Avery Dennison Corp (AVY) — Q4 2017 Earnings Call Transcript

Thank you, Dmitri. Today we’ll discuss our preliminary unaudited fourth quarter and full year results. Please note that throughout today’s discussion we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled with GAAP on Schedules A-4 to A-8 of the financial statements accompanying today’s earnings release and in the appendix of our supplemental presentation material. 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. I am pleased to report another year of excellent progress towards our long-term strategic and financial goals. Sales grew 8% on a constant currency basis, adjusted operating margin expanded by 50 basis points, and adjusted EPS grew 24%. Our Label and Graphic Materials business continues to reach new heights. Retail Branding and Information Solutions posted both strong topline growth and significant margin expansion, and we made progress in expanding the platform for Industrial and Healthcare Materials. This past year marked the company’s sixth consecutive year of strong topline growth, margin expansion, and double-digit adjusted EPS growth. This consistent performance reflects the resilience of our industry-leading market position, the strategic foundations we have laid, and our agile and talented workforce. Our strategic playbook continues to work for us, as we focus on four overarching priorities; driving outsized growth in high-value product categories; growing profitably in our base businesses; relentlessly pursuing productivity improvement and remaining disciplined in our approach to capital management. Our strong topline growth in 2017 reflected the balance of contributions from acquisitions and organic growth, driven by our large presence in emerging markets, as well as in our faster growing high-value categories such as specialty labels, industrial tapes, and of course, RFID. Emerging markets and high-value categories are the two key catalysts for growth across our entire portfolio. Roughly half of our total sales are now linked to one or both of these catalysts and we continue to target above average growth from them over the longer term. In addition to the successful execution of our strategy to expand in high-value categories, we also delivered solid growth in our base businesses, by carefully balancing the dynamics of price, volume, and mix, by reducing complexity and by tailoring our go-to-market strategies. Now equally important to the topline results, we also maintained our strong focus on continuous productivity improvement. Product reengineering, lean operating principles, and the effective execution of our multiyear restructuring plans remain key to our success, not just as a means to expand margins, but to enhance our competitiveness, particularly in our base businesses and provide a funding source for reinvestment. Now I will just touch briefly on how each of these strategies are playing out in the segments. Label and Graphic Materials, our highest return business delivered another year of strong topline growth and continued margin expansion, reflecting continued above average growth from our exposure to emerging markets, our strategic focus on high-value categories and the ongoing contribution from productivity initiatives. Our strategy to expand our position in high-value categories, which include specialty labels, as I mentioned earlier, as well as graphics and reflective solutions is working. We delivered strong organic growth for these products in 2017 and further increased our exposure to them, with the acquisition of Hanita Coatings. Now on the productivity front, LGM consistently delivers. Our focus on material reengineering and continuous improvement through lean enables us to profitably grow our base business while maintaining and expanding our strong returns. Retail Branding and Information Solutions delivered both strong topline growth and significant margin expansion, driven by the execution of our transformation strategy and continued strength in RFID. In terms of the base business, sales increased across most product lines and multiple customer categories, including performance athletic, premium, and fast fashion. Our ability to grow this business in the face of a challenging retail environment underscores the success of our multiyear transformation strategy, as our improvement in service, flexibility, and speed continue to resonate with customers. RFID grew nearly 20% in 2017. We expect this business will represent close to $300 million in sales this year, as we continue to see increasing engagement with apparel retailers and brands across all stages of the pipeline, as well as promising early-stage developments in other end markets. RBIS’ operating margin expanded 150 basis points in 2017, and we expect to be within our 2021 target range for this segment already this year. The team has done a tremendous job transforming RBIS into a simpler, faster, and more competitive business over the past two years and we are pleased with the momentum we are seeing there. Turning to Industrial and Healthcare Materials. We expanded our platform here with sales up 30% on a constant currency basis, driven by both acquisitions and a return to solid organic growth in the back half of the year. Now while I am pleased with our progress on the topline, operating margin is not where we wanted to be, due in part to the impact of acquisitions and growth-related investments, but also from a number of operational challenges, as I’ve discussed over the past couple of quarters. We still have work ahead of us to embed strongly in operating principles and practices into this business to duplicate the operational excellence that epitomizes LGM. We expect to get traction on our productivity initiatives by the middle of this year and I remain confident that this business will achieve our long-term growth and margin targets. As many of you know, this segment serves attractive high-value markets where we are currently under-penetrated and where we can leverage our core capabilities. Given this growth potential, we are investing disproportionately to expand our platform here, particularly through M&A. The acquisitions we completed in 2017 in both of our Materials segments, Yongle Tape and Finesse Medical and IHM, along with Hanita Coatings and LGM are all excellent examples of how we are using both on M&A to accelerate our portfolio shift to higher value categories. I am pleased with our overall progress in executing the strategy. We are on pace to achieve the returns we have targeted from acquisitions we completed over the past two years, while adding new capabilities that are key to our long-term value creation strategy. Carefully planned and executed M&A is just one key element of our highly disciplined approach to capital allocation. Over the past couple of years, we increased our overall pace of investment, including for organic growth, and we are picking up that pace even further in 2018. On the fixed assets side, 2017 spending was focused on capacity additions in both Europe and Asia. This year, capital spending will continue to be concentrated in Asia, while we will also be making a number of investments in the Americas to support our strategy for long-term profitable growth. In addition to the pickup in CapEx spend, we are also increasing our level of SG&A investment, particularly with respect to RFID, as we continue to build our intelligent labels platform. This increased pace of investment is commensurate with our consistent GDP plus organic growth and ability to maintain top quartile returns on capital, while preserving ample capacity to continue delivering cash to shareholders through dividends and share repurchases. Overall, I am pleased with our progress over the last few years and again in 2017, and expect to maintain this momentum in 2018, with another year of strong topline and double-digit EPS growth. Now I will turn the call over to Greg.

