Avery Dennison Corp (AVY) — Q3 2017 Earnings Call Transcript

Thank you. Today, we'll be discussing our preliminary unaudited third quarter results. The non-GAAP financial measures that we use are defined, qualified and reconciled with GAAP on Schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we will 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, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Thanks, Cindy, and good day, everyone. We delivered another strong quarter. Sales were up 10% excluding currency with 5% coming from organic growth and another 5% from acquisitions. Adjusted EPS was up 25% for the quarter, and we raised our earnings guidance to reflect a better than 20% increase for the full year. LGM delivered solid top line performance, with organic growth rebounding in the quarter, as expected, along with continued strong profitability. The consistency of results from this high return business is a key strength of ours. RBIS also had another strong quarter. The transformation of our business model here, becoming more competitive, faster and simpler, is enabling continued margin expansion and is clearly resonating with customers as evidenced by another quarter of strong and broad-based sales growth. And we continue to make progress building a stronger position in IHM. Operating margin declined for this segment in the third quarter, reflecting acquisition-related costs, as well as the near-term operational challenges we discussed last quarter. We'll overcome these challenges in the coming quarters and expect to deliver significant value from this segment over the long term, as we leverage LGM's strengths to target attractive end markets where we are underpenetrated. As I look across the company's portfolio, I'm pleased with the progress we are making against our key strategic priorities, driving profitable growth and superior returns. Our focused investment to capture the above-average growth and profit potential of high-value categories is clearly paying off. Sales in high-value categories are up again high single digits organically this year, reflecting strength in specialty labels, industrial tapes and, in particular, RFID. We anticipate full year organic sales growth for RFID products this year will come in close to 20%, driven by multiple customer rollouts and new programs. At the same time, in the base businesses, within each of our segments, our disciplined approach to balancing the trade-offs between volume, price and mix, combined with our relentless focus on productivity, is driving solid growth and, of course, margin expansion. Product reengineering, Lean Sigma and the effective execution of our multi-year restructuring plans remain key to our success. And finally, our capital allocation strategy continues to drive our resourcing decisions as we pick up the pace of investments to support profitable growth, both organically and through M&A. The acquisitions we have completed over the last 50 months have added scale and complementary capabilities to our core businesses, supporting our long-term strategy for value creation. At the same time, we remain committed to consistent and disciplined return of cash to shareholders, both through dividends and share buyback. Overall, I'm pleased with our steady progress against our long-term goals, reflected in another consecutive quarter of strong results. Our consistent performance reflects our market-leading positions in solid growth market segments, including exposure to faster growing emerging regions in high-value categories, the strategic foundations we've laid and the depth of talent in the company. Now I'll turn the call over to Greg.

