Avery Dennison Corp
NYSE:AVY
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
189.7
229.52
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Avery Dennison Corp
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by, and welcome to Avery Dennison’s Earnings Conference Call for the Third Quarter Ended on October 2, 2021. [Operator Instructions] This call is being recorded and will be available for replay from noon Pacific Time today through midnight Pacific Time, October 30th. To access the replay, please dial 1-800-633-8284. For international callers, please dial 402-977-9140. The conference ID number is 21969421.
I would now like to turn the conference over to John Eble, Avery Dennison’s Head of Investor Relations. Please go ahead, sir.
Thank you, Frans.
Please note that throughout today’s discussion, we’ll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified and reconciled with GAAP on schedules A4 to A10 of the financial statements accompanying today’s earnings release.
We remind you that we’ll make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today’s earnings release.
On the call today are Mitch Butier, Chairman, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. I’ll now turn the call over to Mitch.
Thanks, John, and good day, everyone.
I’m pleased to report we delivered another strong quarter. Our two primary businesses achieved impressive top and bottom line growth, and momentum in our Intelligent Labels platform continues.
We are in a higher demand environment that comes at a time of continued and increasing challenges. The ramping up of COVID infections and restrictions in some countries, continued supply chain challenges and additional inflationary pressures are passing the industry, our customers and our teams. The biggest challenges have been in LGM North America due to raw material shortages and labor and capacity constraints and in RBIS Vietnam, where output was significantly constrained in the quarter due to COVID restrictions.
While we are encouraged by recent trends in these businesses as we’ve been able to increase output in recent weeks, the supply chain constraints continue.
As for inflation, the pressures continue to increase. We previously expected some abatement in raw material input costs towards the end of the year whereas we now expect additional inflation in Q4 as well as Q1 of next year.
Now, for context on the magnitude of the inflation, in our materials businesses alone, we will be exiting this year with annualized inflation of more than $600 million. That’s a nearly 20% increase, a rate we have not seen in decades. We are thus in the midst of another round of price increases. Despite these hurdles, we continue to achieve impressive results. The team is doing a tremendous job managing through these compounding challenges, focusing on keeping our teams safe and delivering for our customers.
Now, a brief recap of the segments. Label and Graphic Materials posted strong top line growth for the quarter, overcoming the challenges I just highlighted, as demand for consumer packaged goods and e-commerce trends continue to drive strong volume growth in our Label and Packaging Materials business, while growth in our Graphics and Reflective Solutions business continues to rebound.
LGM’s profitability remained strong, though margins were down from last year due to the increasing inflationary headwinds and higher cost in the quarter from the supply chain constraints. Given the increasing inflationary pressures, we have redoubled our efforts on material reengineering and, as I mentioned previously, are raising prices again.
Retail Branding and Information Solutions delivered strong revenue growth in the quarter and continued to expand margins significantly. The segment grew 22% on a constant currency basis and 14% organically, driven by strength in both, high-value product categories as well as the core apparel business. Impressive performance is despite the significant constraint in South Asia, where we have major manufacturing hubs, once again demonstrating the advantages of our global manufacturing network.
Intelligent Labels sales, enterprise-wide, were up 15% in the quarter, and we are on track for approximately 30% organic growth for the year versus 2020 and 40% versus 2019, towards the higher end of our long-term target. As expected, the continued strong growth in our RFID business was primarily driven by apparel. Applications outside of apparel, particularly food and logistics, grew faster than the average, though obviously off of a small base. And in Q3, we also closed the acquisition of Vestcom, a business that further expands our position in high-value categories and has the potential to further advance our Intelligent Labels strategy.
In the Industrial and Healthcare Materials segment, sales continued to rebound off prior year lows and were up relative to 2019 by 11% on a constant currency basis. As for margins, they are down as inflationary pressures [Technical Difficulty] and costs from supply chain disruptions have impacted the segment to a greater degree than LGM.
