艾利丹尼森 (AVY) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Avery Dennison's earnings conference call for the third quarter, ended October 1, 2016.

This call is being recorded, and will be available for replay from 10:00 AM Pacific time today to midnight Pacific time October 29, 2016. To access the replay, please dial 800-633-8284, or 402-977-9140 for international callers. The conference ID number is: 21782908.

(Operator Instructions)

I would now like to turn the call over to Cindy Guenther, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, ma'am.

Thank you, Demetra.

Today we will discuss our preliminary, unaudited, third-quarter result. The non-GAAP financial measures that we use are defined, qualified, and reconciled with GAAP on schedules A4 to A8 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, President and Chief Executive Officer; and Anne Bramman, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Mitch.

Thanks, Cindy. And good day, everyone.

We had another quarter of strong earnings growth, with EPS above our expectations. We're improving our competitiveness with continued strong profitability across the PSM portfolio and making progress with our business model transformation in RBIS.

As expected, organic sales growth in Pressure-sensitive Materials, moderated in the third quarter to 3%, reflecting the program loss in the Personal Care segment, the Performance Tapes, that we have discussed previously. Excluding this program loss, sales grew 4.5% organically.

Once again, emerging markets were the key growth driver for PSM, more than offsetting softness in the North American market. From a product perspective, the base label materials business remained healthy with solid top line growth overall, and margins expanding across most categories.

Graphics and Specialty Label materials were up high single digits for the quarter on a global basis. I am pleased with our progress in shifting PSM's portfolio mix towards these higher-value categories. We expect continued benefit over the long term from our focus and investment in these areas.

Speaking of which, the integration of our acquisition of the MACtac Graphics and Tapes business, which we completed in August, is going smoothly. We also completed a very small acquisition of Ink Mill during the quarter, which expands our capabilities in the high-value Reflectives business. And, earlier this month, we made in equity investment in a UK-based startup, called PragmatIC, leveraging our strengths in RFID to enable long-term growth of intelligent labels in new segments.

All three of these recent deals exemplify the range of opportunities we have identified and continue to pursue within our M&A pipeline, with a focus on high-value product lines and supporting technologies. Our commitment to investing here, in terms of both M&A and higher capital spending, is reinforced by the excellent progress we've made with the high-value segments through which we have delivered consistent organic growth, improved mixed, and strong profitability and returns.

Shifting now to retail branding and information solutions. Sales were up a little over 2% organically, driven by radio frequency identification. RFID sales were up over 35% in Q3, and are expected to exceed 30% for the full year.

While the pace of growth will slow in the fourth quarter, reflecting the difficult comparison to the prior year we have discussed, we expect that RFID will continue to be a key growth driver for us. We're continuing to invest in this high-value product line, expanding capacity and improving our manufacturing processes, as well as participating in promising new ventures like PragmatIC.

Outside of RFID, top line growth was short of our target for the quarter, amidst a difficult retail apparel market in the US, particularly among the department stores. That said, we saw solid volume gains across the base business, representing clear signs of success for our multi-year transformation strategy as we become faster, simpler, and more competitive while driving margin expansion.

Our strategy is the right one. Moving decision-making closer to our markets, reducing complexity as well as our cost structure, and qualifying lower-cost, locally-sourced materials to support more competitive pricing. Our improvements in service, flexibility, and speed are resonating with customers.

In light of the soft top line though, these actions have not been enough to deliver the margin expansion we had targeted for the year. Now we will accelerate our efforts through 2017, to further improve our competitiveness and achieve our 2018 margin expansion target.

Coming back to the total Company view. Overall, we have make good progress against our strategic and financial objectives, as evidenced by another solid quarter, and a $0.10 increase to expected EPS for the year. We remain highly confident in our ability to consistently deliver exceptional value over the long run, based on the execution of our key strategies.

First and foremost, we will drive outside growth in high-value segments. We will continue to invest disproportionately here, both organically and through bolt-on acquisitions. Over time, this will improve our portfolio mix and bolster our leadership in these key segments.

Second, we are relentless in our pursuit of productivity improvement, to enhance our competitiveness across all product categories, and of course, to drive margin expansion. Third, we are maintaining our high degree of capital efficiency, while increasing investments to support profitable growth. And of course, we will continue our disciplined approach to returning cash to shareholders.

