over the past couple of years. So between last year and this year, we will have added more than $20 million of organic op-ex to this business, really in the business development areas and so forth that we've talked through. and this just reinforces our strategies trying to invest more to accelerate growth in high-value categories and the relentless focus on productivity to both fund those investments as well as expand margins.

Mitch, the $20 million was over what period, did you say, the last few years? Was there a specific increment there? 18 and 19. Okay, thank you. And then my second question, you know, when we consider – the restructuring. I think you said you had $35 million of savings year-to-date. If I heard that incorrectly, if you could put in the correct number for us. And $50 million is the goal. For this year, what's next? Obviously, Avery always focuses relentlessly, maybe to use your term, on productivity. Some of it's driven by the growth initiatives that in turn drive The ability to then restructure once you get the top line growth, sometimes it's driven by the investments that you make. Obviously, you've had a new coder come up. You know, what kind of pace on productivity should we expect over the next couple of years within your segments? Would we see a bit more perhaps in one segment versus another? Thanks.

George, you're not going to get into specifics of that. Just overall, I think you've captured it. This is a key strategy of ours. It's one of the key four strategic pillars, the relentless focus on productivity. We see restructuring as one of a number of levers to pull, our constant focus on material reengineering, Lean Sigma, our key tenets of our strategy, and restructuring we think of as innovation of our fixed cost structure. We will communicate that as we normally do with annual guidance on what to expect for the given year, and as we roll out these programs and so forth. So we're not going to comment on any specifics now, but I think the overall long-term strategy, you should expect that to continue to unfold.

Mitch, the pace should be fairly comparable from what we've seen over the last few years, not calling it dollar by dollar, quarter by quarter, but no reason to expect that to decelerate over time? Over a couple-year period, yes.

Individual years can be up or down, as you know. Yep. Perfect. Thank you.

Our next question comes from the line of Jeff Sikowskis with JPMorgan Securities Incorporated. Your line is open. Please go ahead.

Thanks very much. In your LGM business, I think you said that your organic growth in North America was flat in the quarter. Can you remind me what the trends were in the first two quarters of the year, and can you talk about why North America is so slow?

Yeah, so organic growth was flat in the quarter overall. And in the first half, you know, I commented that the market overall had been growing low single digits, but we did have the share losses that we talked through within that business. And the market comments I'm saying are in volume, and our growth I'm commenting on is organic growth. So we've had the positive impacts of pricing and negative impacts from some of the share loss and volume.

Right.

I mean, it sounds like the North American – is it fair to say that the North American market is slowing down and the Chinese market is accelerating a little bit sequentially? Or you can't tell that as it's more, you know, both markets are – We don't have data for Q3 yet, Jeff.

We don't have – sorry to interrupt. We don't have data yet for Q3 in North America. But if you – from our own market intel and just what we've seen, it's been fairly consistent, just low single-digit growth growth. So that's not our revenue growth as far as volumes. And in China, China had been on a decelerating trend and then started to bounce back here in Q3. Not decelerating to negative, meaning from upper single-digit growth a couple years ago to mid-single-digit growth to low single-digit growth, and then to flat in the first half of the year, and now we're starting to see a rebound here.

Okay, great. Thank you so much. Our next question comes from the line of Joshua Spector with UBS Securities LLC. Your line is open. Please go ahead.

Yeah, hey, guys. Just a question on IHM. So it's rare we've been hearing about industrials' growth broadly, and you guys printed a pretty good quarter. Just wondering how much of that is an easing comp versus a tough comp last year versus real growth in some of those markets?

Yeah, thanks. This is Greg. So, overall, I think we, as you said, we feel good about our performance against a generally weaker industrial backdrop. There's a few areas where, in addition to the fact that last year, certainly from a comp perspective, was when we really started to see the China auto market slow. So, that was a year-over-year benefit. But in addition to that, our medical business, as you've heard us talk about over the last, it was our fourth straight quarter, I guess, where we've had growth in the high teens in our medical business. So that business continues to perform very well, and it's certainly been taking some share in some targeted applications. We'll start to lap some of that high-teens growth here as we go into the fourth quarter, but feel very good about how that business has performed over the last year. At the same time, on industrial, for us, this is really an application-by-application-based business. And here we also feel like we've won some share in some targeted applications in areas such as building construction tapes in North America, as an example, is an area we continue to grow very well in. It's a little bit easier comps on automotive, but still automotive market as a whole this year or in Q3 was still down, auto production globally, and we did grow in that kind of low to mid-single-digit range. So good about the performance here, as you said, against generally weaker industrial.

