Ladies and gentlemen, thank you for standing by. [Operator Instructions] Welcome to Avery Dennison's Earnings Conference Call for the Fourth Quarter and Full Year Ended on January 1, 2022. This call is being recorded and will be available for replay from noon Pacific Time today through midnight Pacific Time February 5.

To access the replay, please dial 800-633-8284 or 1-402-977-9140 for international callers. The conference ID is 21997964. I would now like to turn the call over to John Eble, Avery Dennison's Head of Investor Relations. Please go ahead..

Thank you, Franz. 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. We're pleased to report our 10th consecutive year of strong top and bottom line growth. Our label and graphic materials business delivers strong performance in the year of significant raw material inflation and constrained supply.

Retail branding information solutions posted both strong and top line growth and significant margin expansion. Industrial and healthcare materials made solid progress. And importantly, our intelligent labels platform continues to deliver significant growth and increasing potential.

In addition to great results for the year 2021 mark an important milestone for the company as a final year of measurement for the five year financial targets we communicated in early 2017. This is the third long-term performance cycle we've completed since first introducing this discipline back in 2012.

And I'm pleased to report that we once again achieved our company goals. Our consistent performance over the years reflects the resilience of our industry leading market positions, the strategic foundations we've laid and our agile and talented workforce.

Our playbook is working extremely well as we continue to focus on five overarching strategic pillars. Driving outside growth in high value categories, growing profitably in our base businesses, focusing relentlessly on productivity, effectively allocating capital and leading in an environmentally and socially responsible manner.

Over the last five years we achieved exceeded even our long-term companywide goals set in early 2017, including delivering an EPS CAGR of 17% and growing the company to $8.4 billion in revenue. There were many important milestones achieved over this time horizon. One standout of course, is Intelligent Labels, now a $700 million platform.

This business tripled in size over the last five years, growing 20% annually on an organic basis. The strong growth over this time horizon was driven primarily by apparel, as we continue to drive further adoption of the technology and expand programs with major customers in this key end market.

And while we continue to expect apparel to be the key growth driver in the coming few years, we see even greater opportunity over the long run in other key untapped markets.

For example, in the food segment three quick service restaurants after successful pilots are in the early stages of rolling out RFID to improve supply chain traceability and inventory accuracy. And in logistics, we continue to work with shipping and logistics players taking further automation to drive speed and productivity.

As the leader in ultra high frequency RFID we are positioned extremely well to not only capture these new opportunities but to create them.

To that end we are continuing to invest in developing new applications and markets, adding new technologies, both physical and digital, increasing our manufacturing capacity, and expanding our team, the best most experienced in the space.

The momentum in Intelligent Labels where we continue to expect long-term growth of 15% to 20% annually is a great example of the progress we continue to make. But it's only one example of many across the portfolio.

Over the last five years, we've made solid progress in achieving the objectives in IHM, great progress in LGM and truly remarkable progress in RBIS. We are focused on creating exceptional value for all of our stakeholders across the entire company.

Now, looking specifically at 2021, the year was no different as we made solid progress on our strategic pillars while posting impressive results. We deliver EPS of $8.91 for the year, up 25% from 2020 and 35% from 2019 levels. We grew the top line by roughly 19% on a constant currency basis, and 16% organically.

All three segments delivered strong results relative to both 2020 and 2019. With solid growth in our base businesses, and continued above average volume growth from high value categories. These strong results come at a time of continued increasing challenges.

The ramping up of COVID infections in many countries, continued supply chain constraints, and additional inflationary pressures are taxing the industry, our customers and our teams.

The biggest challenges are now in LGM, North America and Europe, where we are seeing both increasing constraints on the availability of raw materials and additional inflationary pressure. The team has continued to find ways to manage these compounding challenges and deliver impressive results over the last couple years.

And we are confident we will do so again in 2022. Now a brief summary of the year by segment. Labeling and Graphic Materials delivered another year of strong margins and exceptionally strong top line growth, reflecting above average volume growth as well as pricing. Throughout the year orders remained elevated.