Now I'll turn the call over to Anne.

Thanks, Mitch.

Providing a little more color on the quarter, in Q3 we delivered a 16% increase in adjusted earnings per share on 3% organic sales growth. Currency translation reduced reported sales by 1.7% in the third quarter, which was offset by the lift from the MACtac acquisition.

Adjusted operating margin in the third quarter improved 40 basis points to 9.8%, as the benefit of productivity initiatives and higher volumes, more than offset higher employee related expenses, and the net impact of price and raw material input costs. We realized about $21 million of incremental savings from restructuring charges net of transition costs.

The adjusted tax rate for the quarter was 31%, reflecting a reduction to our estimate for the full-year effective tax rate from 34% of the end of Q2 to 33%, due to stronger income growth in lower tax restrictions. Year to date, free cash flow was $248 million, an increase of $57 million compared to last year.

During the first nine months of the year, we repurchased approximately 2.7 million shares and paid $106 million in dividends. Net of dilution, we reduced our share count by approximately 1 million shares, for a net cost of $118 million, bringing the total amount of cash returned to shareholders so far this year, to roughly $224 million.

Our balance sheet remains strong, and we have ample capacity to continue funding acquisitions as well as returning cash to shareholders in a disciplined manner. We funded the acquisition of MACtac Europe through Euro denominated commercial paper.

We will explore a Euro denominate debt offering in the first half of next year to refinance notes that will be maturing later in 2017, as well as the MACtac acquisition. Our objective will be to take advantage of the low interest rates in Europe, and the opportunity to hedge currency exposure on our balance sheet.

Now, looking at the segments. Pressure-sensitive Materials sales were up approximately 3% on an organic basis. Emerging markets continue to be strong contributors to growth for this segment, representing virtually all of the top line growth in the third quarter.

Excluding the impact of the program loss in Performance Tape, emerging market sales were up over 10% organically, comparable to the pace we saw in the second quarter. This strength was fairly widespread across the countries that comprise emerging markets.

Of particular note, the underlying growth trend in China picked up modestly compared to the second quarter. You may recall that sales in China were roughly flat in Q2, on an organic basis. Adjusting for holiday timing, and the Tapes loss, we estimate the underlying organic sales growth was China was back to the low single-digit rate we saw in the first quarter of this year, and for 2015 as a whole.

Turning to the mature markets in North America sales declined at a low single-digit rate, on an organic basis. This reflects a soft market and the pass through of savings from deflation.

While Western Europe was up low single digits, demand in Western Europe has been consistently growing at solid low- to mid-single-digit rates, and on occasion, even higher. Factoring in Eastern Europe, the overall European market has been a strong source of growth for us and we expect that strength to continue. We are investing to keep pace with the growth in this region. Recently announcing a $65 million investment over the next year and a half, to expand both the capabilities and capacity of our flagship operation in Luxembourg.

From a product line perspective, Label and Packaging Materials sales were up mid-single digits organically, while sales for the combined Graphics and Performance Tapes product lines were down low-single digits, reflecting the expected program loss for Tapes. Excluding the program loss, combined sales for Graphics and Performance Tapes were up mid-single digits on an organic basis.

Pressure-sensitive Materials adjusted operating margin of 12.6% was up 50 basis points over last year, as the benefits from productivity and higher volume, more than offset the net impact of price and raw material input costs, as well as unfavorable mix.

Shifting now to retail branding and information solutions. RBI as sales grew 2% on an organic basis, driven by growth of RFID. Sales outside of RFID continue to be soft, down low-single digits, reflecting modest [bought] growth in volume, which was more than offset by the impact of strategic pricing actions that we began taking late last year.

As you know, we began adjusting our prices in late 2015 to become more competitive. So the sales growth comparisons for the base business become modestly easier in the fourth quarter. As Mitch said, we do believe that the transformation of our business model becoming more cost and price competitive while providing better, faster service, is driving volume growth, albeit in a challenging retail apparel environment that makes it tough to see the impact of these wins in our financial results.

From a regional perspective, we saw strong mid-single-digit unit volume growth for core label products among European retailers and brand owners. Due in part, to continued progress in expanding our share among the fast fashion players.