Okay, that's helpful. And then on the LGM side, in terms of you guys feeling that you got back most of your lost share, if the market remains kind of tepid here, do you see any risk of more share shifts back and forth? you know, maybe some context in prior cycles with, you know, slower general growth. Is there a lot of kind of back and forth or price pushes to try to gain volumes back now that you've kind of got your share again?

Yeah, generally when we see the share moving around, it's usually in periods of change. So rapid inflationary environments or deflationary environments is when we tend to have seen it, particularly at the beginning or ends of those cycles. So if we were to go into slow growth, if that's your question, but stable environment, we haven't experienced that for the same period of time in our industry. Our industry is more resilient than that. But if we were to, I have nothing in our history to tell us that that would cause more variation in share positions.

Okay, thanks. Our next question comes from the line of John McMilte with BMO. Your line is open. Please go ahead.

Yeah, thanks for taking my question. With regard to the margin improvement that you've been seeing from the cost cuts, it sounds like you're going to end the year certainly higher than you started the year at. So I guess when you think about the year-end run rate for 2019 and how we should think about kind of the improvement that you can see in 2020 without any incremental cuts, I guess how should we be thinking about what that incremental bridge is from 19 to 20 based on the cost cuts you've already put through?

Yeah, so just based on kind of cost reduction, we would expect carryover from a restructuring perspective into 2020 of somewhere in the $20 million to $25 million range. A lot of that driven by the European restructuring that we've talked about quite a bit, but that savings really started to kick in at the end of Q2, beginning of Q3 of this year. So I think we have that as a tailwind going into next year. At the same time, we have some headwinds such as currency translation, which is a headwind for us here in the back half of this year. It'll be a headwind then in the first half of next year if we stay at these rates. And a few other items as headwinds, I think, as well there. But overall, caregiver restructuring about $20 million to $25 million.

Got it. Great. And then with regard to, I think you had said autos were actually up in the quarter. And I guess we understand that there were some relatively easy comps. But admittedly, you may be the only company we look at that actually had a positive rate. auto numbers. So I guess, what's driving that? Is that new vehicles that you're on? Is it new applications that you're finding per vehicle? I guess, how should we think about what's really driving that growth when auto comps are clearly going down?

Yeah, so a lot of our auto growth in the quarter actually did come in China, where we had some significant declines, as we talked about over the past year before this quarter. But that market had really slowed, and we saw some While that market is still soft overall from an auto production perspective, we did see some of our business start to pick up a little bit in the third quarter. So that's really been the biggest area of automotive growth here in Q3.

Great. Thanks very much for the call.

Our next question comes from the line of Anthony Petanari with Citigroup Global Markets Incorporated. Your line is open. Please go ahead.

Good morning. In RFID, it sounds like non-apparel opportunities are going better than you initially expected. And I think in the past you've identified food, beauty, aviation, and logistics as kind of four markets that were real opportunities outside of apparel. I'm just wondering if you can provide any color on those four markets, maybe broadly, and if there's, you know, anyone in particular where you're seeing, you know, customer wins or where customer adoption has been kind of faster than you've expected or anything that surprised you there.

Sure, Anthony. So overall, the speed at which we've been able to build the pipeline has been rapid, and I don't think we gave projections about what we expected, but we are hitting our ambitions on that. And as I mentioned, most of the growth in the actual pipeline is for categories outside of apparel. Specifically, the biggest growth driver of that has really been within the food category. So foods, we have quite a few programs in the pipeline that we're working. As far as the actual growth, The growth level is high in percentage terms, but it's off of a very small base. So our focus here is leverage the strengths that we have within the apparel segment, both from a business development as well as innovation and manufacturing capabilities, and identify other end markets where there are similarities to apparel that we think are ripe for adoption and begin to build that. We're having some wins along the way, but a lot of the revenue right now outside of apparel, a lot of them are at the pilot stage and so forth to pilot revenue. There's a couple moving to full adoptions, but it's relatively small, less than 10 programs. So the vast majority of the pipeline is still early stage, and for us it's really the growth opportunity, particularly in the 2021, 22, 22 beyond is what we're really focused on as far as when it starts to become much more meaningful numbers.

Okay, that's helpful. And then just sticking with RBIS maybe more broadly, you referenced uncertainty around tariffs. Did you see kind of a pull forward in RBIS demand in maybe the first half with Chinese customers trying to buy ahead of potential tariffs on apparel? Or are you seeing customers more kind of sitting on the sidelines? Can you say anything about sort of customer inventory levels currently and, you know, when they can resume kind of more normal buying patterns?