This was driven by continued strong demand for consumer packaged goods and ecommerce trends, as well as to a lesser extent, we believe inventory building downstream from us given the supply chain challenges and significant income inflationary pressures. We experienced raw material constraints across many categories throughout the year.

Currently, we are seeing some easing of constraints in chemicals and resins, but increasing constraints for paper and transportation. We exited the year with annualized inflation of more than $600 million and nearly 20% increase in our materials businesses alone, as the cost of raw materials and freight continue to rise.

Given the magnitude of this inflation, and the lag in the timing of our price increases, margins moderated in the back half of the year for this business. While we are experiencing even more inflation as we start this year, particularly in paper, we expect to offset the higher costs over the cycle.

We remain confident in our ability to continue driving GDP plus growth in this high return business. Retail Branding Information Solutions continues to deliver impressive results, with margins expanding to another record on significant revenue growth for the year driven by strength in both high value categories as well as the base business.

As I mentioned earlier, momentum in our intelligent labels platform continues as sales grew roughly 30% on an organic basis compared to 2020 and roughly 40% compared to 2019.

And a recent Vestcom acquisition is not only achieving its performance goals, but also showing positive early signs and providing additional channel access to intelligent labels. In the Industrial and Healthcare Material segment, sales rebounded versus prior year well above 2019 levels, and operating income grew significantly.

We've made solid progress in this group of businesses over the last few years. However, the challenges in some of its end markets, principally automotive have hindered our ability to achieve our ambitions. Despite these challenges, we are focused on achieving the long-term potential of this group.

Now as for capital allocation, we continue to execute a balanced strategy. We have increased our pace of growth and capability building investments, both organically and through M&A.

Over the last couple of years, we've completed several acquisitions, expanded our venture program and started ramping up the pace of organic investments, which we recently began further accelerating.

The overriding focus of our M&A venture program and organic investments is to further increase our presence in high value categories, increase our pace of innovation, and advance our sustainability initiatives. And we intend to continue this path, all while maintaining a strong balance sheet and returning cash to shareholders.

With these great results in mind, it's important to highlight that our overriding focus is on the long- term success of all of our stakeholders. And we have a clear set of objectives and strategies focused on their mutual success.

We're making great progress towards our 2025 and 2030 sustainability goals, and are on track to deliver our 2025 financial objectives. As the overarching objective of our long-term financial targets is to deliver GDP plus growth, and top quartile returns on capital.

This is a recipe for superior value creation over the long term, and we are confident in our ability to continue doing so. After delivering a 20% increase in EPS in 2021 ex. currency, we are again targeting double digit EPS growth in 2022.

While 2022 is already shaping up to be just as challenging as the last couple of years, we are preparing for it commercially, operationally, and financially. And once again, I want to thank our entire team for their tireless efforts to keep one another safe while delivering for all of our stakeholders.

This has been a particularly taxing time for our teams, and we're all grateful for their dedication, agility and focus. Thank you. Now I'll hand the call over to Greg..

Alright. Thanks Mitch and hello, everybody. I'll first provide some additional color on a performance against our long-term targets, and then walk you through fourth quarter performance and our outlook for 2022.

As Mitch said, 2021 was an important milestone for the company as the final year for the five year financial targets we communicated in early 2017. And as he noted, we again achieved our companywide targets.

The consistent execution of our key strategies enables us to continue delivering against our targets, with an overriding focus on delivering GDP plus growth in top quartile returns on capital over the long term.

Over the five year period, sales growth on a constant currency basis was 6.6% annually, with an organic growth of 4.6% annually, both above our target. Our organic growth was roughly 2x global GDP for the same period. Operating margin was almost two full points above our target of 11%.

And additionally, our EBITDA margin was above 15.6% in 2021, up almost three points compared to 2016. And adjusted EPS grew more than 17% annually over the past five years, significantly surpassing our target of 10%.

