Q3 2019 Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by welcome to Avery Dennisons earnings Conference call for the third quarter ended September 28, 2019. During the presentation. All participants will be in listen only mode. After which we will conduct a question and answer session at that time. If you have a question. Please press the one for.
By the four on your telephone, but anytime during the conference you need to reach an operator. Please press star Zero. This call is being recorded and will be available for replay from 12 PM Pacific time today through Midnight Pacific time October 26 to access the replay please dial 806 338.
2.84, or plus 140 to 9779 140 for international callers The conference I'd number is 21896 770.
Now I'd like to turn the call over to Cindy Gunther Avery Dennisons, Vice President of Investor Relations and Finance. Please go ahead with them.
Thank you asked today will discuss our preliminary unaudited third quarter results. Please note that throughout today's discussion will be making references to non-GAAP financial measures.
non-GAAP measures that we use our could find qualified and reconciled with GAAP on pages four to eight attached to the financial statements accompanying today's earnings release, and the appendix of our supplemental presentation material.
We remind you that 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 todays earnings release.
On the call today are Mitch speech here, Chairman, President and Chief Executive Officer, Greg Sullivan, Senior Vice President and Chief Financial Officer, I'll now turn the call over to match. Thanks, Andy Good day everyone.
We delivered solid profit growth in the third quarter, despite softer than usual market demand with s. once again up double digits over prior year on a constant currency basis.
Our focus is in the slower growth environment has been to protect even expand our margins in the base business well driving faster than average growth in high value categories like or if I'd.
Executing well on both fronts.
We appear to recaptured most of the share. We recently lost an l. Jim are intelligent labels platform continues to drive over 20% growth from our if I'd enabled solutions and I Jim's commercial execution continues to improve.
At the same time, a relentless focus on productivity with again the key driver of margin expansion for the company this quarter.
In sum, we're making good progress against our key strategic priorities and are on track to deliver our long term financial targets.
Labeling graphic materials posted strong profitability on roughly a point to organic growth for the quarter driven primarily by volume.
Hi value categories again grew faster than base.
As I mentioned, so all of the market data isn't in yet for the third quarter. We have good reason to believe that by the ended 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 the soft market conditions that we saw in the first half 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 strengthen horrified, even external embellishments, which more than offset declines in the base apparel business.
As we mentioned in July we thought trade related uncertainty impacting orders in the second quarter.
This is uncertainty was reinforced when additional tariffs were announced in August now well trade related issues are causing near term uncertainty, we're well positioned in the base business, given our global footprint and differentiated product and service capabilities.
That's where our if I'd 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.
More than 40% from just the beginning of this year driven primarily by categories outside of apparel.
At the leader in ultra high frequency or if I D. We are positioned extremely well to capture these opportunities with industry, leading innovation in 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 health care materials sales growth was relatively strong on inorganic basis due in part to lapping the slowdown in Chinas automotive market last year.
That said given the high proportion of this segment's portfolio that is focused on industrial end markets I'm pleased with the solid topline 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 strategy is to deliver outsize 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.
Increased our competitiveness overall and grow profitably in our base businesses, while importantly, continuing to protect and expand operating match margin.
Well, we lowered the high end of our near term near term outlook for topline growth due to recent market trends and currency shifts caused us to reduce the high end of our EPS guidance for the year, we're 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 me 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 cents up 14% despite the currency headwind.
We grew sales by 2.1% on an organic basis.
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.
Due impart to L. James restriction in Europe , there was largely completed as of the end of Q2.
And our cash generation has been strong we've delivered $327 million or free cash flow year to date.
$67 million compared to the same period last year.
As we've discussed we've increased our pace of fixed capital and I T 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 some $204 million.
And paid $141 million in dividends for a total of $346 million from 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 in 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 materials 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 L., James high value categories led by specialty labels continued to outpace the growth of the base based business.
And breaking down L., James 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 in 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 immaterial 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 topline growth up 4.1% on an organic basis.
Driven by faster growth in high value categories, with our if I'd sales up roughly 20%.
In external embellishments growing even faster.