Unit volumes for core products were flat in the US, an improvement over the mid-single-digit decline we saw last quarter. This market is especially challenged as demonstrated by macro indicators. In particular, apparel imports into the US were down, on average, by about 3% for the most recent three months reported. And since the fourth quarter of last year, the inventory-to-sales ratio for US apparel has been at pre-recession levels.

Adjusted operating margin for this segment improved by 20 basis points, as the net savings from the business model transformation were largely offset by higher employee related costs. We have not changed our long-term margin expansion objectives for this business, and expect to achieve the goal we set for 2018.

As expected, sales for Vancive Medical Technologies were down 20% on an organic basis in the quarter, reflecting the combined effect of share losses and customer inventory rejection. We were able to partially offset the impact of the sales loss through cost-reduction actions. Going forward, the steps we began taking mid-last year should enable consistent growth and significant margin expansion over the long term.

Now, turning to our outlook for the rest of the year. We have raised the mid-point of the range of our guidance for full-year adjusted earnings per share by $0.10, to $3.95 to $4.00. This reflects the better-than-expected operating results that we delivered in the third quarter, including the lower expected tax rate.

We outlined some of the key contributing factors to our EPS guidance, on slide 8 of our supplemental presentation materials. Highlighting the changes from our previous expectations, we have reduced the high end of our organic growth outlook, and now expect full-year sales to grow between 3% and 3.5%, on an organic basis. We now expect more than $75 million from restructuring savings, net of transition costs for the year.

And as discussed previously, we now expect an effective tax rate of approximately 33%. Just wrapping up, we're very pleased with the strategic and financial progress made against our 2018 goals this past quarter. We are confident we can continue to deliver exceptional value over the long term, through superior execution of our strategy including the disciplined allocation of capital. Now we'll open the call up for your questions.

(Operator Instructions)

Ghansham Panjabi, Robert W Baird and Company.

Hey guys, good morning.

First off, did you see any measurable change in core sales growth for PSM in any particular month during 3Q? There have been some companies in different industries that have commented on the slowdown in Europe during the quarter. Wondering if you saw any deviation in the quarter?

We do normally see some variation month-to-month. We did see a little bit of a slide during Q3, over in Europe.

Having said that, we're seeing a little bit of an uptick in early October, as well, within Europe, as well as North America. I do not read too much into individual month trends too closely, because it is not unusual for us to see four weeks of strong performance followed by a softening or vice versa.

Okay that's helpful. What exactly, Mitch, is, do you think, driving the weakness in North American PSM? Is it inventory reductions? What do you think is going on by channel there?

It is hard to say. We think there has been a softening in the end-consumption of the market in Q3, but we do not have that data right now. But, we also did cede some share earlier in the year within that business, as we were driving more discipline on the lower-value, less-differentiated segments. But in the quarter, we think it basically softened a bit and we do not have clear reasons why.

Out at Labelexpo, the sentiment from North American converters, was overall, I would say, most of them, were very confident in their individual businesses, cautious about the market overall, but also talked about how they themselves have less visibility to their own order volumes than they traditionally have had, as well.

It is hard to give you a read on exactly what is going on in the North American business. Clearly some of the decline was from Graphics, if you will, within that region specifically. But it is hard to give you a clear read here. As I said, the first few weeks of October we're starting to see an uptick.

One final one from me. You also called out higher raw material costs for 3Q. Can you first off, expand on that? And then also, how are you positioning the company for what could be an increase in inflation, as we head into 2017 coming off a period of a few quarters anyway, of deflation.

Ghansham, so what we really said was that we saw an impact to our margins of price net of raw material input costs. So relatively speaking, we don't give specific color on pricing inflation, but as we have been pretty consistent in saying, that we broadly have given some price reductions in segments where we have relatively higher variable margins, and we may have seen some deflation. And, we've basically passing it along to customers in some targeted areas, and in my script, I specifically called out that we had seen that impact in North America.

Okay. Thanks, guys.

Scott Louis Gaffner, Barclays Capital.

Thanks. Good morning.

Hello, Scott.