Thanks, Mitch. And hello, everybody. As Mitch mentioned, we delivered another strong quarter, with earnings coming in ahead of our expectations. Our adjusted EPS was up 25%, driven largely by strong operating performance. We grew sales by 10%, excluding currency, and 5.3% on an organic basis. And currency translation added about 1% to reported sales growth in the third quarter, with an approximately $0.02 benefit to EPS compared to the same period last year. The reduction in the tax rate also contributed roughly $0.05 to EPS in the quarter versus last year. Our adjusted operating margin of 10.4% improved by 60 basis points versus the prior year, as the net benefits from higher volume and productivity improvements more than offset higher employee-related costs. Productivity gains this quarter included approximately $14 million of net restructuring savings, most of which benefited our RBIS segment. And our adjusted tax rate was 28% in the quarter, which is consistent with the guidance we provided in July and down from 31% for the same period last year. In year-to-date free cash flow, we've generated $256 million, up $8 million compared to the same period last year. We continue to expect free cash flow conversion for the year of nearly 100% of GAAP net income. Our balance sheet remains strong, with ample capacity to continue investing in the business, including funding M&A, as well as continuing to return cash to shareholders in a disciplined manner. In the quarter, we repurchased approximately 400,000 shares at an aggregate cost of $35 million, and net of dilution, our share count declined modestly. We paid approximately $40 million in dividends in the quarter as well. Now let me turn to our segment results. Label and Graphic Materials sales were up 7% excluding currency, reflecting 2 points of benefit from acquisitions, including Mactac, which we acquired at the beginning of August last year, as well as Hanita and Ink Mill. Our organic sales growth of 5% represented a rebound from a slower pace we reported last quarter, as the timing effects we highlighted during our last call played out as we had expected. These timing effects reflected the shift of sales that are both the second and fourth quarters, and we continue to expect that organic growth for the second half of the year will be roughly 4% in this segment. Consistent with our strategy, LGM's high value product lines continue to grow faster than the base business, with relatively broad-based strength across most of our high-value categories. Regionally, organic growth reaching mature markets of North America and Western Europe were both solid, with Europe rebounding from the slower pace we saw in Q2, as expected. Growth in emerging markets also rebounded from our Q2 pace, and when we adjust for timing effects, China, ASEAN and India all grew organically at high-single to low double-digit rates in Q3, while Eastern Europe and Latin America both posted solid mid-single digit growth. Operating margin for the segment also remained strong. Our ongoing productivity efforts in material reengineering continued to help us expand the market for Pressure-sensitive Materials and maintain our cost advantage, allowing us to grow profitably across various raw material cycles. For the quarter, LGM's adjusted operating margin of 13.1% was up 40 basis points compared to the prior year, as the benefits from productivity and higher volume more than offset higher employee-related costs and a negative net impact from pricing and raw material costs. As we anticipated, overall commodity costs were up modestly compared to the prior year. As you know, our raw material costs tend to differ across regions and individual categories. We continue to monitor movements within each market, and adjust our prices where appropriate. While our overall raw material costs have been relatively stable this year, we do anticipate some modest sequential inflation in the fourth quarter. We're in the process of implementing some targeted price increases accordingly. So now, I'll shift to the Retail Branding and Information Solutions segment. The RBIS team delivered another excellent quarter, as the team continues to execute extremely well on its business model transformation, enabling market share gains while driving significant margin expansion. Regional empowerment has moved decision-making closer to the market and improved local accountability, helping turn speed and flexibility into competitive advantages. We also continue to build a more efficient cost structure here. RBIS sales were up 7% organically, driven by strength in both RFID and the base business, combined with some benefit from holiday timing. The strength was broad-based, spanning most market segments and product categories. We believe that we continued to gain share, as we see our volume growth outpacing apparel unit imports. Sales of RFID products were up more than 25% in the quarter, and sales of external embellishments, another high-value category for us, were up by low double digits, as our heat transfer solutions got an extra sales lift, related to next year's World Cup. Adjusted operating margins expanded by 170 basis points to 8.7%, driven by the benefits of higher volume and productivity as well as the anticipated reduction in intangibles' amortization. These benefits were partly offset by higher employee-related costs, including incentive plan accruals, reflecting this segment's strong performance against targets relative to last year. Finally, turning to the Industrial and Healthcare Materials segment, with the benefit of the Yongle, Finesse and Mactac acquisitions, sales rose 50% excluding currency. Organic growth returned to a solid 3.5%, following the anniversary of the bulk of the headwinds we've been facing in the healthcare category, and we saw solid organic growth for both the industrial and healthcare categories in the quarter. Operating margin declined by roughly 3 points due primarily to acquisition-related costs. As Mitch mentioned though, we have fallen short of our productivity targets for the underlying business, and we are refocusing our efforts to drive productivity while continuing to invest to support growth. Over the coming years, we expect to see operating margin expand to LGM's level or better here. So turning now to our outlook for the balance of the year. We have raised the midpoint of our guidance for adjusted earnings per share by $0.10 to an updated range of 490 to 495, reflecting the strength of our underlying operating results. We outlined some of the key contributing factors to our EPS guidance on Slide 9 of our supplemental presentation materials. Focusing on the factors that have changed from our previous outlook, we now expect reported sales growth of roughly 8% for the full year, and at recent foreign exchange rates, we estimate that currency translation will be roughly neutral to sales and earnings for the full year. We also now expect incremental restructuring savings of approximately $50 million to $55 million, primarily due to rising confidence that we'll realize the full benefit from planned actions for the year, as well as the execution of a few projects a bit earlier than expected. We expect average shares outstanding, assuming dilution, to be approximately 90 million shares. Our other key assumptions remain essentially unchanged from what we shared last quarter. To wrap up, we're pleased to report a strong quarter of continued progress into our long-term strategic and financial objectives. With that, we'll now open the call up for your questions.