Our base business adjusted for the migration of products to higher value. Our if I'd 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 our if I'd.
Turning to the industrial and healthcare materials segment sales were up 3.7% on an organic basis.
Reflecting both in volume growth and higher prices.
Sales for industrial categories were up low to mid single digits, driven by solid growth in auto related categories.
In health care categories grew even faster up high single digits with medical up in the high teens.
And we made excellent progress on the margin front NIH him.
Adjusted operating margin increased by 180 basis points to 11%.
As the benefits from higher volume and productivity more than offset higher employee related costs.
The normal seasonality does call for sequential easing in margin for the fourth quarter I'm confident we'll achieve the 10% we targeted for item for the full year.
Focusing now and our outlook for 2019, we've lowered the high end of our guidance range for adjusted earnings per share.
Reflecting incremental currency translation headwinds largely offset by stronger operational results in 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 and our short cycle businesses visibility to demand is very limited.
We've seen increased variability in order patterns from month to month.
So the low end of our going to organic growth outlook assumes a continuation of the 2% we've seen year to date, including the first few weeks of October .
Well the high end reflects the fact that comparison to 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 assumptions in July .
And recent exchange rates currency translation represents a roughly three and a half point headwind to reported sales growth for the year.
With the pretax operating income hit of $37 million.
An incremental 9 million dollar 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 rate 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 in top Cortile returns on capital, which together drive sustained growth.
Hi.
Now, we'll open up the call for your questions.
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And our first question comes from a line of can Shine Punjabi with Robert W. Baird and company incorporated your line is open. Please go ahead.
Hey, guys Jolla.
Morning.
Morning.
I guess first off on LG.
Maybe you can just give us a little bit more color Mitch how volumes kind of laid out through the course of the quarter, which regions.
Did you captured share would then from a geographic standpoint, what's your sense from customer as relates to the outlook for Fourq you in 2020 or that kind of managing inventory very tightly more optimism less optimism I would you sort of characterize that dynamic.
So a lot in their gunshot [laughter], 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 .
We are announcing a bit of a moderation as Greg talked about early October again, so little bit more of the choppiness 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 the year because of the share losses, which we've since I believe we're 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 a really no growth pretty flat environment, and we're now seeing a little bit of a pick up low single digit growth in Q3, mostly in southern Europe or not what we're not north or central Europe overall.
And then in.
China, we saw the most mid digit last year growth and we saw flatten first half of this year and a continued started to see some positive growth here in Q3.
Mid single digit and South Asia, as we called out Thats, where we saw shifting its really on so India continues to have strong growth high single digits.
And our Xeon, specifically, Malaysia, Thailand, where we're seeing some softness which we attribute broadly to just softer market conditions and the link between the China in U.S. trade to trade matters.
So as far as sentiment can then customers basically the sentiment reflects the those market trends overall.
So generally the.
Customer sentiment, we just had labelexpo recently, it was well attended by customers, particularly from Europe .
Ones in southern Europe in Eastern Europe , some a little bit more confidence about the near term outlook than the ones from northern and Central Europe specifically.
Overall lot of excitement, though about the innovations 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 sticking with LG looks like prices, starting to kind of flatten out year over year.
Yes, that's been pretty consistent what you said last quarter as well, but just kind of looking out. The next few quarters. How would you have as model price mix, you expect a negative side and part of that or do you think that that will be essentially flat just.
Just like it wasn't threeq you. Thanks, so much.
Yes. 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 using 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 of quarters.
But overall, we're looking at kind of price inflation relatively neutral year over year in Q3, as well sequentially essentially a little more sequential modest deflation, we think in Q4, but not not a material impact overall.
Our next question comes from a line of Adam Josephson with Keybanc capital markets. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Mr., Greg just one question on.
Gregs comments toward the end of the prepared remarks, you talked about seeing increase very variability in your order patterns from month to month, just hoping it could clarify.
What do you attribute that to and then you talked about on the first couple of weeks in October being up low to similar to what you had in Threeq you, 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 long. So I'm, just hoping to understand those two issues a bit better.
