Avery Dennison Q3 2022 Earnings Call Transcript

Participants

Corporate Executives

• John Eble, Head of Investor Relations
• Mitchell R. Butier, Chairman and Chief Executive Officer
• Gregory S. Lovins, Senior Vice President and Chief Financial Officer
• Deon Stander, President and Chief Operating Officer

Analysts

• Ghansham Panjabi, Robert W. Baird & Company
• Anthony Pettinari, Citigroup Global Markets
• John McNulty, BMO Capital Markets
• Jeffrey Zekauskas, J.P. Morgan Securities
• George Staphos, BofA Securities
• Josh Spector, UBS Securities
• Adam Josephson, KeyBanc Capital Markets
• Mike Roxland, Truist Securities
• Chris Kapsch, Loop Capital Markets

Presentation

[Operator]

Greetings. Thank you for standing by. Welcome to Avery Dennison's Earnings Conference Call for the Third Quarter Ended on October 1, 2022. This call is being recorded and will be available for replay from 4:00 P.M. Eastern Time today through Midnight Eastern Time, October 29th. To access the replay, please dial 800-633-8284 or +1 402-977-9140 for international callers. The conference ID number is 21997967.

I'd now like to turn the call over to John Eble, Avery Dennison's Head of Investor Relations. Please go ahead.

[John Eble, Head of Investor Relations at Avery Dennison]

Thank you, Scott. 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 from 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.

As always, on the call today are Mitch Butier, Chairman and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. Also joining us for Q&A today is Deon Stander, President and Chief Operating Officer.

I'll now turn the call over to Mitch.

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

Thanks, John, and good day, everyone. We delivered another strong quarter with revenue up 19% and EPS of $2.46, up 26% ex currency and in line with expectations. We had strong performance across the Company. LGM and RBIS both delivered impressive top and bottom line growth. Our strong results come amidst a dynamic environment. Inflation continues, we're raising prices accordingly, and now we see signs of softening demand. The higher inventory levels downstream from us that we called out at the start of the year have begun to finally reduce. Despite these challenges, and an incremental $0.10 currency headwind, we remain on track to deliver EPS growth of 10% for the year, 18% ex currency. Our ability to consistently deliver impressive financial results rests both on the team's depth ability to execute amidst compounding crises and the strategic foundations we have laid. As you know, a key element of our strategy has been our focus on accelerating the adoption of Intelligent Labels.

Enterprise-wide Intelligent Labels revenue was up 20%. And as you heard us mention a quarter ago, momentum in this business is accelerating. We are now targeting more than 20% growth annually in the coming years, with promising developments in logistics, which is expanding from targeted applications such as special package handling to broad-based use cases in food, where we are seeing promising pilots in grocery and QSRs, and in general retail, where the technology is being expanded beyond apparel.

The benefits of our Intelligent Label technologies and solutions are clear. The increased supply chain and inventory visibility, lower cost and improved speed of operations reduce waste and ultimately enhance the experience of end consumers. We believe the current macro environment will serve to further heighten the value of our tech and solutions here. As the global leader in RFID, we have and will continue to strategically invest to not only capture Intelligent Label opportunities, but create them. Our strategies continue to pay off.

Now, a quick update on the quarter by business. Label and Graphic Materials posted strong top line growth driven by higher pricing and low single-digit volume growth. The supply chain constraints we discussed last quarter eased in Europe, enabling us to normalize lead times, whereas in North America, material availability challenges remained, particularly in paper. Overall, volumes remained strong across LGM, up 4% annually versus 2019. LGM's profitability remained strong in the quarter, with double-digit operating income growth.

Retail Branding and Information Solutions delivered another quarter of strong margins and revenue growth. Robust growth in high-value categories, Intelligent Labels, external embellishments and Vestcom was partially offset by a low single-digit decline in the base apparel business. Following several strong quarters, apparel volumes moderated as some brands and retailers brought down inventories that were built up previously. While our outlook assumes further reductions will take place in the near term, we are well positioned to continue to drive profitable growth in the base.