Thanks, Mitch. Hello everyone. I will provide some additional details on our full-year results and then discuss our fourth quarter performance and outlook for 2018. As Mitch mentioned, 2017 was another year of significant progress toward our long-term financial goals. On slide seven of the supplemental presentation materials, we included our scorecard progress against the five-year goals ending in 2018. We are on track to meet or surpass these goals. We achieved cumulative growth and adjusted EPS of 17% and significantly increased our return on capital, adjusting for the impact of U.S. Tax Reform in Q4. We believe our returns are in the top quartile compared to our peers, a position we intend to maintain while accelerating our investment pace for both organic growth and M&A. We continue to have sufficient capacity for these investments while returning cash to shareholders in a disciplined way. Our balance sheet remains robust, although our net debt-to-EBITDA ratio is at the low end of our targeted range at year-end. In March, we introduced a new set of long-term targets extending to 2021. With only one year into this cycle, 2017's performance was aligned to achieve the new targets. Considering the diversity of our end markets, our strong competitive advantages, and our organization’s resilience to adapt, we are confident in our ability to navigate through various business cycles. Now, let’s discuss our recent performance, specifically our Q4 results. I will first address the transition to the new U.S. tax code, which negatively impacted reported earnings in the fourth quarter but improved our outlook moving forward. We recorded a tax charge in Q4 of approximately $172 million or $1.91 per share, resulting in an effective tax rate for the quarter of 138% and 52% for the entire year. This charge included the tax on deemed repatriation of accumulated untaxed foreign earnings, as well as the revaluation of deferred tax assets and liabilities, reflecting our provisional estimate of the new legislation's impact. We plan to update this assessment over the coming months as new information, including regulatory interpretations, becomes available. Our adjusted tax rate was 28%, representing our estimate of where we would have ended the year without the Tax Reform, consistent with our guidance in October, down from approximately 32% for the same period last year. Looking ahead, we expect our 2018 tax rate to be in the mid-20s and sustainable. Now, focusing on the underlying operating results for the quarter, our adjusted earnings per share was $1.33, a 34% increase compared to the previous year, exceeding our expectations due to strong sales growth and margin expansion. We grew sales by 9.1% excluding currency, with 4.7% organic growth and 4.4% from acquisitions. Currency translation contributed 2.8% to reported sales growth in the fourth quarter, adding approximately $0.04 to EPS compared to the same period last year. Our adjusted operating margin increased by 90 basis points to 10.3%, as higher volume and productivity more than offset higher employee-related costs and the net impact of pricing and raw material costs. Productivity gains this quarter included approximately $16 million in net restructuring savings, primarily benefiting the RBIS segment. Free cash flow was $166 million for the quarter and $422 million for the full year, up roughly $35 million compared to the prior year, largely driven by our increased operating income. In the quarter, we repurchased around 200,000 shares for a total cost of $25 million. For the full year, we repurchased 1.5 million shares at a cost of $130 million and paid $156 million in dividends. Adjusting for dilution, our share count at year-end slightly declined compared to 2016. Now, regarding segment results for the quarter, Label and Graphic Materials sales rose 6% excluding currency, benefiting from the acquisition of Hanita. Organic sales growth was 5%, driven by strong growth in our high-value product lines led by specialty labels and graphics. Our Q4 growth also benefited from some pre-buying by customers in anticipation of announced price increases for January. Breaking down LGM’s organic growth by region, North America and Western Europe both saw mid-single digit increases, while our growth in emerging markets also rose mid-single digits, with strong growth in South Asia and mid-single-digit growth in China, partially offset by softer results in Eastern Europe. It's worth noting