Overall, I am pleased with the progress we’re making as a company on our long-term strategies while also executing in the near term. We are providing superior service to our customers despite the challenging environment, keeping our teams safe and engaged, ramping up investments for the long term and ensuring we continue to deliver for our shareholders. Given our strong performance in the quarter, we have raised our outlook for the year, now anticipating earnings growth of roughly 25% over last year’s record and are on track to achieve all of our five-year company-wide goals that we established in early 2017.
With that, I’ll now hand it over to Greg.
Thanks, Mitch, and hello, everybody.
We delivered another strong quarter with adjusted earnings per share of $2.14, up 12% over prior year and up 29% compared to 2019, driven by significant revenue growth and strong margins.
Sales were up 17% ex-currency and 14% on an organic basis compared to prior year, driven by strong volume across the portfolio and higher prices. We also delivered strong growth compared to 2019, with organic sales up 10% versus two years ago.
As Mitch mentioned, our supply chains remain tight and input costs have continued to rise. Both, raw material and freight inflation were above our expectations for the quarter, and we’ve continued [Technical Difficulty] as we enter the fourth quarter. We continue to address the cost increases through a combination of product reengineering and pricing and have announced additional price increases in most of our businesses and regions across the world.
Despite the impact of inflation, supply chain disruptions and the headwind of last year’s temporary cost reduction actions, we delivered a strong adjusted EBITDA margin of 15.4%, down 70 basis points from last year and up 120 basis points compared to 2019.
Turning to cash generation and allocation. Year-to-date, we’ve generated $639 million of free cash flow, up over $251 million in the third quarter. That’s up significantly compared to previous years, driven by our strong net income growth and working capital productivity.
And we closed the Vestcom acquisition in the quarter for a total purchase price of roughly $1.45 billion. To fund the acquisition, we used the net proceeds from an $800 million senior note offering in August, along with cash and commercial paper.
Additionally, in the first three quarters of the year, we returned a total of $290 million in cash to shareholders, through $164 million in dividends and the repurchase of over 700,000 shares at an aggregate cost of $126 million.
Our balance sheet continues to be strong with a net debt to adjusted EBITDA ratio of 2.3 at quarter end, at the bottom end of our long-term target leverage range. This gives us significant capacity to continue the disciplined execution of our capital allocation strategy.
Now, turning to the segment results. Label and Graphic Materials sales were up 15% ex-currency and 14% on an organic basis, driven by strong volume and roughly 5 points from higher prices. Compared to 2019, sales were up 11% on an organic basis.
Label and Packaging Materials sales were up roughly 15% organically, with strong volume growth in both, the high-value product categories and the base business.
Graphics and Reflective sales were up 11% organically. And looking at the segment’s organic sales growth in the quarter by region, North America sales were up low double digits despite raw material availability challenges that have continued to create extended lead times. Western Europe grew more than 20%, partially due to easier comps given the impact of the pandemic we saw in Q3 last year. With that said, the business was still up double digits versus 2019. And overall, emerging market sales were up low double digits in the quarter with double-digit growth in both, ASEAN and Latin America and mid-single-digit growth in China.
While LGM’s profitability remained strong, adjusted EBITDA margin decreased from last year to 15.9%. This was partially driven by the increased inflationary pressures and the impact of supply constraints, which led to some incremental costs in the quarter such as expedited freight and overtime to minimize disruptions to customers.
And as you know, our goals are to deliver GDP-plus growth and top quartile returns on capital with a focus on driving EVA. Our approach to price increases and material reengineering is designed to do just that as we look to offset higher material costs on a dollar basis by the end of an inflationary cycle. However, the revenue base from such price increases alone, especially at the magnitude we are seeing in the back half of this year, reduces operating margin on a percentage basis with no impact to returns. This pricing impact led to a reduction in operating margin by roughly 0.75-point in the third quarter.
Shifting now to Retail Branding and Information Solutions. RBIS sales were up 22% ex-currency and 14% on an organic basis, as growth remains strong in both, the high-value categories and the base business, due in part to lower prior year comps. Compared to 2019, organic growth was up 9%. The apparel business saw a particular strength in the performance and premium channels and continued double-digit growth in external embellishments.