And, as always, our focus continues to be the optimal balance of growth, margins and capital efficiency to drive incremental EVA over the long term. To that point, our return on total capital performance continues to be in the top quartile relative to our capital market peers coming in at over 18% in 2021, again above our target.

And our balance sheet remained strong with our net debt to EBITDA ratio below the low end of our target range, giving us ample capacity to continue executing our strategies. Looking at the segments, both LGM and RBIS met or exceeded their organic growth targets and delivered margins above the high end of their target range.

And we've made significant progress in IHM despite being short of our targets there. In March of last year, we also introduced a new set of long term targets for the company through 2025. Designed to continue delivering superior value creation over the long term. One year into this cycle, we are on track to achieve these goals as well.

Given the diversity of our end markets, our strong competitive advantages and resilience as an organization to adjust course when needed, we're confident in our ability to continue delivering through a wide range of business cycles. Now let me provide some color on the fourth quarter.

We delivered another strong quarter with adjusted earnings per share of $2.13 slightly above our expectation from a quarter ago, reflecting a tax benefit of a few cents and operational performance right in line with our midpoint Earnings were down 6% versus last year, given the extra week in the prior year, and up 23% compared to 2019, driven by significant revenue growth and solid margins.

As expected, the impact of the extra week and belt tightening in Q4 of 2020 created tough comps. That combined with the increased pace of investments, and a net headwind from pricing and inflation in 2021, decrease margins in the fourth quarter. Sales were up 19% ex.

currency and 13% on an organic basis compared to prior year, driven by higher prices and strong volume. As Mitch mentioned, our input costs have continued to rise and supply chains remain tight.

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 around the world.

Despite the impact of inflation and supply chain disruptions, we delivered a strong adjusted EBITDA margin of 14.9%, down compared to prior year and up 40 basis points compared to 2019. Turning to cash generation allocation, for the year we generated $798 million of free cash flow, up 46% compared to prior year, and 56% compared to 2019.

And we invested $272 million in fixed capital and information technology, as we continue to accelerate investment in our high value categories, particularly RFID. And as mentioned previously, our balance sheet remained strong, with a net debt to adjusted EBITDA ratio at year end of 2.2.

Our current leverage position gives us ample capacity to continue investing organically, as well as through strategic acquisitions while continue to return cash to shareholders in a disciplined way.

During the year, we deployed $1.5 billion for acquisitions, as well as returned $400 million to shareholders through the combination of share repurchases and a growing dividend. Now, let me turn to the segment results for the quarter. Label and Graphic Material sales were up 12% ex.

currency and 11% on an organic basis, driven by a high single digit impact from price and higher volume and mix. Growth remain strong in both the high value categories and a base business with both label and packaging materials and graphics and reflective sales up low double 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. And Western Europe sales were up high single digits despite raw material, labor and freight availability challenges that have continued to cause extended lead times for both of these regions.

Overall, emerging market sales were up roughly 10% in the quarter with India and China both up double digits.

And while LTM's profitability remained strong adjusted EBITDA margin decrease from last year to 14.5%, as the impact of raising prices reduced the margin by roughly 140 basis points, while the remainder of the decline coming from the impact of the extra week last year in the price cost lag mentioned previously.

Shifting now to Retail Branding and Information Solutions. RBIS sales were up 39% ex. currency and 20% on an organic basis. As growth remained strong in both the high value categories and the base business. The apparel business saw particular strength and performance in premium channels and continued double digit growth in external embellishments.

For the quarter, Intelligent Label sales were up more than 20% organically and adjusted EBITDA margin for the segment remained strong at 19%. With the positive benefits from acquisitions and higher volume were offset by growth investments, higher employee related costs and the headwind from prior year temporary cost reduction actions.

Turning to the Industrial and Healthcare Material segment, sales increased 12% ex. currency and 10% on an organic basis, adjusted EBITDA margin decreased to 12.9%, which similar to LGM was driven by the impact of raising prices, the impact of the extra week last year and by the price cost timing lag. Now shifting to our outlook for 2022.