that, while we experienced some quarterly volatility in China during 2017, our full-year growth in this key market was in the high-single digits. The operating margin for this segment remained strong, up 70 basis points on an adjusted basis to 12.2%, as increased volume and productivity benefits outweighed higher employee-related costs and a negative net impact from pricing and raw material costs. The sequential effect of raw material inflation aligned with our expectations for the quarter, and while the increases have been gradual and relatively modest thus far, we are expecting further sequential inflation in the first quarter. We continue to manage this through a mix of product reengineering and pricing, and we have announced price increases across all regions over the past three months, with plans for further actions as needed. Turning to Retail Branding and Information Solutions, the RBIS team had another strong quarter, as they effectively execute their business model transformation, leading to market share gains and significant margin expansion. Regional empowerment has brought decision-making closer to the market and improved local accountability, enhancing speed and flexibility in competitive advantages while we build a more efficient cost structure. RBIS sales grew 5% organically, driven by strength in both RFID and the core business, alongside continued growth related to the 2018 World Cup. For the full year, we estimate that World Cup-related sales contributed roughly 80 basis points to organic growth in RBIS. Our volume growth has outpaced apparel unit imports in the U.S. and Europe for several quarters, showing we are gaining market share, with the performance athletic, premium, and fast fashion segments leading sales. RFID product sales increased at a mid-teens rate for the quarter, and we target 15% to 20% compound annual growth for RFID over the long term, albeit with potential volatility in any given quarter or year based on customer implementation timing. The adjusted operating margin for this segment expanded nearly two full points to 11.9%, fueled by productivity and higher volume, as well as reduced intangibles amortization. However, these benefits were somewhat offset by higher employee-related costs and the net impact of pricing and raw material costs. Lastly, in the Industrial and Healthcare Materials segment, benefiting from Yongle and Finesse Medical acquisitions, sales increased 57% excluding currency. Organic growth rose 6%, reflecting strength in both industrial tapes and Vancive medical products. Adjusted operating margin declined by about 2 points due to the impact of acquisitions and investment spending, along with near-term operational challenges previously mentioned by Mitch. Over the next few years, we expect operating margins to gradually expand to LGM’s level or better, achieving our long-term targets for this business by 2021. Now, for our outlook for 2018, we anticipate adjusted earnings per share to be between $5.70 and $5.95. We have outlined the key contributing factors to this guidance in slide 14 of our supplemental presentation materials. We estimate organic sales growth to be around 4% for the year, consistent with the range we’ve experienced over the last few years. We also expect acquisition effects on sales to contribute approximately 1.5% from closed deals. Current exchange rates suggest currency translation will add roughly 2.5 points to reported sales growth and provide a pretax operating income boost of about $20 million. We estimate that the incremental pretax savings from restructuring actions will contribute between $30 million and $35 million in 2018, primarily reflecting the carryover benefits from actions initiated in 2017. Additionally, we expect a tax rate in the mid-20s, assuming a 25% rate for our EPS guidance. We anticipate spending about $250 million on fixed capital and IT projects. While we have been ramping up our investment pace, our outlook for 2018 aligns with the cumulative five-year spending target under our long-term capital allocation plan communicated last March. Finally, we estimate average shares outstanding, accounting for dilution, will be between 89 million and 90 million shares. In summary, we are pleased with the strategic and financial progress made against our long-term goals this year and remain committed to delivering exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. With that, we will open the call for questions.