Yes, a quite simply Adam the volatility we called it out a little bit more who use termed choppiness in demand last quarter, we're continuing to see what do we attributed to its basically just some of the uncertainty thats going on in the environment.
See you look in 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 due now it's not uncommon in L. GM in particular to have a few weeks of just growth above normal or below normal, but we're just been seeing it more consistent into a somewhat larger degree and we're talking about still within a relatively tight band.
Dramatic swings, but we're seeing more choppiness than we've traditionally seen and that's in L., Jim as well as in RMB I guess.
As far as the other part of your question about the I think Greg explained to a Q4.
Yeah. So Adam this is Greg in Q4 of last year, our strongest volume what it was in October and then volume softened quite a bit November December so, we do see a little bit easier comps in the back part of this quarter.
Whereas we started Q3.
Or sorry, sorry, we started Q4 little bit the lower end of our arranged for the quarter.
Thanks, Fran just one on the raw material I think entre mass about raw materials or price cost specifically you said it was flat and you expect similar trends thereafter can you talk about what exactly you saw with your paper caution or chemical costs in Threeq. You, 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 or year over year on what you're saying in terms of paper prices going down.
Yes, so I guess as we move through this year in the first half of the year, we've seen some benefits in chemicals as we're moving across the quarters and then paper started to be a benefit for us in Q4, Oh are starting Q3 overall, though still I think kind of low single digit type of deflation sequentially very low and total with a little bit heavy.
Our year end paper.
So still not a huge impact, but low single digit deflation as we came into Q3 from largely from paper.
Our next question comes from a line of George Staphos with Bank of America Merrill Lynch. Your line is open. Please go ahead.
Hi, everyone. Good morning.
Thanks for all the color detail.
Yes.
My two questions to start or around margin one question specifically within RV.
And then kind of a broader question on that.
In terms of cost saves with RBL, yes, the incremental margin was.
Quite a bit lower than what we've seen in prior quarters, not totally surprising given the cadence of restructuring and.
Every quarter can't be phenomenal and you also called out the spending on on growth within our VA, yes 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 and incremental margin within RV I asked to the extent that you can comment.
Yes, George this is Greg So just as you said there the variable flow through we got from the topline growth was largely inline with what we would have expected from that.
The same time as you mentioned as Mitch mentioned earlier, we haven't continuing to invest particularly in our if I'd 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. Jordan I think this overall just the margins you see for.
All of our business in particular, RB I asked the.
Expansions, we'd be able to achieve our.
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 opex to this business really in the business development areas and so forth that we've talked through and this just reinforces our strategy is 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 20 million was over what period did you say the last few years was there a specific and incremental.
18, and 19, Okay. Thank you and then my second question.
When we consider.
The restructuring I think you said you have 35 million of savings year to date, if I heard that incorrectly if you can.
Putting the correct number for us.
And 50 million is the goal.
For this year.
What's next obviously Avery always focusing relentlessly maybe to use your term on productivity. So it's driven by the growth initiatives in turn drive.
The ability then restructure once you get the topline growth, sometimes it's driven by the investments that you make.
Obviously, you've had a new coder come up 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.
So george not going to getting the specifics of that just overall I think you've captured this is a key strategy of ours. It's one of the key for strategic pillars, the relentless focus on productivity.
And we see restructuring as one of a number of levers to pull our constant focus on material reengineering lean Sigma our key tenants of our strategy and restructuring we think of as innovation of our fixed cost structure.
So we will communicate that as we normally do with.
Annual guidance on what to expect for the given year.
And as we roll these programs and so forth. So that's not going to comment on any specifics now, but I think the overall long term strategy you should expect that continue to unfold Mitch the pace should be fairly comparable from what we've seen over the last few years would not calling us dollar by dollar quarter by quarter, but no reason expect that to decelerate overtime.
Over a couple of year period, yes individual years can be up or down as you know yes.
Perfect. Thank you.
Our next question comes from the line of Jeff Zekauskas with JP Morgan Securities incorporated your line is open. Please go ahead.