As for Industrial and Healthcare Materials, the segment delivered strong sales growth in the quarter and improved margins compared to prior year and sequentially as we continued to implement pricing actions to cover inflation.

Across the Company, I'm pleased with the continued progress we are making towards the success of all our stakeholders. Our consistent performance reflects the strength of our markets, our industry-leading positions, the strategic foundations we've laid and our agile and talented team. We remain confident that the strategies we formulated will continue to enable us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long run.

And, once again, I want to thank our entire team for continuing to raise their game to address the unique challenges at hand and deliver value for all of our stakeholders.

Over to you, Greg.

[Gregory S. Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Thanks, and hello, everybody. As Mitch said, we delivered another strong quarter, with adjusted earnings per share of $2.46, up 15% over prior year and up 26% excluding currency translation. Sales were up 19% ex currency and 16% on an organic basis, driven by higher prices. Adjusted EBITDA was up 13% and 22% excluding the impact of currency. Despite the impact of inflation, we delivered a strong adjusted EBITDA margin of 15.6%, up 20 basis points compared to prior year.

Turning to cash generation and allocation, year-to-date, we've generated nearly $425 million of free cash flow, with $140 million in the third quarter, down compared to prior year due to currency, higher working capital, which we deem largely as temporary, and increased capital spending. The higher level of capital spending is in line with our expectations as we continue to invest to support our long-term growth strategy, particularly in Intelligent Labels.

Our balance sheet remains strong, with a net debt to adjusted EBITDA ratio at quarter end of 2.1. We have ample capacity to continue executing our disciplined capital allocation strategy to invest in organic growth and acquisitions, while continuing to return cash to shareholders. In the first nine months of the year, we returned $497 million to shareholders through a combination of share repurchases and dividends, up from $290 million for the same period last year.

Now turning to segment results. Label and Graphic Materials sales were up 20% on an organic basis, driven almost entirely by higher prices. Label and Packaging Materials sales were up more than 20% on an organic basis, with strong growth in both the high-value product categories and the base business. Graphics and Reflective sales were up mid- to high-single digits on an organic basis. Looking at the segment's organic sales growth in the quarter by region, North America sales were up mid-teens due to pricing on lower volume as the region continued to be hampered by material availability constraints, as Mitch mentioned earlier. Western Europe sales were up approximately 40%, driven by strong volume growth and a significant impact from pricing as this region has seen the highest amount of inflation across this cycle. Emerging markets overall were up high teens. The Asia Pacific region was up mid- to high-single digits, with approximately 40% growth in India, while China and ASEAN were roughly flat. And Latin America grew more than 25%.

LGM's profitability remained strong in the quarter, with adjusted EBITDA dollars up 10% and up 19% ex currency, and adjusted EBITDA margin of 15.6%. Pricing actions continue to be implemented to offset inflation, and we anticipate inflation will be more than 20% for the year, with a low- to mid-single digit increase expected sequentially in Q4, primarily driven by paper and energy. We continue to address the cost increases through a combination of product reengineering and pricing actions.

Shifting now to Retail Branding and Information Solutions. RBIS sales were up 22% ex currency and 7% on an organic basis, as growth was strong in the high-value categories, with continued strength in Intelligent Labels and external embellishments, while the base business was down slightly, driven by a decline in the value channel. Profitability remained strong for this segment, with adjusted EBITDA dollars up 19% and up 27% ex currency and adjusted EBITDA margin of 18.9%. The positive benefit from higher organic volume and acquisitions more than offset growth investments and higher employee-related costs.

Turning to the Industrial and Healthcare Materials segment. Sales increased 5% on an organic basis, driven by higher prices. Healthcare sales were up mid-teens and industrial categories were up mid- to high-single digits, partially offset by a mid-teens decline in retail. Adjusted EBITDA dollars were up 4% and 8% ex currency, and adjusted EBITDA margin of 14.3% was up 90 basis points compared to prior year and up 60 basis points sequentially.