As Mitch mentioned, Intelligent Labels sales were up organically, roughly 15% and up about 40% compared to 2019. Adjusted operating margin for the segment increased to 13.8% as the benefits from higher volume and productivity more than offset the headwind from prior year temporary cost reduction actions, higher employee-related costs and growth investments. The RBIS team is continuing to deliver in this high-growth, high-margin business.
Turning to the Industrial and Healthcare Materials segment. Sales increased 20% ex-currency and 15% on an organic basis, reflecting strong growth in both, the industrial and healthcare categories. Compared to 2019, sales were up 6% on an organic basis. Adjusted operating margin decreased to roughly 10%, as the benefit from higher volume was more than offset by the net impact of pricing, higher freight and raw material costs and higher employee-related costs. Freight, in particular, had an outsized impact on IHM in the quarter, given the significant increases in global shipping costs.
Now, shifting to our outlook for 2021. We have raised our guidance for adjusted earnings per share to be between $8.80 and $8.95, a roughly $0.08 increase to the midpoint of the range. And we now anticipate roughly 15% organic sales growth for the full year, at the high end of our previous range, reflecting strong volume growth and the impact from higher prices.
We’ve outlined some of the key -- the other key contributing factors to this guidance on slide 12 of our supplemental presentation materials. In particular, the impact of the extra week in the fourth quarter of 2020 and the resulting calendar shift will be a headwind to reported sales growth of roughly 8 points in the fourth quarter this year with a roughly $0.30 EPS headwind.
The anticipated tailwind from currency translation is now $30 million in operating income for the full year, based on current rates. Most of this benefit came in the first half and will thus create a headwind as we go into 2022, if rates stay where they are now.
And we expect a modest EPS benefit from Vestcom in 2021, net of purchase accounting amortization, which we estimate to be nearly $60 million on an annualized basis and net of financing costs. [Technical Difficulty] target over $700 million of free cash flow this year, up significantly from previous years.
In summary, we delivered another strong quarter in a challenging environment, and we remain on track to deliver on our long-term objectives to achieve GDP-plus growth and top quartile returns on capital, which together drives sustained growth in EVA.
We will now open up the call for your questions.
Thank you. [Operator Instructions] Our first question is from Ghansham Panjabi with Robert W. Baird & Company. Please go ahead.
I guess starting with RBIS and some of the production issues, a lot of your customers have talked about on the consumer side in Vietnam and just Southeast Asia more broadly. How are you sort of able to navigate through that dynamic? Do you start to see sort of a flex across your different production footprints, et cetera, as order flow moved? Or just more insight on that dynamic would be helpful.
Yes, absolutely, Ghansham. So, it’s exactly what you just said. So, it was -- Vietnam is what’s getting a lot of the press and headlines that definitely had the biggest impact. But throughout the pandemic, there’s actually been different regions that have been impacted more than others, and we’ve been flexing the global manufacturing network to help offset that. And so, specifically here, if you’re asking about Vietnam, we are able to leverage specifically China to be able to service that demand in Vietnam. Still impacted growth by a couple of points overall. Question is how much of that is just end demand that won’t happen now because the retailers and apparel brand owners won’t be able to fulfill more end consumer demand or not. But it had an impact of a couple of points is what we estimate, but we were able to -- it would have been larger than that, had we not sourced from China.
Got it. And then, just for my second question on inflation. I mean, inflation has been building all year for many different supply chains, including yours, I guess what surprised you incrementally over the past three months, which specific categories and which regions are you seeing the most inflation? And also, did 3Q benefit from any sort of material pre-buy as customers kind of positioned for these incremental inflations? Thanks.
Yes. Thanks, Ghansham. Overall, I think we’ve seen inflation continue to increase really across the category. So, I don’t think it’s zeroed in one particular place. We’ve seen chemicals, adhesives, the film and resin components continue to increase. And then, I think in the third quarter, as we expected, we started to see some increase in paper, particularly in Europe. So, I think we’ve seen the acceleration in the third quarter and into the fourth quarter here really across the different component categories.
I think the biggest regions where we’re seeing the largest inflation is probably both, in North America and Europe. And North America really started late last year, as you recall, with some of the chemical increases, and that’s continue to grow as we move through this year and then Europe continued shortly after that with paper really kicking in here in the third quarter. It’s been the biggest sequential increase.