Mitch, just wanted to go back to RBIS for a second. You mentioned the North American apparel retailers and some of the import data. Are there any categories, in particular, within that channel that you are seeing any weakness in? And then, what about European retailers? If you could give some color there, as well.

Yes. So, the categories within US department stores, in particular, are seeing softness. And we're seeing that as well with our key customers in that space. But generally I think it is relatively broad-based, and the data that Anne shared is across the entire retail apparel sector, if you will.

So, inventory levels, returned back this year, to their pre-recession high. If you recall, for a few years after the recession, they were quite a bit lower. Those have bulked up. A good portion of that, relates to the fact that it was a very warm winter last year, and there was not as much sell-through, so they've been holding on to the inventory. So, I know the goal is for retailers to flush some of the inventory out of the system through this holiday season.

Then, for Europe, it depends, I would say, overall softness in the UK. Clearly, the UK retailers, with Brexit going on, I think are struggling a bit. So that is one place we see softness. But in Germany, pretty solid. Other markets, we're seeing relatively solid performance at the end-retail level.

Okay. You said RFID, up 30% in the quarter. With some of the weakness in apparel, is there any change in the conversation with your customers around adoption rates on RFID?

It was up 35% in the quarter, and we expect to be 30% for the full year. And we're expecting the growth to moderate a bit going into -- quite a bit going into Q4.

The conversation is very similar. The working through -- each retailer or brand need to go through an assessment of the business case, and then piloting, and then you get a partial adoption, and then full adoption. So, no real change in the conversations.

There has been in the last quarter, since we talked about where the pipeline is, we have had one Tier 1 move from pilot into early adoption. And then a couple of very small specialty retailers, move either from business case to pilot our pilot to adoption. Conversation is pretty much the same. Seeing a little bit of migration through the pipeline, as well.

Last one for me; around the share repurchases. Obviously, you don't make a decision based on one-day's move, but the stock is down fairly dramatically today, and I would think your internal model would be screening well for share buyback here. How do you think about share buyback here into the into the year?

As you talk, about we don't really comment on timing and pace of share buyback, and we have been really consistent in how we look at this. But, we do have been intrinsic-value model, and if see a gap widening, we will be much more aggressive in buying back stock, and again as we see the gap -- less of a gap, we do not buyback as much stock at that point. We are bit opportunistic in how we look at our share buyback programs, as well.

Scott, we do not comment, but you can probably infer from our past behavior how we would behave in such an environment.

Understood. I appreciate all the color.

Absolutely.

George Leon Staphos, Bank of America Merrill Lynch.

Thanks, operator. Hi everyone. Good morning. Thanks for all the details.

Cindy, congratulations to you, as well, and good luck with the retirement. We will miss working with you.

I guess the first question I had, recognizing the answer is probably both, when we look at the slight reduction in the core growth rate you are expecting, Mitch, is it more centered in our RBIS, given the weakness in retail, or is it in the somewhat difficult to pin down, but none the less apparent, reduction in consumption in Pressure-sensitive Materials in the -- I think the US is what you said? Which one of those is a bigger driver of the modest trim there?

George are you asking about Q3 are Q4 because you can triangulate what that actually takes.

I was meaning it really more for the full-year outlook, but answer it however you feel is most illustrative.

Overall, RBIS you can see where the growth rate is a little over 2%, and so we expect roughly a continuation of that. Obviously, it could be a little lower, a little higher, depending on how things pan out. A couple key contributing factors; we have harder RFID comps, if you will. We have a couple of things that ease up on the comps front, in that business. So that is what we're thinking within RBIS, is a continuation.

And, within Pressure-sensitive, Q3, the revenue was lower than we were thinking that business would come in at. And it was specifically around North America. It's really a question about, is it early trends we see in October continue, the positive trend we're seeing? Or does it revert back to a lower level?

Is October more-or-less in line with what you would have expected otherwise? Obviously, it is up, but is it up where you would have liked it to have been?

I'd say it's consistent with our guidance range, that we provided.

One thing, it is very hard to read Asia, North Asia in particular, because of the calendar shift of the Golden Week, so basically their Harvest Festival, if you will. So that distorted things. Anything for RBIS, because so much is sourced out of North Asia, as well as North Asia for materials group, is not a good read.

North America rebounded like we said, and Europe has rebounded a little bit from a softening late Q3 as well.