I just had a couple of questions on LGM. First is around the mix shift that you noted to the higher value-added product. Can you talk a little bit about when that started to occur and how long you think that could maybe last into, say, 2018 or is this a multiyear trend and around that?

Yes. So overall, what we're seeing in the quarter is higher growth in our higher value categories in every segment. And, Scott, that's part of the overall strategy that we've laid out. Not just for the year but for the long-term to shift the portfolio mix more towards these higher-value segments because they have higher growth potential, higher-margin profiles. That's going to be both our source of targeted investment, both organically and in M&A. What we're seeing in the quarter, every quarter will have a little bit more or less, but it is consistent with the theme of what we're trying to drive up for the long-term.

Okay. And within that, I thought I heard you say price/cost spread in the third quarter was maybe a little bit negative and might be negative into the fourth quarter. Just correct me if I heard that wrong. And then just for the full year, when we look at price/cost spread, do you think you'll end positive or neutral for the full year?

Yes, I think overall, as I mentioned, we do see material costs tend to differ a little bit across regions and categories. Overall, the impact on the quarter was relatively modest, and it was in line with what our expectations were for the quarter. Overall, we're seeing a few pockets of inflation in some specific areas, areas such as paper in Europe and Asia. Our approach to deal with these is pretty consistent with what we've done in the past. We've focused on material reengineering, to try to reduce the costs of our materials where we can, and then we look to pass inflation onto pricing as necessary as well. Overall, we did have a little bit of modest inflation this quarter and expect to see a little bit of modest inflation in Q4 as well. We also had a little bit of carryover price headwind from the prior year, as we're still in pretty much a deflationary environment through the beginning of this year. So a little bit of carryover there. But overall, at this point, we're seeing some modest inflation trends and looking at some price increases where necessary. An example of that, in China right now, we're seeing some increases in paper, and we're in the process of implementing some price increase actions in China in early October as well to deal with that.

Okay. Thanks, Greg. Just one last one for me. When I look at the organic growth in the quarter, it was up 5.3%. If I look at the full year guide, you're basically guiding to a 4% organic growth rate in the fourth quarter. Obviously, a slight moderation from Q3. But is there anything in particular, whether it's RBIS or LGM that we should be thinking about where that moderation would come from?

Yes, there are a few timing-related impacts that we talked about last quarter, about some timing in Q2 that led into some timing impacts in Q3. A little bit of impact from the timing of the Chinese mid-Autumn festival, which was in September last year, fell in the first week of October with Golden Week this year. But also, I mentioned the price increase we've implemented in China here in early October led to a little bit of a prebuy for us in the third quarter in LGM. So overall, we still expect, on the LGM side, about 4% organic growth in the quarter or in the back half. That basically translates into the total corporation deal as well.

Yes, so Scott, Q3 benefited from a pull-in from Q2, with a little bit of pull-in from Q4 to Greg's point. The other thing I'd highlight is a little bit tougher comps in the fourth quarter as well. Overall, as far as the expectation of us to continue delivering on the long-term organic trends that we've laid out through 2021, is something we continue to expect to do, adjusted for these calendar shifts and tough comps or easy comps quarter-to-quarter.

First, as a clarification question on the 5.1% core sales in LGM, how does that break out between volumes and price mix?

Yes, we had a little bit of a headwind from pricing. Again, most of that was carryover, as we talked about a minute ago. But largely, volume-driven growth in the quarter drove the majority of our organic growth.

So price mix was also negative through the year-over-year, or is it just you're afraid of price/cost?

Price mix was a slight modest headwind, I think, in the quarter as well.