Thanks very much in your LTM 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. So slow.
Yes, the organic growth was flat in the in that quarter overall.
And in the first half I'd comment to that the market overall been growing low single digits, but we did have you share losses that we've talked through within within that business and the market comments I'm, saying are in volume in our growth I'm, commenting on or is organic growth. So we had the positive impacts of pricing the negative.
Impacts from some of the share loss and Boeing.
Right I mean, it sounds like to North America 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 its more.
You don't have as Dave.
Re yet Jeff we don't have started could you don't interrupt we don't have data yet for Q3, North America, but if you from our own market Intel and just what we've seen some fairly consistent just low single digit growth.
So that's not our revenue growth, but as far as volumes and in China, China had been on a decelerating trend and then started the bounce back here in Q3.
Not.
I give meeting from upper single digit growth a couple of years ago to mid single digit growth to low single digit growth and now and into 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 a lot of Josh Spector with UBI Securities LLC. Your line is open. Please go ahead.
Yeah, Hey, guys. Just a question on Jan So it's very than hearing about industrials growth broadly can you guys printed a pretty good quarter. Just wondering how much of that is an easing comps versus a tough comp last year versus real growth in some of those markets.
Yes. Thanks. This is Greg so overall I think we as you said, we feel good about our performance again said generally weaker industrial backdrop.
There's a few areas where we're in addition to the fact that last year certainly from a comp perspective was only really started to see the China auto market slow so that was a.
A year over year benefit, but in addition to that our medical business.
Your first talking about over the last is our fourth straight quarter, I guess, where we've had growth in the high teens and our medical business. So that business continues to perform very well and it's certainly been taking some share in some target applications will 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 last year.
The same time on industrial for US. This is really an application by application based business and here. We have also feel like we won some share and some targeted applications in areas such as building construction tapes and North America. As an example is an area. We continue to grow very well and so it's a little bit the easier comps on automotive, but still automotive market as a whole this year.
During Q3 was still down auto production globally, and we did grow in that kind of low to mid single digit range. So feel good about the performance here as you said against generally weaker industrial.
Okay. That's helpful and then on the LG Chem side in terms you guys feeling that you've got back most of your loss share. If the market remains kind of tepid here do you see any risk of more share shifts back and forth maybe some context in prior cycles with slower general growth is there a lot.
Kind of back and forth or price.
Pushes to try to gain volumes back now that you've got your share again.
Generally when we see this share moving around it's usually in periods of change so.
Rapid inflationary environments are 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 I'll be it slow growth. If that's your question, but stable environment.
I haven't experienced that for sustained period of time in our industry. Our industry is more resilient than that but if we were too.
I have nothing in our history to tell us that that would cause more variation in share position.
Okay. Thanks.
Our next question comes on the line of John Mcnulty with BMO. Your line is open. Please go ahead.
Yes, thanks for taking my question.
With regard to the the margin improvement that you've been seeing from from the cost cuts.
It sounds like you're going to end the year certainly higher than you started the year. So I guess when you think about the year end run rate for 2019, and how we should think about kind of the.
The improvement that you can see in 2020 without any incremental cuts I guess, how should we be thinking about what that incremental bridges from 19 to 20 based on the cost cuts you've already put through.
Yes, so just based on cost reduction, we would expect carryover from a restructuring perspective into 2020 of somewhere in the $20 million to $25 million range.
That driven by the European restructuring that we've talked about quite a bit but that savings really starting to kick entity. The into Q2, beginning into Q3 of this year.
So I think we have that is a 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 that will be a headwind than 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 carryover restructuring about 20 to 25 million.
Got a great and then with regard to I think you would said autos were actually up in the quarter and I guess.
We understand that there were some relatively easy comps, but admittedly you maybe the only company. We look at that actually had a positive auto number. So I guess, what's what's driving that is that new new vehicles that you're on is it is it new applications that you're finding per vehicle I guess, how should we think about what's really driving that growth one autocam.
Ups 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 past year before this quarter.
Is that market it really slowed and we saw some well 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 a line of Anthony Pettinari with Citigroup Global markets incorporated your line is open. Please go ahead.