Hi. Good morning. This is actually Matt Krueger sitting in for Ghansham. How are you doing?

Good, Matt. Good morning.

Good, Matt. Thank you.

Good, good. So looking back at 2017, how much inflation did you see across the raw material basket in your businesses? And then what are you baking into your expectations for 2018 as far as raw material inflation goes?

Overall in 2017, as we mentioned, I think, last quarter, we had relatively modest inflation, particularly in the back half of the year, and in Q4 it came in pretty much in line with what we had expected it to be. We are seeing some sequential further lift in inflation in Q1. I think, overall, our expectation for the full year in 2018 versus 2017 is probably low-single digits in terms of the rate of inflation versus last year.

Okay. That’s helpful. And then, taking a step back, looking at your business, you’ve averaged 4% organic growth since 2013 in what looks like a relatively tepid macroeconomic environment. Are there any factors that would keep you from accelerating organic growth above this level moving forward, especially as pricing contributes more and the global macro seems quite a bit more favorable?

I mean our guidance of 4% basically just reflects exactly what you said, the organic growth we have had the last number of years and there have been puts and takes over those years as well. So we thought that was the right number to go with from a guidance perspective. As you look into ‘18, clearly with price increases coming through, if the macro were to improve then that would be tailwinds to that number, I think, there is question about how many macro tailwinds are really are and how long they will last, but then second you have got to think about headwinds that we have as well. Greg talked about the World Cup growth that we had in 2017 in RBIS that won’t continue, as well as the pre-buy from the price increases that we announced that we received the benefit from in Q4 as well, so few things going both ways.

Okay. That’s helpful. That’s it from me. Thanks.

Thank you.

Thanks. Good morning, guys.

Hi, Scott.

Hi, Scott.

Hi.

Just a follow-up on the raw material inflation. If I remember correctly, I think it was last quarter, maybe it was for the full year, you had about a 25 basis point drag on gross margins from inflationary pressures. Did that continue over into the fourth quarter and how should we think about the underlying inflationary pressure from a gross margin perspective in 2018?

Yes, Scott. So I don’t think we quoted a number last quarter, what we had expected in ‘17. I think as we said was relatively modest net impact last year between price and inflation. As I said, we are seeing some sequential inflation as we enter 2018 and as you know, our approach is two-fold to deal with that, one, we look at product reengineering, see if we can take material costs out of our products and we also then look at pricing. So across this year, at the very end of 2017 we announced price increases or have implemented them in Q4 or early Q1 in all regions across the LGM business. So we are continuing to deal with that and we feel relatively comfortable with our ability right now to manage the inflationary pressures between those two levers that we have. So we do see some net modest impact probably in the first part of the year, but we expect that to be able to manage that. Now if inflation comes in stronger, continuous sequential increase as we move through the year, I think, as you know, as we have said in the past, it takes us a quarter or maybe two quarters to deal with that as it goes, but right now based on what we are seeing with the price increases we have announced in the material cost reengineering, we feel relatively comfortable being able to manage through that.

Okay. And on the transportation side, obviously, there has been a lot of concern about rising transportation costs both rail and truck-related. I would assume some of your rolls go on trucks and some on rail, but can you sort of give us a breakdown of your exposure there and what you’re most concerned about that, if you have the ability to pass through that transportation cost?

Yeah. So we do obviously have some materials that move on trucks and rail, and we do see some increases there over the last couple of years. I think in North America, some of the factors you mentioned and some of our pricing actions do take into account the either increases in those kind of macro issues on the transportation, perspective, as well as fuel. Sometimes we deal with that through surcharges as well. But right now, we factor that into how we think about pricing actions across each of the regions.

Good morning.

Good morning.

Good morning.

Mitch, you talked about investment in the Americas to support growth, and I wasn’t sure if you were referencing LGM, RBIS, or both. Are there any details you can give in terms of product categories or geographies that you’re focusing on in terms of the investments?

Yes. The investment focus overall is what I was commenting was LGM and RBIS, RBIS specifically around RFID, and the rest is LGM. And we are looking at some expansions for growth in the Americas particularly in the U.S. and Mexico are some expansion that we are planning right now. We have not invested in the North America region for quite some time, well over a decade and some of the discussion we had around Luxembourg, we are expanding there, we have gone through a period of little investment there as well. We consider the amount of the market and our own growth. It’s time to ramp that up again.