And as far as pre-buys on your question on that, we didn’t see -- we don’t really detect much pre-buys in the Q3 from Q4. We did accelerate and get a bit more benefit from pricing in the quarter purely because we just accelerated some actions there. As we look at within Q4, it’s hard to get a good read on the fourth quarter just because of the price increases we’ve announced in some regions for November 1, which is causing some pre-buys here in October, but it doesn’t have any inter-quarter movements, if you will, Ghansham.
Our next question is from Anthony Pettinari with Citigroup. Please go ahead.
Is there a way to think about the timeline for possibly rebalancing price cost in LGM based on the commodity inflation you’re seeing and the pricing actions you’ve taken? And then, just understanding the market is extremely dynamic and it’s tough to say, is there anything that you could say about how your LGM market share position has maybe fared in the current environment?
Yes. So, on your first question, Anthony, I think when we look at a quarter ago, I think our communication view was that we thought by the end of the year, we’d be looking to close the price inflation gap essentially and we’ve continued to see accelerated inflation. So, we’re looking at somewhere kind of low to mid-single-digit further inflation from Q3 to Q4. And now, we’re implementing additional pricing actions. So, I think, our view is that it takes us a few months, 3 to 4 months to pass pricing or reengineer some materials to take cost out to manage the inflation. So, when we start to see inflation stabilize 3 or 4 months after that is probably when we expect to be able to cover that on an ongoing basis.
Yes. And from your share question, so overall, markets remain relatively strong in North America and Europe, and from a share [Technical Difficulty] pretty stable. We don’t have share data yet on the most recent. We think it’s relatively flat in some regions and up -- maybe up sequentially and other regions just stable. Specifically, North America, we’ve called out in the past, we’ve seen some sequential improvement, we believe, but we’re not quite where we want to be yet. But expect we will be there in the next couple of quarters.
Okay. That’s helpful. And then, is it possible to specify either the financial or the volume impact of the North American labor issues that you referenced? Are those primarily with a group of customers or within Avery? And do those kind of linger in 4Q? Are they better or worse exiting October versus what you saw in 3Q?
It’s more about just the ability to meet surges in demand. And so, the ability to flex when demand suddenly -- you see peaks temporarily and so forth. So, it’s primarily impacted our service lead times which are consistent with what we’re seeing across the industry, our lead times being longer than they usually are, which is what the whole industry is seeing. That’s what the driver is really. So, it’s not really particular number. Yes, we’ve got a bigger backlog. We don’t know how much of that is true end demand versus maybe inventory building or people getting into queue just to make sure they’ve gotten allocation of future manufacturing. So, overall, I think the key message here is the markets remain -- good growth in the end markets, particularly in North America and Europe. So, the gains that we -- the market achieved last year when the pandemic first hit, have been held and then we’re seeing incremental growth from there. And yes, it’s putting a bit of a strain on the lead times across the industry.
Our next question is from George Staphos with Bank of America Securities. Please go ahead.
First question I wanted to ask is around what you’re doing to offset inflation. Good companies play to their strengths and advantages during periods of stress to gain position, to gain share. As you think about LGM versus RBIS and you think about the broad buckets, reengineering and cost versus commercial and price versus, I don’t know, new products and innovation, how would you say that sort of mix varies in terms of how you’re behaving in the market, LGM versus RBIS? I know LGM is heavy on the reformulation and pricing.
And then, the second question related to it is, is there a horizon, is there a practical limit where you really can’t do any further reformulation where certainly the incremental benefit isn’t what we’ve been seeing this year and in prior years, which would mean that you’d have to raise pricing further? And is there a practical limit in terms of how much more pricing you can get before you would worry about the strong demand? Thank you, guys.
Sure, George. So, your first question, which was talking about the relative levers within between RBIS and LGM as an example. I mean, first off, the inflation is much larger in LGM. Our levers within that -- all of our businesses are one, just our relentless focus on productivity is both focusing on variable costs, so things like innovating material reengineering and so forth, [Technical Difficulty] restructuring. So, touching on both of those, as you highlighted.