Good morning.
In our if I'd 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 is 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.
Anyone in particular, where you're seeing customer wins or where customer adoption has been kind of faster than you've expected or anything that surprised you there.
Sure Anthony Yes, so overall the speed at which we've been able to build the pipeline is 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 his for categories outside of apparel.
Specific 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 were working it's one of the actual growth.
The growth levels.
Hi in percentage terms, but it's off 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 innovation and manufacturing capabilities and identify other end markets, where they are similarities to apparel that we think are ripe for adoption to begin to build that.
We're having some wins along the way, but a lot of this revenue right now outside of a apparel lot of Martha pilot stage, and so forth to pilot revenue and there's a couple of moving to full adoption, but it's relatively small less than 10 program. So the vast majority the pipeline, it's still early stage and for US, it's really the growth opportunity, particularly in the 2021.
On 20 to 22 beyond here's 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 RBC I asked maybe more broadly you referenced a uncertainty around tariffs.
You see it kind of a pull forward and RV I asked demand and 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 when they can resume kind of more normal buying patterns.
So overall, we just saw Tentativeness, we've talked about the base apparel business slowing a little bit already the rate of growth slowing in Q2 already and further moderated here in Q3.
We didn't you didn't see people trying to buy ahead of time because it was just there was tentativeness and.
People in generally were slow to move in overall.
We look at what's going on our growth trends when we talk to other players in the segment suppliers people to provide fred's and so forth there what they're seeing is similar to what we're 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 theres a bit of a mixed bag, if you will as far as what's going on and retail environment. So.
We didn't really see inventory builds or anything if you look at the inventory trends inventories dropped dramatically in 18 built up a little bit at the end of last year beginning of this year, but and have already started completing 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 focused on the need for faster supply chains and lower inventory levels in this more uncertain environment, which just further reinforces the adoption of our fiveg.
Got it got it that's helpful I'll turn it over.
Our next question comes from a line of Rosemarie Morbelli with Gabelli and company incorporated your line is open. Please go ahead.
Thank you for taking my question.
I was wondering if on LG and you have ups you see lead steel marching try gets it is as strong a strong level you have done with restructuring Europe .
How much more do you think we can tease is targeting something I mean, not to try and get but the munching itself.
Yes, Rosemary so we set a target of 12 and have to 13 half percent as you said we are in the.
Upper end of that targeted range. When we set those targets. We had last two times, we'd set long term targets, we continually raise 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 businesses. The 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.
Well adjust accordingly, but I think the key message here is we got a good growth high return business here in L. GM.
That we see a feel great about our position and prospects for.
Alright. Thank you and then I was wondering if you could touch on M&A in the potential of.
I know seeing something between maybe not now in the end of the yeah, but other than the answer kitchen.
Yeah, So M&A timings always tough to call.
Pipelines full bottoms 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 focus here is a disproportionately focusing on areas that will increase our exposure to high value segments, and calling something specifically within announcing an athree hundred six month period is just too tough to call. So.
Not going to comment on that specifically.
Alright, thank you.
Thank you.
Our next question comes from will end up production Misra with Berenberg capital. Your line is open. Please go ahead.
Great. Thank you so in your I am segment.
Within the medical products is there any specific product launch or application that is driving the strong growth.
Yeah, it's pretty pretty broad broad based force across applications that we continue to grow well in some of our core business. We've also been growing some of our anti microbial business, where we call CHG that we've launched over the last a year. So so we've seen a little bit of growth coming from new products from that perspective, but pretty broad based across.
Folio over the last few quarters.
Got it and then a follow up on the RBC 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 RB is 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 to that so but it's still sub 10%. So we see good amount of opportunities to continue to expand this is taking our capabilities both innovation and.
Product capabilities as well as our manufacturing presence.
Basically move from trim and being having external about having embellishments inside the government outside of the government and the key driver for growth right now for US is in the European soccer clubs.
I appreciate it thank you that.
Our next question comes from the line of Chris Kapsch with loop capital. Your line is open. Please go ahead.