Okay. And then in terms of RBIS, it seems like broad improvement across both the tags business and RFID as well. Is this due to share gains in your tags business in the context of all the turmoil in retail apparel? And also, how are your customers starting to think about 2018 in terms of the volume outlook there?

Yes. Short answer is, yes, there is continued share gain. We've been talking about that for a number of quarters now, in the base business. Clearly, our differentiated position in RFID allows us to continue to drive growth and penetration of that new product platform. If you look at just apparel import units, they've been — if you look at them within the U.S., they are up less than 1% for the last 6 months, and they're down around 1% in Europe. So the overall apparel imports that you're seeing into the mature regions, still pretty anemic growth or flattish overall. The growth we're showing is share gain. As for the outlook for next year, I can't give one comment that describes what's going on. It's really unique, retailer by retailer and brand by brand. Overall, you can see the focus that retailers are having towards driving more towards omnichannel. That's something we're working with each of the retailers and brands to help support them in that transition, a place where our position in RFID continues to make us a key strategic partner for them, as they look to make that transformation.

Okay. And then just one final one, Mitch, on cost savings in 2017, obviously, that's been a nice tailwind for you. How should we think about any benefit in 2018? And also, can you just comment on what drove the upsize in savings for 2017 as part of your revised guidance?

Ghansham, this is Greg. I think, overall, revised guidance for this year, as I mentioned, was really driven by just continued confidence in our ability to execute on our strategy, particularly in the RBIS strategy that they've been executing against this year, and really delivering solidly against. For next year, I think you could expect — we've said this year, we have $50 million to $55 million restructuring savings, roughly half of that is carryover. We look at basically $20 million or so of carryover into next year as well.

I just want to highlight, this has been a consistent source of strength of ours. The innovative way the team keeps looking for to continually find ways to reduce cost, whether it be material reengineering or deploying Lean Sigma or restructuring activities. We consistently look for new opportunities to restructure our business and lower our fixed cost base, so that we can continue to expand margins and be competitive and grow profitably within the base. So that's the carryover, and we're continuing to look for new opportunities over the strategic horizon as well.

I just wanted to come back, just — I guess, Scott's line of questioning, and just one last point. You're out in the market with some pricing increases, I think you termed them as modest. I think you also said you're seeing some moderate headwind from cost in the fourth quarter. Net-net should we assume, therefore, the price cost should be, given what you know right now, basically neutral in the quarter? Or could it still be a headwind for you in 4Q or maybe a tailwind? How would you position us given what you know right now?

I think modest headwind year-over-year. Sequentially, relatively neutral, I think, as we look from Q3 to Q4. So a little bit of modest increase in inflation and a little bit of pricing actions that are offsetting part of that.

Next question I had, if we can jump around a little bit to RFID. You mentioned, I think, for the year, you expect volumes to be up nearly 20%. Can you comment at all in terms of what progress you're seeing in terms of installations, customer adoption, which may be running at a different rate relative to the actual growth in the consumable?

Yes, so we're seeing a few retailers and brands adopting right now and are maybe in their second or third quarter of the adoption ramp, which is when things tend to pick up. We also have a number of customers just due to their own seasonality seeing a sequential pickup from Q3 into Q4. The pipeline remains healthy, and we continue to work with customers on adoption. The amount of activity we have is consistent with what we've seen over the last couple of years as far as various customers in various stages of adoption.

Mitch, given the pipeline of trial and seasonality, do you think that you can continue this kind of growth rate into 2018 for RFID, recognizing it's not 2018 yet in terms of when you typically would give the outlook for the year?

Yes, we've communicated we expect this business to be able to grow 15% to 20%-plus over the long-term. We'd expect to see that going into 2018 as well. Having said that, a large part of that around next year would be just from rollouts that are going on right now, as far as new rollouts, when firms decide to actually adopt. It takes 6 to 9 months from decision to actually ramp-up, so a lot of this is just from rolling out what we currently already see. Clearly, towards the end of next year and beyond, that will be for new rollouts where decisions have not yet been made. The average for the quarter is not a great way to look at it because of all of the calendar shifts that we've had. In China, as Greg mentioned, a little bit of ramp-up because of the prebuy for the price increase we've had. In India, we did see a bit of progression positively, that has more to do with the fact that there was some goods and services tax that negatively impacted us both in Q2 and Q3. That started to show a positive trend as we went throughout. In ASEAN, Q3 overall had higher growth than we saw in the first couple of quarters but was also impacted by some of these timing effects as well. Overall, if you remove the noise, I'd say China was solid consistent growth with what we've seen in previous few quarters on a normalized basis. India is starting to pull out of the whole from GST. ASEAN continues to have strong upper single-digit growth.