The material reengineering is more to do within the materials businesses, as you’d expect. You asked, are there limits to that within a given time period. Yes, there are some limits to that. But, over the long horizon, we continue to have a pretty consistent ability to deliver material cost out, we call it, every single year, and we’ve been doing that for decades. So, I don’t see a long-term limit to that, but definitely a short cycle, there’s some limits to what we can do there, which then you move to pricing.
Within RBIS, they’re having some inflation as well, not nearly the magnitude that we’re seeing within materials. And there, we’ve been raising prices as well. It’s a little bit of a different impact because every year, there’s a different program, just the way that industry works, and so you’re constantly kind of re-pricing for new programs going from different designs of information and branding solutions for the apparel and retailers out there.
And then, last thing I’ll say is just restructuring. That’s been a consistent focus of ours. In times when that are relatively coned, that’s when you want to focus on the restructuring as we’ve been doing over the years. We accelerated a lot of restructuring, as you know, into last year, and so we’re in a position of strength right now. When you’re in a high-volume environment, that’s when you taper back a bit of your restructuring. So, long term, that’s something that’s going to be a key lever for ours -- of ours across the portfolio. But clearly, we accelerated some of our actions in the last year from what we have here on the near horizon.
Just on the pricing side, is there a point at which you’d start to worry about pressure-sensitive materials being replaced by something else in the market? I don’t know what it would be, but nonetheless, you’ve had a lot of inflation. You’ve had to raise pricing. Does there come a point where your customers can’t bear any further pricing? Thank you.
You’re welcome. No, the pricing is broad-based. So, it’s not just industry specific, is my point. So, regardless of what labeling solutions you’re looking at, there is just inflation that is extremely broad-based. And it’s even outside obviously of packaging materials. So, when you think about the cost of packaging, it’s pretty small relative to overall cost of the packaged goods. So, I think generally, what you’re seeing when you see what’s going on in the macro around increasing inflation, labor constraints, it actually further heightens the need around information solutions labels, whether that be classic barcode labels or RFID and intelligent labels. And so, we think it’s just going to -- while there are inflationary pressures, it also further increases the business case for a lot of the solutions that we’ve been focusing on and investing in.
Our next question is from John McNulty with BMO. Please go ahead.
On the Intelligent Label front, admittedly, the 15% that you hit is kind of in your long-term range of 15% to 20%. But admittedly, it’s a bit lower than I think what we were expecting just based on a bunch of channel checks throughout the industry. So, I guess, anything constraining your ability to deliver in terms of the volumes throughout this quarter in the Intelligent Label side that we should be thinking about?
Yes. Thanks, John. So, I mean, each quarter, you’re going to have movement up and down from within that range. Overall, if you look year-to-date and then what we’re looking at for the full year, we’re looking at growth of 30% for the full year. And that’s obviously with a little bit easier comp, roughly 10% last year. So, you’re looking at basically compounded annual growth of 18%, which is at the higher end of our range, of our 15% to 20%. So, we feel good with where we are.
Now, specifically, your question about constraints. Yes, we were constrained. The challenges in South Asia referenced, we had Vietnam. So, our Intelligent Labels, a biggest portion of that, 75% is for apparel with the constraints we saw in Vietnam, just as I mentioned, for RBIS overall, impacted the Intelligent Labels businesses by a couple of points. As well as in Malaysia in the middle of the quarter, it was just a couple of weeks, but Malaysia had a lot of lockdowns, and that’s where we have one of our RFID inlay manufacturing plants. So, definitely, a bit of a constraint, but overall, we feel good with where we are and how we’re trending and how the pipeline is developing.
Got it. No, that’s helpful color. And then, I guess, the other question would just be on the free cash flow front. I mean, you already generated a huge amount so far at whatever it was 632, I think it was. 4Q normally is a big windfall kind of quarter for you as well in terms of free cash, I guess. Should we be thinking about it differently just given all the raw material inflation and things like that, or is -- can 4Q kind of be the big acumen that it normally is? How should we be thinking about that?