Now shifting to our outlook for the year. We have narrowed our guidance for adjusted earnings per share to be between $9.70 and $9.85. At the midpoint, our guidance reflects a roughly $0.10 incremental headwind from currency and an operational outlook similar to last quarter. As Mitch mentioned, this outlook reflects 10% earnings per share growth versus prior year and 18% growth excluding currency translation. We now anticipate roughly 16% ex-currency sales growth for the full year, 0.5 point below our previous expectation due to a slightly lower volume outlook.

As I mentioned, the anticipated impact from currency translation has increased and is now a roughly $77 million headwind for the full year based on current rates. Given the dollar has continued to strengthen throughout the year, assuming the rates remain where they currently are, we'll have an additional headwind of roughly $0.50 in 2023.

We continue to anticipate investing up to $350 million on fixed capital and IT projects and roughly $35 million in operating expense, adding capabilities and new capacity particularly in key strategic platforms such as Intelligent Labels, which is poised to grow more than 20% annually in the coming years.

Lastly, we now anticipate a roughly $0.05 GAAP to non-GAAP difference for the year, down $0.05 from our outlook last quarter, reflecting a benefit from a gain on one of our strategic venture investments.

In summary, we delivered another strong quarter in a challenging environment. We remain confident that the consistent execution of our strategies will enable us to meet our long-term goals for superior value creation through a balance of profitable growth and capital discipline.

We'll now open up the call for your questions.

Questions and Answers

[Operator]

[Operator Instructions]. We have a question from Ghansham Panjabi with Robert W. Baird & Company. Please go ahead. Your line is open.

[Ghansham Panjabi, Analyst at Robert W. Baird & Company]

Hey, guys. Good day. I guess, for my question, Mitch, you touched on the supply chain inventory adjustments, downstream rippling through the -- all the way up to you guys. That seems to be pretty pervasive just based on other earnings reports from different companies and so on and so forth. Where do you think you are in that phase? And is it more specific in any particular region? And is there a chance of a more severe destocking in RBIS given some of the excess inventory that a lot of the footwear customers have called out in recent weeks and months?

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

Yeah. Thanks, Ghansham. So, very high level. We don't know exactly where we are in that. There's not a lot of great data about where inventory levels are outside of the large retailers in the apparel sector. So, when we entered the year, we said that we thought that we had an elevated level of inventories downstream from us. It seems like it's starting to clear out. If you look within RBIS and apparel, the value channel, so the large discounters seem to be ahead of others as far as reducing that, and that's been impacting us in Q2 and Q3. And then, as we look at the other large retailers in athletic -- performance athletic companies and so forth, I think they're still in the midst of that right now. So, our guidance assumes that that continues going into Q4. As for LPM where it is, we think that Europe has had a very strong Q3 and -- as the supply chains eased up there. So, we expect our guidance has some softening of that here in Q4. And for North America, though, given the supply chain constraints, there's some inventory in the system, but it doesn't seem as much as maybe you would otherwise think.

[Ghansham Panjabi, Analyst at Robert W. Baird & Company]

Got it. Thank you.

[Operator]

Our next question is from Anthony Pettinari with Citigroup Global Markets. Please go ahead. Your line is open.

[Anthony Pettinari, Analyst at Citigroup Global Markets]

Just following up on Ghansham's question, can you talk about maybe the level of organic volume growth that you're expecting for LGM or what level could be embedded in the view for 4Q and maybe some of the regional differences? I think earlier in the year, there was an expectation for volume growth to kind of accelerate in the second half. I'm just wondering how the cadence from 3Q to 4Q is sort of shaping up.

[Deon Stander, President and Chief Operating Officer at Avery Dennison]

Hi, Anthony, this is Deon. Overall, our sales grew 20% on an organic basis in the quarter with volumes growing in the low single digits. And just as a reminder that since pre-pandemic times, LGM has actually grown at a 4% CAGR, which is well ahead of GDP. Specifically in each region, Europe saw a very strong volume growth, low double-digit growth as we worked through the backlogs where supply chain constraints, particularly in paper, started to ease. And in Western Europe, as Greg indicated earlier on, we saw high-teen volume growth. In North America, continued paper availability challenges drove mid-single volume declines on top of very tough comps. And we expect the availability challenges to moderate in Q4 and this to improve. In Asia Pacific, our volumes grew low single digits, reflecting the COVID challenge in China as well as strong volume in India. And as a reminder, we recently opened our new greenfield site in Noida, India, that adds capacity to support this future market growth. As Mitch has already indicated, as we're starting to see order patterns slightly soften as we go through October, and we anticipate that as inventory corrections adjust, this will continue.