Okay. Thank you for that. One other question I had, if I look at the guidance increase, and it was roughly $0.10, the tax effect in the third quarter was probably a couple of pennies, the FX negative is about a couple pennies more favorable. Is there a way to split the remaining difference between restructuring, which you said is in excess of $75 million, but you did not necessarily say how much, and any other factors that are benefiting you?

Yes. Really the biggest piece of the gap that you're talking about, is from the beat we had with PSM this quarter. Even though the restructuring -- we gave guidance, it's just slightly more than $75 million. It could be a couple of million off, we just wanted to give a little bit of flavor on that. But it's really the operational beat we had this quarter.

My last one, and then I'll turn it over and try to come back. Back to RBIS, we have asked similar questions, I guess, in the past around the business and your need to restructure, recognizing that is a challenging business, and it's competitive. At the same time, you're continuing to restructure, and you are trying to stay ahead of the pace of competition, and the other challenge in that market. At this juncture, given what you know, what two or three things make you confident that you can continue to retool that business, stay ahead of competition, and ultimately hit your margin targets for RBIS by 2018?

I think overall, what makes is confident around that, is the adjustments that we made, started making last year, that we talked through. And it was the beginning of what we said would be a multi-year transformation. We made quite a few adjustments, and a lot of that was around moving more decision-making into the regions and closer to the customer, having a more segmented approach -- different customers, if it is a performance athletic -- high-end performance athletic brand, relative to a discounted retailer. They have different needs, so we've adopted a more segmented approach.

And as part of that, in some segments, that meant adjusting our cost structure to one, expand margin, but two, also to get more price competitive. Remember the variable margin in this business, even what we call the less-differentiated, are relatively high. So being able to drive consistent growth is a key requirement within this business as well.

What are the signs of success? It's basically, we're getting volume gains, we've stopped the share slide that we had for a couple of years going into mid-last year, and we are seeing volume gains even though the market is down. We have basically proven the model ourselves internally, So now it's a matter of pushing forward to accelerate.

As far as just to get to the margin targets that we've laid out for 2018, if you recall, when we laid those out, we identified, there is a lot of amortization expense going away late in the cycle. So we have got to have, basically, the full point of an expansion, just from that. That is not new. We talked about it when we first laid out the targets. So that gives you a full point, and then from there, from where we expect to be this year, you need less than a point of margin expansion over the two years to get to the low-end, less than two points to get to the high end.

Okay. Thanks, Mitch. I'll turn it over.

Thank you, George.

Adam Josephson, KeyBanc Capital Markets.

Good morning, everyone. Mitch and Anne, hope you're well.

Forgive me, I joined a bit late, so forgive me if I am repeating anything. But it sounds like you reduced -- you slightly reduced your organic sales growth guidance on account of some weakness in North America and PSM, am I on the mark so far?

Yes, so, when we looked at our guidance we came in a little bit softer on North America for PSM. I think if you look at the full-year guidance the reality is, we're going to be around the midpoint. If you look at the two ranges, you would have to assume a pretty significant change in the run rate in Q4 for the businesses, and on the downside piece to it, you would have to assume a reversal in trends for all the businesses as well. So, the likelihood is we're going to be around the midpoint.

Thanks, Anne. And you raised your guidance, partly on tax, and I think you said, partly on better PSM? Is that right?

Correct. And I will clarify on the tax, that is really a contributor from PSM, as well. We saw very favorable geo mix of where the income was coming from, from lower tax jurisdictions, so I really consider that an operational beat, as well.

So, you have lower sales expectations for PSM broadly, but you have higher profit expectations for PSM for the year? Presumably on margins, right?

Correct.

And, why the margin upside? Given that sales were a bit light?

Again, a similar story than we've had the last couple of quarters, is productivity continues to be a very strong performer for this division. And in this quarter, we continue to deliver on the productivity front. So, really, the beat we had, that we're showing for the full-year guidance, came from this quarter.

Okay, thanks. And just in terms of your implied 4Q guidance, the midpoint's around $0.95, compared to last year's $0.85. Last year you had a pretty low tax rate. So can help us understand what the primary drivers of that year-over-year growth are?