Yes, I think there’s a couple of things. So one is our CapEx year-to-date is a bit lower than we would have expected coming into the year. For the full year, we’re probably still around what our initial expectations would have been. But, just given supply chain challenges and some things getting delayed from an equipment production perspective, building perspective, things like that, we expect to have more CapEx here in Q4. And we normally do, but I think probably more relative to the first three quarters than what we normally would have. So, that’s one driver.
So overall, I think our view is that we’ve got about $630 million, as you said, year-to-date, our target is to deliver over $700 million We’re very confident in that and that’s still about $150 million more than last year, which was a record free cash flow year for us. So, we feel very good about the trajectory here and our ability to continue driving strong free cash flow.
Our next question is from Josh Spector with UBS Securities. Please go ahead.
So, in the third quarter, I mean, you guys did a really good job holding margins flat sequentially in spite of what you earlier called out as high single-digit raws inflation quarter-to-quarter. Just curious what was the biggest factor that helped you achieve that in the third quarter? And I think your guidance for fourth quarter reflects about a 50 basis-point sequential margin decline. So, what’s different about what you think you can achieve here in the fourth quarter versus last quarter?
Yes. I think overall, as you said, part of what you see when you look at the segments is some improvements in RBIS, particularly sequentially Q2 to Q3. And in the materials businesses where we saw a little bit more of the sequential inflation in the third quarter, is where we saw a little bit of sequential decline Q2 to Q3.
So, I think overall, a big part of that overall flatness was really driven by the strengthening of RBIS from Q2 to Q3. So, we look at Q3 to Q4, we expect to continue delivering strong margins in the RBIS segment. We did talk about having further sequential inflation that we’re now working through passing prices through. So, that would be a little bit more of a gap in the fourth than what we would have expected before as well.
Okay. Thanks. That’s helpful. And just on the RFID side, UPS specifically talked about more RFID adoption in their parcels. Just wondering if you could comment if that’s a project one that you’re involved with. And two, can you size that opportunity, if not specifically for UPS as a customer, but maybe the North America parcel market, if adoption was taken up at the rate that UPS is discussing? And does this change any of your view about some of the medium-term adoptions as I think you still talk about retail being the biggest opportunity for the next few years?
Yes. So, we’ve got a number of -- I’m not going to comment on anything specific, any specific program we’re working through, but we are working with all of the major logistics players. And a lot of it is -- specifically as you normally see starting out with targeted areas where the biggest challenge is the need for automation are. And so, we’ve got a number of programs, and that’s part of that. I’m going to talk about the revenue growth being above the average from a very small base that relates to those programs and logistics.
And as far as adopting across the entire network, which we see significant opportunity just when you think about the amount of automation required and trying to reduce costs, but also increase speed. We see that this technology, RFID and our broader intelligent label solutions as being a key enabler to helping companies achieve that. So, you asked what can the size of the market be? We shared some information in our March Investor Day. You can look at it. But simply, you can just look at a number of parcels that are out there. So, if you think about individual companies when they ultimately fully adopt what the magnitude that can be.
Our next question is from Jeff Zekauskas with JP Morgan. Please go ahead.
I think, in your slides, you talk about $600 million of annualized inflation. But, you also say that for the year, your annual inflation is about 10%. So, if $600 million is 20%, then 10% is $300 million. And $300 million would be offset by, I don’t know, 4% across the board price increase. Are your prices up that much, or are you in the hole by, I don’t know, $50 million or $70 million in raw material costs this year. Can you size that?
Sure, Jeff. So I think, in general, directionally, you’re right. I think, when we look at pricing, as I said, here in the third quarter in LGM specifically, and we’re talking mostly LGM here when we’re talking about that $600 million and 20% -- LGM and IGM, I should say. We had about 5 points of price in Q3 as part of the LGM growth rate there. In the fourth quarter, we expect that to be a little bit higher year-over-year as we’ve been implementing prices in the third quarter and some new increases that take effect at some point in Q4. So, yes, we still have a gap, as we’ve talked about from a margin perspective overall, between price and inflation. But certainly, that pricing percentage continues to grow as we move through the year.