We anticipate adjusted earnings per share to be in the range of $9.35 to $9.75. We've outlined some of the key contributing factors to this guidance on slide 19 of our supplemental presentation materials.

We estimate that organic sales growth will be 8% to 11%, reflecting mid to high single digits from higher prices, and low to mid-single digit volume growth, coming up very strong volume growth across the segments in 2021.

Based on current rates, currency translation is a roughly three point headwind to reported sales growth, with an estimated $35 million headwind to operating income. This is roughly $15 million worse than we would have expected a quarter ago, given recent changes in exchange rates.

On inflation, our outlook assumes the low to mid-teens rate for the full year, with the largest impacts coming in the first half. And we anticipate spending up to $350 million in fixed capital and IT projects as we continue to increase our pace of investment, adding capabilities and new capacity, particularly in key strategic platforms.

And we are also investing roughly $35 million in operating expense, principally in intelligent labels, digital capabilities, and sustainability. We expect our tax rate will be in the mid-20s for the full year based on current regulations as well.

And lastly, we anticipate earnings growth in 2022 will be back half weighted due to tough comps in the first part of the year, particularly Q1, including the timing of currency headwinds, the price cost lag and the increasing pace of investments.

In summary, through this dynamic environment, we are pleased with the strategic and financial progress we've made against our long-term goals in 2021. And we are confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation.

Now we'll open up the call for your questions..

[Operator Instructions] Our first question comes from Ghansham Panjabi of Baird..

Thank you. Hi, everybody and hope everybody's doing well. Great to hear your voice, Mitch. Can you start off by giving us more color on the raw material constraints that you referenced? I think you said it was petrochemicals at one point. And now it's paper and maybe a little bit more on the shipping side.

How much do you estimate was the impact on 4Q volumes? And also, what are you embedding for the first quarter of this year? And also, if you could break out the volume components, specifically adjusting to the extra week a year ago for the fourth quarter? And I'm sorry, if I missed that..

Yes, Ghansham, thanks for the question. I'll try to cover all those pieces. First of all, I guess, as you said, earlier, in the year, we had more of a challenge in early mid-2021 from petrochemical supply constraints.

I think as we move through the first or the fourth quarter, and into the first quarter here in 2022, we've seen more that constraints coming from the paper side, it's a little bit the same on the inflation perspective, as well, we've seen a little bit of easing in petrochemicals in some of the regions, but continue to see some challenges on paper.

And particularly in Europe, we've seen more of the constraints, I think in the fourth quarter on paper, some constraints in North America, but a little bit more in Europe, even in Q4. So we're continue to manage through that across the businesses. But that's been a little bit of a trend as I look across the last number of quarters..

And just to build on that while the supply chain constraints and related inflation tend to be concentrated in specific industry - regions, I should say. It obviously has a global impact. So just like the Texas storm last March, had an impact most on North America, there was a ripple effect across the region.

Right now the paper inflation we're seeing is broad based but principally Europe, and that's obviously having ripple effects elsewhere as well, both on availability as well as inflation..

And then Ghansham, I think your other question was on the extra week, so the extra week impact is not in our organic sales number that we're quoting. On a reported sales it was about an 8.5% decline year-over-year from a sales perspective..

Okay, And then RBIS. If I remember correctly, there was a power production issues because lockdowns of Vietnam that impacted perhaps 3Q. Did that boost 4Q in any material way seems to be quite an acceleration in volumes for that segment after adjusting to the actual week. Thanks..

A bit. But if you recall, we were able to offset most of the shortfall in Southeast Asia as far as just the lockdowns that were occurring there by servicing that volume from elsewhere, principally China. So there was a bit of a carryover into Q4. So you do should be looking at the second half a little bit more on an averaging basis for that business.

But overall demand is strong in our business and in apparel specifically. And then broadly, intelligent labels and external embellishments, which continue to show great potential and performance. So overall, the demand outlook within RBIS is strong. There are issues right now just replenishing inventories at the end market level.