For our guidance, for the margin we assumed the normal seasonal margin -- sequential margin pieces from Q3 to Q4 for PSM. And traditionally, the RBIS business does have a higher margin, sequentially, from Q3 to Q4 that we also have baked in. So if look at our guidance range, really the biggest component of it is where will the margins deliver for RBIS.

Okay. Thank you, Anne. Appreciate it.

Anthony Pettinari, Citigroup Global Markets.

Good morning.

With the investment in Luxembourg, is it possible to say when the capacity becomes available, or when it ramps? And then, how much of that $65 million investment shows up in 2016 CapEx versus 2017? And any early view on 2017 CapEx?

Specifically with that investment, it's coming online, essentially, for the year, 2018, is when it will be up and running. So that is our expectation, and if you look at the investment that we're making, we've consistently talked about pretty robust growth within Europe, both Western Europe but also the combination of Western Europe and Eastern Europe.

This is a business that, actually, we haven't added a new coder in for labels for quite a number of years, and so this is to fund the growth that we're seeing within that business, right now. And we expect we will continue to be investing in the region because we see quite a bit of opportunity for continued growth there. As far as the CapEx timing, Anne, do you want to comment?

Yes, so generally, the bulk of the CapEx timing will take place in 2017. And, the spending that we have this year is within the guidance that we gave at the beginning of the year, roughly $200 million for CapEx. And again, when we laid out our 2018 target, we said that, on average, we would spend about $200 million in CapEx over the year. So we were a little behind in the first couple of years of that guidance range, so I would expect to see us still average around the $200 million, it's just going to be a little more back-weighted overall for the company.

Okay. That's very helpful. And then, in RBIS I think last quarter, you indicated you were impacted by store closures in athletic goods. I'm wondering, given what we have been reading and a very challenging retail environment, are store closures, were they still a headwind in 3Q and does that -- maybe a drag through the end of the year? Any kind of color you can give there.

There's always some consolidation and store closures, and what you see is what we see. Specifically, what we commented on before was the fact that there was some bankruptcies of some athletic stores -- athletic chains. That affected Performance Athletic You recall, it had declined last quarter, which was exceptional, because usually we see very consistent growth. So that category for us, returned to growth in Q3.

Okay. That's helpful. And maybe just one last one. It is a follow-up to George's question on RBIS. In your remarks, you referenced accelerating the RBIS margin improvement program. And I was wondering if you give a little color on the levers you can pull there from here on out. Do you need to get more aggressive on the price adjustments? Or are there additional costs at you can take out? Or would you get more aggressive along M&A, or how should we think but the levers you can pull to accelerate the RBIS margin improvement?

I think it is, basically, a continued execution of what we've have been doing, but really taking the next step in accelerating what we've been doing.

This is about winning the marketplace, and I'll tell you from what we're seeing, and what we're hearing from customers, the changes we have made are resonating. That gives us confidence. We're seeing the numbers behind that, of volume gains in a period of declining market conditions. So that gives us confidence.

We just see opportunities to run this business more efficiently, as well. There's quite a few levers within a business of that size. And I don't want to go through each of the individual details, but we feel, not pleased with where the performance is, but confident with the prospects of this business and what we are going to deliver.

Okay. Thanks. I'll turn it over.

Rosemarie Morbelli, Gabelli and Company.

Thank you. Good morning, everyone.

I was wondering if you could give us a feel for the growth rate in the athletic chains, following the softness in the previous quarter? What is a normal rate that you were expecting, and are you there in the third quarter?

This can have a little bit of volatility to it, but it is consistently grown above the average for the overall segment, and pretty relatively consistently, mid-single digits to higher. And that is where was within Q3.

Okay. Thank you. And could you give us some detail as to the inventory increase. Versus last year, inventory is up 10% versus revenue is up 2.7%. Is this MACtac, or is something else going on?

So, Rosemarie, there's a couple of components to it. Yes, this is the first quarter that we have got MACtac in our balance sheet, so that will distort some of your ratios a little bit. But in general, a couple of quarters ago, we talked with the fact that we were making some investments in certain select areas in inventory, primarily, in RFID with RBIS. So while we have continued to make progress, and we have seen the inventory reductions come down as we played out the year, we still have an investment in that, in order to carry us through the end of this year, into next year.