Okay. And so, propylene has already fallen and probably polyethylene is going to be down, I don’t know, a few cents a pound in October. Maybe it’s going to go down $0.05 a pound for the next 3 or 4 months. But, what you said is you thought that your inflation would be not only higher in the fourth quarter, which I understand, but in the first quarter, why would it be higher in the first quarter of ‘22, as a base case?
Yes. And I’m talking sequentially. So, I think just you’ve seen things progress that we exited Q3 and entered Q4, so that will create a little bit of incremental impact in the first quarter, the first part of the first quarter I guess.
Part of it, Jeff, is just the first 1.5 months it stays in your inventory and then it slowly bleed through to the P&L. So, it’s just a delayed effect of when we actually get the inflation. The other thing I’ll say is, I know there’s an outlook as far as what might be happening over the coming months. I think, us and the entire industry kind of got that wrong a quarter ago, where there was an expected abatement here in Q4, and we’ve been seeing incremental inflationary pressures. So, we tend to just look out a few months and look to see what’s there and what do we expect and try to evaluate capacity additions and what’s going on in the macro to help shape beyond that. But I think we’re in a pretty uncertain environment. So, we’re not baking anything in or commenting on 2022 at large.
What raw materials are you short? What can’t you get?
Yes. I think, it depends on the region and the specific business. I think, it’s been a challenge on certain chemicals that go into our films and our adhesives depending on the region and it’s not as though we haven’t been able to get them for an extended period of time, but it does create some challenges within operations when you may have something that’s delayed a week or a few days even. And then, you end up having to run over time or do something else to manage through those kind of situations.
I think paper liners in Europe has been a challenge more recently as well. So, there’s a -- really nothing that’s been longstanding one thing, I would say, over the course of the last few quarters. It’s really been different areas that impacted us for short periods of time as we moved across the year here.
And just to add to that, Jeff, it’s not just what can be outbound from our suppliers. There are lots of delays in the freight industry. So, it’s taking longer things being held up at across docking facility or something, or it’s just taking longer to get your materials and that alone can cause a delay. It might be a delay just by a day or two days or it might be 1.5 weeks where you then need to shift the assets to other products and so forth, as Greg said.
Our next question is from Paretosh Misra with Berenberg Capital. Please go ahead.
So, I had a question on slide 10, where you show the product mixes within RBIS. How should we think of the mix within Vestcom relative to this pie chart. Is Vestcom -- will that be a totally new category, or it has some overlap with your existing portfolio?
Yes. We’ll lay that out in the next earnings call. But overall, it’s going to be a new category with both -- and the majority of it is in high-value categories and the rest of it will be a base.
Got it, got it. And then, any other color you could provide on your RFID pipeline where it stands versus the start of the year?
I think your question, sorry, there was a little disruption. The RFID pipeline growth I think is what your question was. So, yes, we continue to see good momentum overall within the RFID pipeline. I’d say -- I think, I commented on this last quarter as well. Our focus is more on moving things through the mouth of the funnel, if you will, more migrating them further down into the funnel. So, great progress on what we’re seeing there, a lot of -- whether you’re looking at food, on quick service restaurants, a number of pilots being initiated, a number of pilots being moving to local or regional rollouts. So, there’s quite a bit of activity going on there, and we commented on logistics earlier as well. So, that’s generally what’s happening.
I guess, beyond that is just a move into -- within some of the -- if you think about a number of retailers that are multi-category retailers, having discussions about moving out of the apparel department and into other departments within those larger retailers as well. So, number of activities going on. Broadly, I’d say, it’s the food and logistics areas of the area with the greatest growth similar to what we identified in the Investor Day in March about where the opportunity was and where our focus was.
Our next question is from the line of Chris Kapsch with Loop Capital. Please go ahead.
So, focused on LGM and the comments about organic growth by region specifically, just hoping for a little bit more color as to why Western Europe would be up more than 20% versus the low double digits in North America and emerging markets. I don’t think it has anything to do with the more pronounced inflation there. So, just wondering if you could -- if there’s some explanation for the divergence in the trends there? Thanks.