Yes, hi, Thank you just a follow up on the dynamics around your comments about gaining back market share within LG M.
So you said that in the past you've talked about when these things happen tenor tend to lean on on.
Pure service and quality more so than price as a means to get back fair can you just characterize if that's sort of what the tactics have been in this instance, as he said to gain back.
The share that you did or be in a position to gain back to share at least sounds like you characterize is that right.
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 in quality and just continue the dialogue with those customers.
And eventually to share Rebalances. The other thing that happens is we went from the last price increase when we're at the end of the inflationary cycle.
Two in some areas some commodities seeing some deflation so where we saw that we had a relative price premium that was maybe outside of that targeted bands 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 base, that's maybe targeted areas, but the overall focus here is be patient diligent we've built a tremendous capabilities as far as a 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 is that would you characterize the the regained market share consistent by region, and then getting more granular and that is that enough to explain why this.
The sales growth in southern Europe , and then and in North America, where you were flat and if you. If you gain back shares that to suggest that the overall market is with negative in the quarter. Thanks.
So it's important or shared 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 share gain was not a driver of year over year growth.
As much as it was sequential.
We have a follow up question from the lineup Adam Josephson with Keybanc 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 or whomever can you ended the Chinese one has strengthened quite a bit in recent weeks. So can you help me with what FX rates, you're using for Fourq you.
Yes, so RMB or sorry, our euro rates just under 110 in the quarter. So I think 109 points something in the quarter for the for the Euro in the RMB is a little over Oh 0.14 for the quarter.
One four okay, and just on that Mitch on sustainability Theres, a lot of talk about potential shift out of P.T. bottles toward aluminum just.
Given CPG companies desire to read themselves of plastic to the extent possible can you just give us your view of this whole sustainability movement and talking about what if any impact you're saying 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.
Yes the.
Largest primary focus right now is really around single use plastic containers.
And there's varying definitions for what that is could you think of water ball 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 packagers of making sustainability of priority and I'd say the first wave of that was more around improving the sustainability of our own business.
Dramatically reduce greenhouse gases by 30% over the last number of years.
Buying more sustained 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 isn't focus and now more recently have been shifting more and making sure that our products make recyclability much more easy and efficient. So we think this is an over a longer term trend for us we see to something more of a longer term drive.
We think it's important where the market leader, we're increasing our level of investment innovation in this space because we intend to lead here.
Thank you.
Our next question comes from the line of George Staphos 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 that regarding displacement types of technologies relative to your core products, So where a pack Expo recently and we saw it seems to us anyway, a lot more commentary by some of the other packaging providers around direct printing on secondary package.
Nothing.
Which obviously if that really took off I know is scalable would have some threats present, some threat to labeling and pressure sensor materials. Mitch what are you seeing in that regard or are you seeing a little bit more activity there from competing technologies.
Are you not would you agree with our perception that whether or not as a threat you're seeing a little more activity from competing materials.
Competing technology I should say and then similarly comes up periodically.
Are you seeing any increased attempts bye bye.
Brand owner and retailers to not necessarily go down the RF I'd path, but use other technologies to track products the supply chain.
Without having RF ideas revision systems or other things like that thank you very much and good luck in the quarter.
Thanks, George Yes, so specifically as far as other labeling technologies and commenting on direct print, but 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, we what we see as far as the economics of it is still pretty far ways off.
So we're we're actively engaged I think number of people are flying within working through but it's really going to be in small volumes premium side of side of the industry.
As far as the use of other technologies attract products, we've been consistent in saying when we think about the internet of things and everything physical having a digital twin digital life.
He said, our if I'd is one of a number of enabling technologies.
And there's a number areas, where a wireless radio base connection will be required others, where you maybe have more clear line of sight sq complexity, and so forth you'd be using other technology. So we think there's going be a complement of technologies that enable that future overall, so thats not.
Working with a number of those companies.
And well aware of that and see this is actually space for multiple technologies will prosper.
Thank you very much.
Thank you.
Mr. Muted there 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 weve laid and are algae oil 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.