On the LGM side, it seems like we've seen an uptick in project announcements from competitors. Is there any reason to think the competitive environment could be a little bit tougher in 2018 as some of these projects come online? From a capacity perspective, do you have anything kind of notable on the horizon beyond the project in Luxembourg?

We've announced the projects that we're actively pursuing today, and we will announce any new future investments at the appropriate time. Overall, with the amount of investment that's been going on within the industry, we think it's commensurate with the industry's growth. The industry has been growing on a volume basis around 4% globally. North America has gotten a lot of attention around the recent increase in investment over the last few years, but there had been a long period of no investment before that. We see this as just basically catching up with what the market needs for overall growth investments. Our biggest investments right now are the ones we've announced in Luxembourg as well as we've got a new coder within China as well.

Okay, that's helpful. Then switching to IHM, can you remind us when the integration costs that you're seeing with Yongle, when you expect them to recede? Is it possible to give maybe kind of a cadence of margin expansion that you might expect into the end of the year and maybe into the first half of 2018?

Yes, I think overall, we, as we said, had some headwinds in Q3. We expect continued headwinds or additional headwinds in Q4 from a margin perspective from the Yongle acquisition. We expect to contribute roughly $0.10 increase next year in earnings from Yongle. We'll start to see that pass us as we get into next year from a Yongle perspective.

Just one on the cost inflation issue. I know you talked about just modest sequential inflation in 4Q. As you know, there's been quite a bit of resonant pulp inflation, as a result of which, there have been several chemical and packaging companies that have called this out as a pretty significant impact on their fourth quarter results. You guys are really not seeing it. I remember back in '08, '09, fluctuations in raws had a major impact on PSM margins. But that doesn't seem to be the case this time. So can you just talk about why the impact on your business might be considerably more muted than that on some of your chemical impacts and competitors? Also, what kind of paper do you buy? Just so we better understand.

Right. So I'll start with the first question. I think overall, one thing I think it's good to remember is our breadth across geographies. Given how broad our geographic spread is, what we're seeing right now is pockets of inflation that are different in different categories and across different geographies. You might see a little bit of chemical inflation in North America, still relatively modest to us in that region, whereas, we're not seeing that necessarily across all other regions. So right now, it's still kind of in pockets, in different categories across different geographies. Relatively modest across each of those individually. I think some of our — just the breadth of our geographic scale, as I said, strong vendor relationships, and good material science ability to manage through that as well, gives us the ability to manage through some of those potential challenges that you mentioned.

And, Greg, just on the paper you're buying in all these regions, just so we better understand what we can look for to see what might be inflationary or not?

Yes, it's typically specialty papers, Adam. Not 100% linked to pulp, for instance, as you mentioned yourself. What I can tell you is that we're seeing a little bit of paper increases in Europe and a little bit of paper increases in China. We're not seeing much outside of that at this point in time. That's where we're seeing a little bit of headwinds right now. That's why we've done some pricing actions accordingly in both of those regions to deal with that.

I just want to emphasize what we're talking about because I know that everybody is seeing what other companies are reporting on and so forth. The amount of inflation we're actually experiencing is extremely modest. In aggregate and by region, in places where it's larger, we are offsetting the amount we can through productivity or put in through price increases. It's the same playbook we've had for years, and we'll continue to execute. I think you've seen through our results, we've continued to be more and more disciplined about how we manage our business and the dynamics between volume, price, and mix. The decline you talked about a number of years ago relates mainly to two things. One, the amount of inflation was significant back then. Two, the margin declines you saw was just because of the one-quarter delay generally between our pricing trends and what happens with underlying inflation or deflation. That is a little bit of what Greg was talking through. Some of our pricing trends reflect some of the deflationary environment we had that has now turned into inflationary environment. On a sequential basis, you will now see that flattening out, and us begin to put in price increases should we continue to see inflation.