This is -- making sure you have the proper inventory in anticipation of the changes you are making?

It is the pipeline of RFID customers that we've got, to make sure that we are meeting their demands.

Okay. Thank you, and if I may ask one last one. Your ratio price, selling price versus cost, was negative, as raw material cost seem to be rising. Are you expecting that ratio to worsen in the few quarters until you manage to get price up, in line with raw material cost?

Raw material cost, the environment we're seeing is relatively stable. You see some commodities like oil, have been on an upswing, but as far as what we are experiencing, they have been relatively stable.

And as far as the net impact of price and raw material cost, Anne talked about what the headwind was in the quarter, and over the long run we have been pretty consistent in saying that some of modest gains we have had in each quarter, over the past couple of years basically, over the long run those eventually adjust for themselves, if you will, or correct.

What we're seeing on the pricing, net pricing front, is what we expected. The out-performance in PSM was largely around continued productivity. And our objective here is to consistently grow this business, leveraging our innovation capabilities, which includes finding ways to reduce the material content of our products, so that we can be competitive in the marketplace, and grow the market while driving returns and margins in this business.

Thank you. And one very quick one if I may. When are you -- when are we anniversaring the program loss in Performance Tape?

We had a bit, a small piece of that, in the first half of the year, but I would expect to see headwinds in the second half as the program loss -- we really started feeling that in Q3.

It is basically mid next year, is the rough rule of thumb you should use, Rosemarie.

Okay. Thank you.

Jeffrey John Zekauskas, JPMorgan Securities.

Hi. Thanks very much.

I would like to go back to raw materials. I understand that your raw material costs were pretty benign, but propylene costs are up $0.10 per pound since April, so that is going to move up acrylic prices in the fourth, and in the first quarter.

Is your attitude that you are going to wait and see, as the raw material costs move up, if they do move up, before you take pricing action? Or are you going to try to be more aggressive? What is your stance as some of the petrochemical values move up?

We saw a little bit of modest inflation that we talked about last quarter, but we've seen relative stability. And individual components, Jeff, move different directions, but on balance is where we're seeing things fairly muted, if you will. So that is what we are referring, to not any individual components. You are absolutely right. What you are seeing is what we're seeing, for that component.

What we do is, when there is inflation -- so if we were to start seeing inflation, we go through, and we will announce price increases on which products or which regions, it is affecting. And a good example of that is, last year, we were still in a relatively deflationary environment. We raised prices within filament categories, within Europe. So we went out and announced it, and pushed it through.

You've really got to think through, with the commodities we're seeing, it is different in US dollars or if you are in Euros, and so we basically make adjustments, and we will put price increases through, where we see inflation.

Okay. You made a couple of small acquisitions. What did you pay for them and what did you get? That is, what was the revenues or the EBITDA, and what were the costs of your two small acquisitions?

They are very small, so we don't want to disclose all the details about them, but I can tell you the Ink Mill acquisition just has a few million dollars of revenue, so very small. It is a business that is really investing in our high-value Reflectives business, but it's also a capability we think we can leverage elsewhere within the portfolio as well. They make UV and UV LED curable inks, and as part of our TrafficJet solution within that business.

On PragmatIC, that was an investment that was earlier in October, so it is not in the results right now. That is a minority investment., there was an GBP18 million funding round that PragmatIC went through. We were less than half of that, I will say.

Why is Europe PSM growing faster than the US? Or are there particular markets in Europe that are healthier or more robust? And are there particular PSM markets in the US that are a little lackluster?

Europe, broadly speaking, gets the benefit of Eastern Europe emerging markets. And, Eastern Europe, this quarter, is what really was a key driver for them. Actually, pretty consistently for the past years, even Western Europe, we've talked about growth being higher than the US.

There's a number of factors behind that. We cannot point to any one. One of them is regulatory requirements around larger label sizes and so forth.

There is not one thing I can point to, that is one example. But to be honest, the differential between the US and Western Europe has pretty much consistently been a little bit bigger than we would have even expected. I'm talking the market level not just our performance.

And, in the weakness in the US, was it confined to a particular market or it's too hard to tell?

Not a particular market, no. It was relatively broad-based.