Okay. That’s very helpful. And then you also referenced some early-stage development in non-apparel RFID. I don’t know if you can give any details there and then just kind of related question, there has been a lot of attention paid to Amazon, Amazon Go store that I don’t think is using RFID. Any thoughts on competition potentially down the road to RFID from cameras and just general thoughts there?

Sure. So broadly speaking about the areas outside of apparel, we are seeing a number of small opportunities that are bubbling up, but there are three end markets specifically that we are focusing on accelerating the development of: aviation, food and beauty. There have been quite a bit of – we have got a few pilots going on with a couple of end customers in those spaces and we have actually seen a relatively small pickup in some of our growth, a lot of that round pilot stage, but we see a tremendous amount of opportunity in the space. And if you think about food, a lot of similarity to apparel in some way, so one is just the desire to increase and improve the supply chain and reduce the manual labor involved with managing that supply chain. And then the focus on freshness, in apparel you have season that create a certain level of perishability. Well, fresh foods definitely have an even higher degree of that. And what we see customers trying to do is reduce their cost by reducing waste but also as part of their sustainability drives to reduce the amount of wasted food in the network. So those are three areas where we are seeing progress. As far as your question about Amazon Go, I am not going to comment on any specific company that we work with. But, yes, that Amazon Go specifically, my understanding does not use RFID. We have been consistent in saying that we actually see the Internet of Things and the connection between the physical and virtual world is going to be a huge driver for a number of technologies, and with the proliferation of cameras and AI and sensors, we think that all these technologies are going to complement each other. And what RFID really provides is in areas where we have a tremendous amount of SKU complexity, perishability and lack of line of sight, RFID really plays in that category. So we think there is going to be a complementing technology that supports this whole drive towards IoT more broadly. We are also seeing unmanned stores, convenience stores and the like in Asia that are definitely using RFID. So different companies are attempting different technologies as they look to rollout a more automated customer interface for food and convenience stores.

Thanks. Hi, everyone. Good morning.

Hi, George.

Lots of detail and congratulations on the year. I guess, first question I had to the extent that you can comment, the investments that you’re seeing in LGM and U.S. and Mexico, is there a way to put a revenue potential to the level investment or quantify the level of investment? Are we talking about one new coder or two new coders or something totally different?

Yeah. We haven’t announced the complete extent of the investments that we are making in Mexico. We did announce that we are putting a small coder in that location to serve the Mexican, as well as the export market in Central America to support the growth that we are seeing in those regions and again in the U.S. is to support the growth in the U.S. and Canada. We have been seeing a good amount of growth. We have not articulated the exact amount of dollar investment overall, George.

Okay. But we are talking about two coders here then, correct?

Yes.

Can you discuss the productivity challenges you're experiencing in IHM and explain why you believe a traditional lean approach can be effectively applied here? This situation shares some similarities with LGM regarding the product, yet it is more complex because of the variety of SKUs and especially high-value SKUs, which could lead to productivity and spoilage issues. Any insights would be appreciated.

Sure. So when we just look at the plant and supply chain, a lot of similarities with LGM, so that’s what gives us the confidence from a starting point, and we are seeing progress in certain regions from instilling this discipline around lean sigma for example. We have connected the R&D team from this business with the LGM team as part of one organization. We are cross-pollinating people, pulling people in from LGM, from RBIS, where we also have a strongly lean culture as well, and that is what gives us the confidence, both cross-pollination of leadership, as well as taking the process and process technology from elsewhere in the business and instilling it within IHM. That coupled with, we are getting early traction in some regions, but not the amount of traction that we wanted to be at this stage.

Thank you. Just quick follow-up on IHM, like those operational issues that you are having, like how long do you think it will take you to address that? Is it something that’s going to take more than a year or is that something we should see more progress no sooner?

Yeah. We said – yeah, so we said that we would expect to be seeing traction in the middle of the year. I think from the context perspective, when you look at the margins where they are, a big portion of that is M&A, as well as growth investments, it’s about a point, so $1 million worth is the upper in the quarter is the operational challenge I am referring to, so I think we will be on a good trajectory by the middle of this year.

Okay. Yeah. That makes sense. And in terms of opportunities you are seeing in that segment for bolt-ons and stuff, I mean, is it still as attractive as you earlier expected?