Yes, Chris. I think some of that is just based on comps. So, last year, if you go back to last year, we were declining in Europe, particularly in the third quarter after the surge we’ve seen in the second quarter from the pandemic. So, most of that is just comps when we look over a two-year period, Europe is up about 10% from 2019 Q3 to 2021 Q3.
But you’re still above the historical growth rate of that region. So, still healthy markets, but definitely, we’ve got some gyrations quarter-to-quarter.
Got it. And then, you mentioned how some of the supply chain logistical challenges have restrained growth a little bit in RBIS. Has that been the case in any instances in different regions in LGM? Thank you.
Well, we had -- it’s pretty much LGM North America is what’s [Technical Difficulty] the most in LGM. And then, for RBIS, it’s the constraints just around like we talked about Vietnam and Malaysia and so forth that are COVID-related, and it’s not just us, obviously. It’s the entire -- it might be a region of a country or the entire country. And then, LGM Asia has also impacted, particularly freight is a challenge globally. It’s a particular challenge in freight around Asia and just moving product between countries and so forth. So, that’s obviously a challenge in LGM as well in Asia.
Our next question is a follow-up question from the line of George Staphos with Bank of America. Please go ahead.
One is just a quick detail question. I had missed it. You said something about $60 million related to Vestcom just for posterity. What was that related to again? And I had a question on capital allocation.
Yes, George. So, that was specific to Vestcom, purchase accounting amortization will be somewhere in the $55 million to $60 million range is what we expect for 2022. When we step back and look at kind of total depreciation and amortization, including kind of the ongoing depreciation, it’s probably in the $70ish million range for Vestcom next year overall.
And then, my other question, could you remind us what you said in the past, and if any of this has changed in terms of your appetite and ability to do M&A within the LGM sector? Again, in periods of stress, the big companies usually gain capabilities, gain share; the smaller companies would tend to fall back. Are there any companies in the pipeline that would be helpful to you from a value-add standpoint, because that’s one of the components in terms of your capital allocation strategy, and would be complementary to Avery. Would you have the willingness to do anything like that? And relative to some of the experiences some of your peers had back in early 2000s, would you have the ability to add anything in LGM? Thanks, guys. And good luck in the quarter.
Thanks, George. Yes. We continue to have an M&A pipeline that we’ve talked about. We continue to engage and work with that, with our partners in the industry. So, that’s something that we are definitely continuing to work through.
And as far as specifically the LGM, yes, LGM, each of our divisions have a pipeline that we continue to work and we definitely have an appetite for areas, if we look at M&A as opportunities to accelerate our strategy. So we’re focused on M&A that --disproportionately focused on high-value categories and give us new capabilities that, as you mentioned, can enhance the overall capabilities of the portfolio. So, there’s a number of angles we look here, but those are the two broad for us as high-value categories emphasis and bringing on new capabilities overall and obviously, the financial end.
So, we’re continuing to work it. We just spent $1.45 billion on Vestcom, and we feel good with the early results of that and the outlook for that business and are confident we’re going to achieve a good return there. And then, we’re also looking to deploy our capital that we have going forward.
Mitch, would it be fair to say that the high-value quotient would be more likely met in things that would be in the RBIS segment more broadly, or is that an over simplification and incorrect? Thanks. And again, I’ll turn it over from here.
Yes. I think what you’re seeing is just more of -- it’s more around moving higher end around information solutions and the brand management capabilities. And so, we’ve got base materials, both within LGM, but also even RBIS has a base materials business, just making the blank RFID in there and then there’s working through the actual brand and information solutions. So, I wouldn’t say there’s business more than the other. Overall, the focus is around high-value categories, focusing around value-add material science product categories as well as information and branding solutions.
Mr. Butier, there are no further questions at this time. I will now turn the call back to you for any closing remarks.
All right. Well, thank you everybody for joining. We had another strong performance in a very challenging period. And I just once again want to thank our entire team for their ongoing efforts to keep one another safe while continuing to deliver for our shareholders and obviously delivering for our customers. So, thank you very much.
And ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Have a great day, everyone.