Okay. I think that's it for me. Thank you so much.

You're welcome.

(Operator Instructions)

George Leon Staphos, Bank of America Merrill Lynch.

Thanks. Hi guys.

I want to come back to RFID and RBIS, a little bit. Recognizing you are not giving guidance yet for 2017, do you think, Mitch, over the next couple of years -- let's frame it that way, that the outlook for adoption is as good as what we have seen, say over the trailing 12 months? I recognize it is retailer by retailer, etcetera, and it can come in in fairly large chunks, but if you had a frame it, is it as good, better, somewhat worse? How would you have us consider it over the next couple of years?

I would say, it is as good and getting better.

(laughter)

Basically, a year or so ago, we were talking about getting it into an inflection point and starting to see some customers adopt. We have seen that, but it is really hard to call when that will happen to the point that you raise.

Next year, we expect this business to be double-digit growth. It could be just over 10%, or could be 30%. Timing specifically is hard to tell, but over the long run, we talk about this business being a 20% growth business and that is what we continue to expect.

Mitch, are the returns getting better to the retailer from adoption, and that is what the growth has been so strong? Or are there other reasons why you'd see adoption? I would imagine it would have to be the former, but again want to get your thoughts on that.

I think it is more retailer by retailer, and brand by brand, them going through the process. It's a pretty big shift in how they do things, how they think about running their supply chains.

The returns have been strong -- very strong the last years, for adoption, it is just each business, each customer, needs to go through that assessment and evaluation. And the reason pilots can take so long, and the early adoption phase can take a while, is purely because of the change in adjustments they need to make.

Back to the margin question from earlier. Again, we have talked about this before, and I was aware that you have the drop off in DNA, the roll-off from Paxar there. If I look at the low end of your range, I would drill down, and say what makes you comfortable about getting that incremental 100 basis points or so? When I look at 2016, obviously, a lot of restructuring benefit to your credit, but yet the margins are, at least in this quarter, kind of flat versus the year-ago.

Is it just further restructuring that drives the majority of that 100 basis points? Is it more in, your view, the RFID element -- which you're quite obviously positive on? What gives you confidence in at least capturing that last 100 basis points above and beyond the DNA component.

Is really a balance between driving the growth strategy, as well as driving further productivity. If you look at the business, we've consistently delivered over half-point a year of margin expansion, regardless of what is going on the top line.

If you look over the last few years, we have grown this business 2.5%.So our objective here is to ensure we can get those margin target, even in a lower-growth scenario than the 4% to 5% we had targeted. We will get there, even in this lower-growth environment, and ensuring there is upside as we develop and push through our growth strategies. So that will we start achieving that 4% to 5% growth, which is still our goal, you will then have further uplift from there.

Okay. Appreciate that. My last question, and I will turn it over, actually two part -- two questions, I apologize. The Pressure-sensitive mix -- what was negative in the quarter? I remembered reading on the release, but I don't remember what your comments were here on the call. And then, the extra sales week in the fourth quarter from last year, I seem to remember that not really having much in of an effect in earnings, but I wanted to verify that.

Thanks guys, and good luck in the quarter.

The mix was primarily in two different areas. First, was the customer application that we had discussed in the Personal Care space, for Tapes. The second piece was North America. Primarily in the high-value segments, we've been talking about the North America volumes as well. Those were the two pieces in the mix. It was geo mix, as well as the customer tapes. As far as --

Anne, just on that, I thought emerging markets tended to be a higher-margin for you, so why would North America being a little bit weak, be negative for mix?

As far as on the geo mix comment, George, our margins we've said are higher where we have higher relative market share. In North America, we have relatively-high relative market share.

Okay. Thank you for that. Sorry, Anne. Go Ahead.

In the 53rd week, that was really 2014, 2015 impact, so you really wouldn't see anything for 2016.

Okay, fair enough. I was just reflecting on the comparison, but that is fine. Thank you, guys.

Thank you.

Mr Butier, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Okay. Thank you. Thanks, everybody for joining the call. Again, I'm pleased with the progress we're making against both our strategic and financial objectives, and we remain committed to achieving our long-term targets for value creation. I want to thank the entire team, within Avery Dennison, for their hard work and commitment to our success. So, 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.