Yeah, so overall, we just saw tentativeness. We talked about the base apparel business slowing a little bit already, the rate of growth slowing in Q2 already, and it further moderated here in Q3. We didn't see people trying to buy ahead of time because it was just there was tentativeness and people in general were just slow to move overall. When we look at what's going on, our growth trends, when we talk to other players in the segment, suppliers, people who provide threads and so forth, what they're seeing is similar to what we are seeing. Now, when you talk about actual at the retail and brand level, you have some retailers, some brands that are doing phenomenally well and others that are struggling. So there's a bit of a mixed bag, if you will, as far as what's going on in the retail environment. So we didn't really see – inventory builds or anything. If you look at the inventory trends, inventories dropped dramatically in 2018, built up a little bit at the end of last year, beginning of this year, but then have already started depleting again. And these are levels that are near all-time lows right now as far as inventory levels, which I think just shows retailers and brands focus on the need for faster supply chains and lower inventory levels in this more uncertain environment, which just further reinforces the adoption of RFID. Got it. Got it. That's helpful.

I'll turn it over.

Our next question comes from the line of Rosemary Mirbelli with Gabelli & Company, Incorporated. Your line is open. Please go ahead.

Thank you for taking my question. I was wondering if on LGM you have obviously reached your margin target. It is a strong level. You are done with restructuring Europe. How much more do you think we can see this target improving? I mean, not the target, but the margin itself.

Yes, Rosemary. So we said it's already 12.5% to 13.5%. As you said, we are in the the upper end of that targeted range, when we set those targets, two times we'd set long-term targets, we continually raised them, and we said that we were focused on and we saw the opportunity for more, and so we expanded them at that time. At this level, this business's returns are at a multiple of the cost of capital. So for us, we're not looking to adjust targets or anything for any of our businesses right now, Some are within them, ones below it, making good trajectory to get within, and another being RBS is above it. We're not going to adjust our targets or comment on that at this time when we set our next set of long-term targets. We'll adjust accordingly. But I think the key message here is we've got a good growth, high-return business here in LGM that we feel great about our position and prospects for.

All right. Thank you. And then I was wondering if you could touch on M&A and the potential of – kind of seeing something between maybe not now and the end of the year, but over the near future?

Yeah, so in M&A, timing is always tough to call. Pipeline's full, a lot of engagements. I will say prices remain stickier for longer than we probably would have previously anticipated. So we're going to be disciplined as we go through this. Our focus here is disproportionately focusing on areas that will increase our exposure to high-value segments, And calling something specifically within announcing in a three-, six-month period is just too tough to call. So not going to comment on that specifically.

All right. Thank you.

Thank you.

Our next question comes from Milena Paratosh-Misra with Berenberg Capital. Your line is open. Please go ahead.

Great. Thank you. So in your IHM segment within the medical products, is there any specific product launch or application that is driving the strong growth?

Yeah, it's a pretty broad base for us across our applications, and we continue to grow well in some of our core business. We've also been growing in some of our antimicrobial business, what we call CHG, that we've launched over the last year or so. So we've seen a little bit of growth coming from new products from that perspective, but pretty broad-based across our portfolio over the last few quarters.

Got it. And then a follow-up on the RBIS segment. I think you mentioned something on embellishments. So how big is that, and what do you think that growth rate is sustainable?

Well, we think this business can grow at a pretty high clip, well above the average, and it's been above 10%, above 20% this year. The business is less than 10% of overall RBIS, and so it's relatively small. We've been talking about this for a few years and started off from essentially nothing about five years ago and been growing it, but it's still sub-10%. So we see a good amount of opportunities to continue to expand it. This is taking our capabilities, both innovation and product capabilities, as well as our manufacturing presence to basically move from trim and having embellishments inside the garment to outside the garment. And the key driver for growth right now for us is in the European soccer clubs.

Appreciate it. Thank you, guys.

Our next question comes from the line of Chris Capps with Loop Capital. Your line is open. Please go ahead.

Yeah, hi, thank you. Just to follow up on the dynamics around your comments about gaining back market share within LGM. So you said that in the past you've talked about when these things happen, you tend to lean on superior service and quality more so than price as a means to get back share. Can you just characterize if that's sort of, you know, what the tactics have been in this instance, as you said, to gain back share? the share that you did or be in a position to gain back the share, at least it sounds like you characterized it that way.

Yeah, so primarily the tactics are if some business moves away for a bit is be patient and diligent. And we know that we've got superior service and quality and just continue the dialogue with those customers and eventually the share rebalances. The other thing that happens is we went from the last price increase when we were at the end of the inflationary cycle to in some areas, some commodities, seeing some deflation. So where we saw that we had a relative price premium that was maybe outside of the targeted band that we think a particular product or solution warrants, we will then adjust at that level. So there's some price in there to be focused on being competitive, and that's not broad-based. That's maybe targeted areas. But the overall focus here is be patient and diligent. We've built tremendous capabilities as far as service and quality, and be confident in that and let it play out for a few quarters.