Yes. What we are seeing with both working through our pipeline, we continue to see attractive opportunities that we are evaluating, as well as just looking at our own business, I mean, the industrial tapes business, which is one of the key areas of focus, was up almost 10%, and the Vancive medical business where we made a small acquisition this past year also up double digits the second half of this year, so both in the performance of our business, as well as what we are seeing out there in the pipeline give us that confidence that this is the right place to keep going.

Thank you very much. You incurred a $172 million tax charge, which includes $29 million in repatriation tax. How does this affect your cash taxes payable? Specifically, in the first or second quarter, how much cash will this charge result in, and how does this compare to previous years when you had tax obligations in the first quarter or the first half of the year?

Yeah. So, overall, Jeff, with the tax code, the transition tax to the new tax code, you basically have seven years or eight years to pay that, so we do not expect anything more than a modest cash tax impact certainly in 2018. Overall, I think, as I said, we are looking at roughly mid-20s effective tax rate. We think our cash tax rate will be somewhere in the low 20s on a go-forward basis as well.

Okay. And your accounts payable was a little bit more than a billion dollars, up from about $850 million last year. Is there something unusual there or are you happy having a higher level of payables or what accounts for that lift? And your inventories are up about $100 million year-over-year at 20%. Can you comment on that lift as well?

A significant portion of the increase is related to acquisitions made this year, which also affected our working capital, along with currency fluctuations. Specifically, currency impacted us more in the fourth quarter compared to the previous year, as last year's fourth quarter had lower rates while this year saw some of the higher rates. These factors contributed to the dollar increase. From a working capital efficiency standpoint, we ended the year in line with our expectations, possibly even exceeding them slightly. Our operational working capital was consistent with where we concluded the previous year, despite experiencing higher working capital ratios in emerging regions where we are growing. Overall, we are pleased with the progress we've made regarding working capital this year.

Good morning. Thanks everyone and congratulations on another really good quarter.

Thanks.

Mitch or Greg, just one on North America, I think, you said it was up mid-single digits in the quarter and I – if memory serves, it’s been accelerating throughout the year, correct me if I am wrong there. Is this as simple as the economy has gotten steadily better or is there anything more that you would point to and then what are your expectations for that region in ‘18?

Yeah. So, I think, Adam, overall, as we said, we also had some pre-buy in the fourth quarter relate to some of the price increases we’d announced for January, but even with that we had grown kind of that low to mid single-digit range in North America in the quarter. That’s relatively consistent I think what we saw in the third quarter as well. So, overall, we have just seen a relatively good market situation there in the U.S. over the last few quarters, but no major changes that I’ve seen in the fourth quarter from a macro perspective.

Yeah. Correct me if I am wrong, in years past, Greg, it was growing quite a bit lower than that, right, maybe 1%, 2% max?

Yes. It was growing less and part of that the market was growing a little bit slower than Europe, it was something that commented on the past. If you recall, Adam, we also had some share challenges a couple of years ago and we basically made some adjustments and have regained that share late last year early this year, and share has been stable since.

Thanks. But just a couple others, the uses of capital, can you just go over what your preferred users are be it M&A, buyback, et cetera, at this moment?

Yeah. So our capital allocation approach hasn’t really changed from what was communicated in the past. We typically look to spend about 30% of our available cash reinvesting in the business through CapEx and restructuring, about 20% through dividends and then the other half we have available essentially for both M&A and buyback. So that’s a way we look at it and that’s how we have communicated in the past, we are remaining relatively consistent with that.

Thanks, Greg. And just one housekeeping one, tax rate, excuse me, FX rate assumption for ‘18 euros specifically?

Yeah. Pretty close to $1.20 in the high one teens.

Good morning. I have some questions about the price increase initiative and its implementation. I understand you're aware of raw material inflation as we enter 2018, and you mentioned that it may take about a quarter to successfully implement broad-based price increase efforts. I presume we're discussing the LGM segment, and I'm wondering if you are indicating that margins in that segment will decrease in the first quarter. Additionally, I've observed that some competitors announced high-single-digit price increases, while yours seems to be more of a mid-single-digit increase. Could you discuss the difference between what the industry is targeting and where you expect to land?