[Operator]

Our next question is from John McNulty with BMO Capital Markets. Please go ahead. Your line is open.

[John McNulty, Analyst at BMO Capital Markets]

Yeah. Good morning. Thanks for taking my question. So, had a nice kudo, I guess, yesterday with UPS highlighting how important efficiency in RFID was in helping them to hit their numbers, so good on that. I guess as a follow-up maybe, I'd be curious, you mentioned early on logistics is kind of moving to the next level for you guys. Can you help us to understand what's kind of in the pilot phase process, and how close we may be to seeing other larger players kind of reach that tipping point where it goes on to a full-fledged launch as opposed to just pilots?

[Deon Stander, President and Chief Operating Officer at Avery Dennison]

John, this is Deon, again. You're right. We originally said that what we're seeing in logistics in the early pilot stages was very much around how they would manage special packaging, as an example, hazardous materials. What we're now seeing is an increased focus on routing optimization and the efficiency that that will bring. And we expect that that will continue to scale from pilot to adoption. And as more of the logistics players get involved as they see the benefits that these two, both individual identification, package identification management as well as routing optimization come to bear in the market.

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

Yeah. And just to build, as far as other large players and so forth that might be doing things, we're not going to comment on -- given how concentrated in the industry is, where things are overall, we see this as a significant opportunity long term. We actually want to make sure there's a good cadence of how this gets deployed across the industry. So, this is a huge -- significant opportunity in logistics as well as the other categories we've talked about of food and general retail and apparel still driving significant growth from a very high base.

[Operator]

Our next question is from Jeffrey Zekauskas with J.P. Morgan Securities. Please go ahead. Your line is open.

[Jeffrey Zekauskas, Analyst at J.P. Morgan Securities]

Thanks very much. You talked about raw materials being sequentially higher. Propylene and propylene derivatives are really coming down meaningfully now. And there even is some energy abatement in Europe in terms of natural gas costs. Do you see -- but you talked about having higher inflationary costs in the fourth quarter. Is that the peak? Is it really driven by paper, and your average prices continue to go up sequentially?

[Gregory S. Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah. Thanks, Jeff, for the question. So, as I said, we saw some sequential inflation Q2 to Q3. That included a bit of slight deflation on the chemicals and film side, just as you said, petrochemical inputs starting to come down. And we expect a bit more favorability on those from Q3 to Q4. So, the increases we've been seeing here in the back half are really largely paper driven, with much of that also coming in Europe, really driven by what you've seen as -- just as you said, energy costs are up. They've started to come down for now. Depending on how you look at those projections, some expectation, depending on how the winter goes, those could come back up. So, they've come down recently, very recently, not sure how that will continue to play out. So, our approach has been continuing to manage that through both pricing and productivity. So, we did have sequential price benefit Q2 to Q3, continuing to increase prices here as we move through the back quarter as well. So, we'd expect more price in Q3 to Q4. So, overall, we continue to see generally inflationary pressure driven by paper, with some relief on the petrochemical side. At the same time, we do see -- even though utility costs or energy costs have come down a little bit now, still a bit of a headwind as you move into next year for suppliers as well as our own operations. Not a big impact for own operations, but bigger for our supply base as well as just continued inflationary pressures in areas like wages that are a bit higher than what we normally would have seen from an inflation perspective. So, kind of a broad set of inflationary pressure still, we think, and we've continued to increase prices to manage that.

[Operator]

Our next question is from George Staphos with BofA Securities. Please go ahead. Your line is open.