And if I could just follow up on that, would you characterize the regained market share consistent by region and then getting more granular on that? Is it enough to explain why this – the sales growth in Southern Europe and then in North America where you were flat, if you gained back shares, that suggests that the overall market was negative in the quarter. Thanks.

So it's important. Our share gain comments are mostly sequential comments. So the share gain was not relative so much to Q3 of last year. It's more from the first half of this year. So when we're talking about market growth, the comments that we made, those are year over year. So the share game was not a driver of year over year growth as much as it was sequential.

We have a follow-up question from the line of Adam Josephson with KeyBank Capital Markets. Your line is open. Please go ahead.

Thanks for taking my follow-ups. I appreciate it. Just one housekeeping one and one on sustainability. On the housekeeping one, Greg or whomever, the Chinese yuan has strengthened quite a bit in recent weeks. So can you help me with what FX rates you're using for 4Q?

Yeah, so our euro rate is just under 110 in the quarter, so I think 109-point-something in the quarter for the euro. And the RMB is a little over 0.14 for the quarter. Okay.

And just on that, Mitch, on sustainability, there's a lot of talk about potential shift out of PET bottles toward aluminum, just given CPG companies' desire to rid themselves of plastic to the extent possible. Can you just give us your view of this whole sustainability movement and talk about what, if any, impact you're seeing on your business? I would assume it's negligible, just given the types of labels that go on those bottles. But anything more, I would appreciate it. Yeah, so the largest primary focus right now is really around single-use plastic containers. And there's varying definitions for what that is. But if you think of water bottles and straws and so forth, pressure-sensitive labels are going very few of those products. And that's where you're seeing a lot of the migration over. In general, my view is that there is an appropriate focus on sustainability of packaging in general. It's a key focus of the industry. It's a key focus of ours. We've been – we're out in front of many companies, especially packages, of making sustainability a priority. And I'd say the first wave of that was more around improving the sustainability of our own business. Dramatically, we've reduced greenhouse gases by 30% over the last number of years. Buying more sustainably sourced raw materials, such as more than 90% of our paper that we procure is sustainably certified. such as for stewardship council. So that has been the focus, and now more recently we've been shifting more and making sure that our products make recyclability much more easy and efficient. So we think this is an overall longer-term trend for us. We see this as something more of a longer-term drive. We think it's important. We're the market leader. We're increasing our level of investment and innovation in this space because we intend to lead here. Thank you.

Our next question comes from the line of George Saffos with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hi, everyone. Just a couple of questions on topics that come up periodically on your calls regarding displacement types of technologies relative to your core products. When we were at Pack Expo recently, we saw, it seemed to us anyway, a lot more commentary by some of the other packaging providers around direct printing on secondary packaging, which obviously if that really took off and it was scalable, you know, would have some threat, present some threat to labeling and percentage of materials. Mitch, what are you seeing in that regard? Are you seeing a little bit more activity there from competing technologies or Are you not? Would you agree with our perception that whether or not it's a threat, you're seeing a little more activity from competing materials and competing technologies, I should say? And then, similarly, it comes up periodically. Are you seeing any increased attempts by brand owners and retailers to not necessarily go down the RFID path but use other technologies to track products through the supply chain? without having RFID, other revision systems, or other things like that. Thank you very much, and good luck in the quarter.

Thanks, George. Yeah, so specifically as far as other labeling technologies and commenting on direct print, we've actually been engaging with a number of firms on the direct print front for a number of years now, so we've seen some activity here. The technology, what we see as far as the economics of it, is still pretty far ways off. So we're actively engaged. I think a number of people are playing with it and working through, but it's really going to be in the small volumes premium side of this industry. As far as the use of other technologies to track products, we've been consistent in saying when we think about the Internet of Things and everything physical having a digital twin and digital life, we've said RFID is one of a number of enabling technologies, and there's a number of areas where RFID a wireless radio-based connection will be required. Others where you maybe have more clear line of sight, less skew complexity and so forth, you can be using other technologies. So we think there's going to be a complement of technologies that enable that future overall. So that's not – we're working with a number of those companies and well aware of that and see this is actually a space where multiple technologies will prosper.

Thank you very much. Thank you.

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

Okay. Well, thank you, everybody, for joining. Overall, another solid quarter. We're confident in achieving our long-term targets, which once again reflects the resilience of our industry-leading market positions, the strategic foundations we've laid, and our agile and talented workforce. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.