In the Industrial and Healthcare Materials business, I think sequential sales growth was $40 million. And operating profits were flat. Is there $2 million or $3 million or $4 million in extra costs? What's happening and how do you explain this sequential change?

So sequentially, it's essentially all Yongle, the acquisition that we made, as well as Finesse and others but much smaller acquisition. When we make acquisitions, Jeff, we said don't expect much to flow through in the first 6 months or so of when we make an acquisition, both because of integration and deal costs, as well as just accounting adjustments that you have, such as the inventory step-up. That's what the sequential trend is. If you look year-over-year, the tapes business we began to cycle through. The reason you see the return to growth is we've cycled through the program loss we've talked about within personal care categories and the medical business has returned to growth after cycling through some of the declines that we'd had mid last year as well.

Okay. In retail branding, if you exclude the growth in RFID, how fast did Retail Branding and Information grow?

Roughly 3%.

And can you talk about your growth rates in the U.S. and in Europe both in the quarter and for the year in the LGM business?

Sure. In both, U.S. and Europe, as we mentioned earlier, we had low-single to mid-single digit growth in both North America and Europe in the quarter. Roughly consistent with that, across the year-to-date, there was a little bit of a challenge earlier in the year in North America, but for the last couple of quarters, relatively consistent, from that perspective, low single-digit growth.

And then, your SG&A expense was up maybe 2% and your revenues were up 11%. Can you talk about why there's such moderate inflation in the SG&A line? Do you have fewer people or has the employee count changed?

I think a lot of the restructuring savings we've talked about, a significant portion of that comes in SG&A as well, somewhere, I would say, 65% to 70% of that. So you're starting to see a pickup in the SG&A side, and that's what's helping bring the overall SG&A number down for us in total.

Okay. How much was share issuance this year?

Share issuance. Probably have to follow back up with you on that one. I don't have that off the top of my head.

I had a follow-up on this pricing discussion. You mentioned there were some pockets of inflation,, specifically in paper in Europe and Asia. So I guess the tactical price increases that you're talking about are focused on passing through that inflation? Is that accurate? And I want to understand, I guess, is that to suggest that your price increases are focused more on, say, the variable information label stocks versus prime label stocks? More generally, if you could just characterize the difficulty of getting a price increase through to those different customer bases to the extent they are different. I mean, it has been really a few years since the industry has had broad-based price increases. If you could comment on that sort of dynamic. Has your competitors in those regions followed your initiatives? Or is it too early to really understand what their reaction might be?

Overall, we are seeing inflation in specific categories, where we are seeing inflation in paper, and also chemicals, and we're putting through targeted price increases. Sometimes it's on variable information label; sometimes it's on paper; sometimes it's on the film products that we have. There's not one overall general story that we can tell. As a leader within the industry, we need to offset as much of that inflation as we can through material reengineering, which has been a historical area of strength for us. That which we can't, we will pass on through price increases. That's what we're in the process of doing today. When we announced the price increase in China a couple of quarters ago, we saw that the market moved with a price increase, given the inflationary pressure relative to some specific commodities within China, the market needed to move. Customers understood that. Do customers always like price increases? Of course not. But if they understand it, and can communicate that to their own end customers, that's when we generally are successful pushing a price increase through.

Okay. And then if I could, a different subject, when you realign your segments, one of the rationales, as I recall, for having LGM and IHM separately was just the nature of the channel. Ultimately, I think in IHM, there needed to be a little bit more of an OE customer focus and getting product speced in. If you could just characterize if that's accurate and how that's been going in terms of the rationale for IHM to have a little bit more of an OE focus, if that's actually translating into specific successes or challenges that you've seen, as you pursue that commercial strategy to accelerate your organic growth prospects?