[George Staphos, Analyst at BofA Securities]

Hi. Thanks very much. Hi, guys. Hope you are doing well. Thanks for the details. I want to come back to the question on IL and adoption. So, you're obviously optimistic on the outlook. You're calling for 20% or better growth, more than 20% growth looking out into the future. How do you think that evolves or varies if we are in a bit of a downturn in next year, partly, as I would imagine some of your target customers return profiles on adoption in a trial might come down early on if there's less traffic to track through IL? How should we expect that? Do you expect to see better than 20% growth next year? Thank you.

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

We expect better than 20% growth in various economic scenarios. The benefits, as we said, are clear, and there is a very quick payback coming from a multitude of areas around increased revenue lifts from enhanced consumer experiences through productivity because of automation and just increased speed. So, we expect that in a number of scenarios. And that's a -- there's a lot of questions around where are we in the inventory cycle and so forth. We entered the year expecting that there's some excess inventory. We have scenario plans about how to manage through these various elements. We are not fazed by that. We are as confident as ever at the long-term prospects of the Company, continue to invest. We've got great growth drivers such as Intelligent Labels, the addition of Vestcom, most of the Company's focus within staple categories. So, we're as confident as ever going to continue to lean forward here and continue to deploy our scenario plans depending on which economic environment we're in.

[Deon Stander, President and Chief Operating Officer at Avery Dennison]

And George, I will -- this is Deon. I'd also add that as it relates to the various sub-segments, while apparel has had significant growth, we continue to see great growth prospects as we move forward, not least because we're going to see new customers come on board, expansion in additional categories and expansion in new use cases such as loss prevention during next year. And then, if you look in food and logistics, both these segments are much, much larger than apparel overall, and we're just starting to see the adoption profile there as specifically some of the solutions they're bringing up are starting to resonate. As an example, in grocery, the pilot we've run has really helped to drive significant initial results around store labor efficiency and freshness visibility across the supply chain. And we remain confident in the outlook. We continue to invest both in innovation capability and capacity. We believe this business will be a $1 billion business in 2023.

[Operator]

Our next question is from Josh Spector with UBS Securities. Please go ahead. Your line is open.

[Josh Spector, Analyst at UBS Securities]

Yeah. Hi. Thanks for taking my question. Just curious if you could comment on the backlogs in LGM by the regions, or I guess to the extent that there is a backlog existing given the growth you saw in Europe? So, just curious how the length there changed? And have you seen any change in pricing behavior from the competitors as their material availability improves as well? Thanks.

[Deon Stander, President and Chief Operating Officer at Avery Dennison]

Hi, Josh. Yeah. As we anticipated, we knew that there were excess inventories in the supply chain. And as we have worked through our backlogs, we started to see supply chains more normalize, particularly in Europe, less so in North America, where there were material availability challenges. And as those lead times normalize, we're starting to see softening in all demands as inventories are corrected at our customers. As it relates to your second question, we're not going to comment on competitive activity. Suffice to say, we still see strong growth and opportunity in the market as well as managing our pricing relative to our inflation that we continue to see as we move through Q4.

[Operator]

We have a question from Adam Josephson with KeyBanc Capital Markets. Please go ahead. Your line is open.

[Adam Josephson, Analyst at KeyBanc Capital Markets]

Thanks. Good morning, everyone. Deon, just to follow up on that, when you talk about softening order patterns in October, can you be any more specific in terms of region, segment? And then is that because converters are reducing their label stock inventories? Is it because of end market demand that's weakening? Can you give me a little better sense of what you think is the reason for those slowing order patterns?

[Deon Stander, President and Chief Operating Officer at Avery Dennison]

Well, Adam, as I said, I think there's two elements at play here. One is that as supply chain constraints abate, we've tended to see some of the risks disappear, and our converting customers are starting to normalize their inventories that they have, which then has an impact on some of our order patterns as we've gone through October. It's not necessarily region specific. It's more pronounced initially in Europe because this is where we've seen the biggest moderation in the supply chain volatility that we had, and we've seen more normalized order -- some normalized lead times as we've gone to market during October.