Yeah. So, Chris, traditionally it’s taken us a few months, as you say, to pass along price increases once we see the inflationary trends. So that definitely has been the trend about four months. We think it’s probably less than that, less of an impact usual specifically on Q1. And then as far as the level of price increases, you sound like you have seen some of our letters. We are not going to comment on where our competition specifically came out and it’s different by geography, and perhaps, customer set, so I don’t want to comment on what their actions are overall. But we are putting in through price increases that are necessary for us to offset the inflation after consideration of our material reengineering efforts which reduce the raw material cost of our products. And given our strength of our R&D group and capabilities around innovation here, we would expect our ability to continue to be able to have a greater offset, if you will then perhaps others may.

I would like to follow up on the opportunities in RFID, particularly in aviation, food, and beauty. When the apparel industry began using item-level RFID, the primary benefits included improved inventory accuracy and reduced stock-outs, which not only helped with inventory management but also increased sales significantly, making the return on investment quite attractive. I'm curious to know how the cases for adopting item-level RFID in these other sectors compare in terms of ROI. I assume aviation is quite specific, likely referring to baggage tags, but I would appreciate it if you could compare and contrast the ROI for adoption in these different areas.

Aviation, yeah, absolutely, so aviation is unique, but follows some of the same principles around high degree of SKU complexity and perishability, you have got to get the bag to the customer pretty quickly once they disembark from the plane. And as far as, if you look at beauty, a lot of parallels to apparel and if you think about beauty, a lot of it’s sold within the department stores, the same place where apparel is, so forth and so the value proposition is very similar. And with food it’s equal, but probably weighted heavier toward reducing waste overall and ensuring freshness. And we have all seen some large brands that have been impaired from having safety concerns around fresh foods and so forth. So ensuring safety and quality, as well as reducing waste, both for cost reasons, as well as for sustainability drives.

Hi. Thank you for taking the follow up. I will ask them in sequence and leave you to get onto the rest of your day. So, first of all, in terms of the 15% growth in RFID, could you give us some additional color perhaps in terms of how much might that have been new customers, new launches, trials, organic growth with existing customers?

The RFID, your question about what’s driving the adoption, it’s basically continued trends from what we have seen in the past and there is a few big retailers or brands that have moved one or two a year and then a number of smaller ones as well. So we are seeing major retail moving into full adoption, a number of others moving in the pilot and then in addition to that many specialty retailers and brands various state of pipeline. So each stage of the pipeline, whether it’s from assessment in business case through piloting, partial rollout, or full rollout, each day the pipeline has increased from where we were a year ago. And that adds to that the level of activity we are seeing which is very early in that pipeline for the areas outside of apparel.

Secondly, Greg, I would imagine or Mitch that, with tax policy change or and given where your stock price is that and given your history as an EVA company, that would tend to put more focus in the future investment on M&A and organic growth versus buyback, but if you have any additional color there?

From a tax perspective, being an EVA company influences our approach to M&A. The most significant impact is that it enhances our competitiveness against international firms, as the shift to a territorial tax system removes obstacles in evaluating M&A targets. Additionally, changes affecting financial buyers give U.S.-based multinationals a competitive edge. As an EVA company, all these factors inform our outlook, which will be a primary focus for us moving forward.

And then lastly on the productivity issues and IHM where you’re not necessarily where you want to be, not to make too big a deal relative to the size of the segment also of Avery, since it’s mostly about cross-pollination and training, why hadn’t that already been done to your satisfaction? Thanks guys and good luck in the quarter.

Thank you, George. That’s a three-point question. So RFID, your question about what’s driving the adoption, it’s basically continued trends from what we have seen in the past and there is a few big retailers or brands that have moved one or two a year and then a number of smaller ones as well. So we are seeing major retail moving into full adoption, a number of others moving in the pilot and then in addition to that many specialty retailers and brands various state of pipeline. So each stage of the pipeline, whether it’s from assessment in business case through piloting, partial rollout, or full rollout, each day the pipeline has increased from where we were a year ago. And that added to that is the level of activity we are seeing which is very early in that pipeline for the areas outside of apparel.

All right. Well, thanks everybody for joining the call and for your interest in the company. The fourth quarter capped another great year here at Avery Dennison and we are well-positioned going into 2018 to continue the momentum you have seen over the last two years. I really just would like to take the opportunity to thank the entire team for their commitment and focus on continuing to deliver for our investors, our customers and our communities. So thank you everyone.