Yes, we continue to execute against that strategy that we've communicated. The industrial tapes business specifically is up high single digits. It's not dissimilar from some of the specialty labels within LGM, where we have similar growth rates. We continue to work to build our capabilities around front-end design so we can get speced in and qualified for various programs within our specialty businesses of which a big portion is within IHM. That is progressing as we had expected.

One last question just on commodity passthrough or trends really, more than anything else. We were recently at an industry conference, and recognizing that on the paper side, what you're buying is in fact very specialized. Nonetheless, it comes from other, if you will, parent grades. Capacity shutdowns are happening fairly quickly. Even one of the suppliers of some of the specialized papers more recently converted some of their capacity. So, Mitch, your view on modest inflation — does that continue to be informed by what you've been seeing on the supply side on the paper side, in terms of what your contacts are relaying? Recognizing you'll respond if you need to with pricing, are there any other thoughts that you have on that, other than what you've already said? I have a couple of follow-ons.

As far as what we've talked about regarding some announcements that I think you're referring to, we are not seeing any immediate impacts of that, and don't expect to going into next year. If you think beyond, our visibility tends to be 3 to 6 months out, and there are often a lot of views about how various markets will evolve a year out. That said, we do see a potential for there being some inflation next year, specifically around liners. We continue to work with our raw material suppliers. We feel very confident. We talked about the shutdown of capacity and being able to secure the amount of material we need to continue to grow our business and grow profitably. If the inflation does come forth, we will put through price increases, because that'll be broad-based and industry-based as far as what we are seeing. Even in the grand scheme of things, it does not look very significant at all from what we are seeing going into next year.

Okay. Switching gears maybe on a related way, one of the things that we've picked up in some other travels is there is — just because of inflation broadly in the economy and in the supply chain, there is growing demand for your customers for their suppliers, you and other materials and packaging companies helping them become more efficient in their supply chain. Whether it's the back end of the packaging line or somewhere else. I don't know if that's resonating in terms of the trends that you're seeing either and face stocks or maybe some of your specialty tapes business. If you have any updates on that, that'd be great.

Yes, a key part of what we do, especially concerning variable information label growth, specifically around some of the e-commerce areas, is around helping. It's not just about e-commerce but automating various packaging lines and the whole lowering the cost of delivery systems and so forth, that is absolutely a part of what we do. Whether that's in LGM or what you're seeing in RBIS. IHM, less so. IHM is more about light weighting and reducing the overall weight and improving the performance of various fasteners that you have. But you see that trend definitely within RBIS and LGM.

Two last ones, and I'll turn it over. First of all, we picked up some commentary that QR codes are a way for users to sort of push back against RFID if they chose not to. I am not sure whether they initially agree with that view, but what's your view on that? Also, I don't know if I've ever asked this question on a conference call, but given Avery's share's illiquidity at times in terms of trading volume, what's your view on whether a stock split would help that at all? I recognize all the theoretical views on stock splits and whether they help or not. Have you ever looked at it on a practical base in terms of what it might mean for your liquidity?

Thanks, George. So as far as QR codes, we see where RFID is or variable information barcode labels, it's an interface between the physical and the virtual world. I think there's going to be a role for various technologies as the demand for more linkages between the physical and virtual continues to increase. QR codes need a clear line of sight. RFID's key advantage around that is that it does not. When you have packaging lines or supply chains with a lot of variations and SKU complexity, package size and so forth, or a lack of clear line of sight, that's where RFID is going to win. Where you have fairly standardized products and a clear line of sight with continued proliferation and advancement of both cameras and artificial intelligence, I think you'll see QR codes and simple barcodes continue to grow as well. There's an overall need for a linkage between the physical and virtual world, and you're going to see multiple technologies play out in different ways. As far as the stock split, that is not something we are considering at this time. When you look at the liquidity and otherwise, that's just not something we are evaluating. But, George, if you have some views on that, we would love to hear them, but that's where we are right now.

Okay. I want to thank everybody for joining the call today, and for your interest in Avery Dennison. We again continue to deliver and execute consistently across the portfolio. We, here at the company, are extremely excited by both our position and prospects going forward. Thank you very much.