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

And I think it's important to look at, so we expect in October to come in where it's coming in. The supply chain challenges in North America, we, even a month ago, knew that it would basically be end of October when that would start to ease up a little bit, allow us to be able to get the product out the door. And to be quite frank, Europe came in stronger volumes than we had anticipated in Q3. And so, we think that was a little bit just pull forward from Q4 as far as the temporary inventory build on top of whatever was there. So, there's been a lot of management to look at growth and so forth just because of comps around supply chain challenge over the last couple of years, timing of price increases that would cause temporary pull forwards and so forth. It's why we go back and look at what's our compound annual growth rate been since pre-pandemic levels. And that's been 4% pretty consistently throughout the year here. We're anticipating it again being 3%, 4% here in Q4. So, that's really the thing to focus on and overall volumes remain strong when you look at it relative to GDP and consumption.

[Gregory S. Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

If I could just clarify one other point, I think at a company level, and Mitch already talked about this a little bit, but the bigger inventory drawdown is most likely on the apparel side. So, Deon talked a little bit about LGM, where we're seeing more of that, of course, as we talked about already is more on the apparel piece of the business.

[Operator]

We have a question from Mike Roxland with Truist Securities. Please go ahead. Your line is open.

[Mike Roxland, Analyst at Truist Securities]

Thank you very much, guys. Congrats on the quarter. Last quarter, your company benefited from portfolio shifts in RBIS. You called that out with high-value segments comprising about 50% or so, resulting in less exposure, obviously, because [Indecipherable] the value channel, excuse me, can you talk about plans to further increase the portfolio to higher value categories and to minimize your exposure to this value channel?

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

Sure. Overall, that's a base premise of our overall strategy. The first pillar of our strategy is to drive outsized growth in higher-value segments, and we've talked about it over time about how the portfolio has been shifting as a company. And as you called out, specifically within the RBIS is where you've seen it play out to the greatest extent because of the growth within Intelligent Labels, a significant organic growth, as well as the acquisitions we made there as well as the acquisitions we made around Vestcom and other areas have been disproportionately weighted towards high-value segments. So, that's a direct result of the execution of our strategy. And, over time, we see [Indecipherable] continue to lift the average growth rate of the Company and improving the margin profile, which is what we've seen over the last number of years.

[Operator]

And we have a question from George Staphos with BofA Securities. Please go ahead. Your line is open.

[George Staphos, Analyst at BofA Securities]

Hi. Thanks, guys. Thanks for taking my follow-on. If I could, I'll put two in here real quickly. First of all, Greg, you gave us the potential headwind if we mark-to-market for foreign exchange into next year. Could you remind us on financing what your fixed versus variable is? And if we did a mark-to-market, would there be much change in your interest outlook -- interest expense outlook for '23 relative to what we've been seeing year-to-date? And then, Deon, could you just give us a quick update on how Vestcom is doing? What are the pleasant surprises, and were there some things to work on? Thanks very much, guys. And good luck in the quarter.

[Gregory S. Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah. Thanks, George. So, as you said, currency, right now, if rates stay where they are now for next year, we'd have about a $0.50 headwind. If debt levels kind of stayed around the level they are now, we would see probably $0.05 to $0.10 headwind as well just from the increase in interest costs as we head into next year. So, those are a couple of specifics looking at next year. I think year-over-year, we have a number of things like we talked about IL continuing to grow, and Mitch mentioned that a few minutes ago as well as a key growth driver for us, of course. So, a number of ins and outs as we look at next year and the uncertainty of the macro, but specifically, $0.05 to $0.10, we would think interest headwind at current debt levels.

[Deon Stander, President and Chief Operating Officer at Avery Dennison]

And, George, as regards Vestcom, we've been extremely pleased with the acquisition and the Vestcom team joining the Avery Dennison family. The business continues to grow and thrive and particularly the talented team at Vestcom have added enormously to the broader capability than Avery Dennison have. In particular, we're seeing a lot of collaboration between our Vestcom team and our Identification Solutions team as there is a strong overlap on solutions, broader solutions that benefit some of our end retail markets like food and logistics and apparel as well. And I'd also say, George, in the final point, that Vestcom brings to the RBIS portfolio, a balance as well as it's less cyclical and so makes sure [Phonetic] that their portfolio at our RBIS level becomes more resilient as we move forward as well through cycles.

[Operator]

We have a question from Chris Kapsch with Loop Capital Markets. Please go ahead. Your line is open.

[Chris Kapsch, Analyst at Loop Capital Markets]

Yeah. Thank you. And my question is focused on the LGM segment. I realize there's limited visibility into '23. But there's a scenario where you could see continued inflation in, say, paper and energy and then maybe more moderation in the petro-derived raw material costs. Just wondering what your thoughts are based on experience in prior cycles about the ability to keep pricing in excess of the raw material cost inflation as a means to improve margins in that segment? And given all the cross-currents, should we expect that mix would continue to be a positive contributor to LGM segment margins? Thank you very much.

[Gregory S. Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah, Chris. So, a couple of things there. So of course, we've gone through a lot of things we've managed through the last couple of years. One is the unprecedented inflation, but also supply chain challenges at the same time. And I think our teams have proven the resilience and have been able to manage through a number of those challenges like that and feeling well prepared for any type of downturn that we may see next year. I think when you back up and look at LGM, from a margin percentage perspective, certainly, the margin percent has been impacted just by the magnitude of pricing we've been putting in. We said it's roughly 20% here in the third quarter versus last year, on top of pricing we were putting in last year. So, just the math on the margins has led to a margin percentage impact there. But when you look overall at LGM, I think you heard Mitch and Deon both say about a 4% compound growth rate from 2019 to this year from a volume perspective. At the same time, if you look at LGM EBITDA dollars, they're up in the 9% to 10% range, compound growth range when we look over that period. So, that business has done a tremendous job really driving strong EBITDA growth over the last many years despite the impacts on margin percentage from the pricing math. And we know and we've talked about before that in LGM, we've got strong capital efficiency there, strong margins, strong growth opportunities, and that business generates significant EVA, and we expect to be able to continue delivering significant EVA into the future there.

[Operator]

We have a question from John McNulty with BMO Capital Markets. Please go ahead. Your line is open.

[John McNulty, Analyst at BMO Capital Markets]

Yeah. Sorry. Just one, I guess, area of clarification around the raw materials and your outlook. So, if I understood right, it sounds like petchems are starting to come down, may come down more. The paper supply chain issues seem to be improving, but you guys are actually guiding to raw materials up sequentially. Do I have all that right? Is that right? And is there something in terms of the timing of when you might see raw material relief that it lags a bit and it drags into, say, 1Q because it seems like the arrows are pointing favorably and yet your arrow is pointing negatively?

[Gregory S. Lovins, Senior Vice President and Chief Financial Officer at Avery Dennison]

Yeah. So, you have those pieces right, John. I think the paper inflation is really most recently largely driven by Europe, and a lot of that's been driven by the energy cost inflation that we've seen over the last couple of quarters. We talked a few minutes ago, Jeff said that energy prices have come down a little bit over the last week or so. Not sure how that will continue or how that will play out. It may depend on how the winter goes in Europe and how that energy prices play out. So, right now, we expect some sequential inflation here in Q4. How that plays out going into the beginning of next year, I think, will be determined by -- largely by how those energy prices evolve over the next few months.

[Operator]

And Mr. Butier, there are no further questions at this time. I will now turn the call back to you for any closing remarks.

[Mitchell R. Butier, Chairman and Chief Executive Officer at Avery Dennison]

Excellent. Well, thank you, everybody, for joining the call today. We remain confident that the consistent execution of our strategies will enable us to continue to deliver superior long-term value creation for all of our stakeholders. I know there's a lot of questions about what's going on in the macro. We're as confident as ever. If you look at the performance of the Company over the last number of years with compounding crises, we've been laying the foundation to continue to drive superior profitable growth, both in the near and long term. So, we look forward to talking to you all again in the coming quarter.

[Operator]

[Operator Closing Remarks].