But there's a little bit of that, Ghansham. But most of this, you should look at as a strong demand environment thus far, clearly, there's a lot of questions about what things will look like as we go through 2022. A lot of shifting forecasts out there and so forth. But right now, what we've experienced is a strong demand environment in RBIS..

The next question comes from George Staphos of Bank of America..

Hi, everyone. Good morning, guys. Congratulations on the year. And thanks for all the details. First question is going to be on LGM.

So to the extent that you're starting to see more inflation in paper, and sounds like in particular in Europe, does that change at all your positioning from a competitive standpoint, traditionally, Avery has had in my sense more strength when it came to film based, and also in terms of sourcing feedstock on the pet side, but on paper, you obviously don't have quite the same advantages.

So does that put you at a little bit more of a disadvantage, then if it was the inflation is coming at the petrochemical side? Why? Why not? And talk about your ability to raise pricing to offset inflation on paper, relative to if it was coming from the chemical side?.

Yes, so I'll talk about the second question first, George. So we've been raising prices across all the categories here multiple times and across all the regions, and we've been able to pass along the price increase to extent we need them to the extent the productivity and product reengineering, can't cover the rising inflation.

And if we look over past cycles and this cycle, we've been pretty much at that constant kind of few months to lag category by category, region by region. So that is very consistent in our ability to pass through remains intact.

As far as the competitiveness as far as, so we do have a bit higher share in films and the number of regions and a little bit less than favorite, we're still the industry leader, overall, across all categories.

So that is something that we've looked to be able to leverage our size and purchasing capability to continue to be sure that we can maintain supply and so forth.

Now, particularly in Europe, there's a few unique dynamics going on there where there is further constraint around paper supplies, which I think are hindering industry at large and clearly raise a question about when those constraints release in Europe, when we'll be able to have the normal supply chain, if you will, on paper good.

So I don't think that's as much a competitive issue as it is just a reality of the marketplace. And I say that I think it's important to put in context.

If you look over the last 12- month, the magnitude of supply chain constraints we've had, again, starting with what happened in the US last year, with the whole petrochemical industry on the Gulf Coast kind of being shut down and the ripple effects that had through supply chains.

The fact that Southeast Asia and parts of South Asia in general were locked down in the third quarter of last year in RBIS. And now this is the challenge of the quarter that we're working through busily to make sure we continue to meet our customers' needs and our end market needs..

Mitch, thanks for that. Just a point of clarification on the answer.

Then my second question, is the supply chain issue in Europe largely being triggered by some of the strikes that are occurring at the Finnish paper mills from what you've gathered? Are there other things that are more important? And then the second question, you talk about investing incremental $35 million in intelligent labels, digital capabilities and sustainability, is that capital cost, will there be some or is that mostly P&L effect, and independent of work shows up on your financial statements.

Beyond sort of the description you have here, what will Avery get in terms of incremental growth and capabilities in this key category for you going forward in '23 and beyond from that investment? Thank you..

Sure. So, two very different questions, I guess I'll start with the second one, $35 million investment, that's essentially all hitting the P&L, George. So that's we lay out CapEx investments, and then the P&L investments. And by and large, those are operating expense investments.

And those are all around market development, new innovation, sustainability, all the focus we've highlighted. So this is a ramp up of the level of investment we've had, we've been investing in the future growth of business for a number of years. We stepped it up beginning about three, four years ago, we further accelerated it.

And just as we had commented on a year ago, that we've been increasing our pace throughout 2021. And we're doing so again here in 2022. And the returns on this investment are, quite clearly, you're seeing the returns of all of our investments in the intelligent label space for the investments we made a few years ago.

And it's just a sign of confidence and all the increasing interactions we're having with various end markets and see tremendous potential for intelligent labels and more. And as far as when these are investments more for the 2023 horizon and beyond. So that's where the investments are coming through.

And specifically regarding your question about Europe, and there's a lot of factors, but we're not going to get into any specifics about what might be happening with other companies and so forth. But we're, we see what you see on that front..

The next question comes from John McNulty, BMO..

Yes, good afternoon and thanks for taking my question. I guess the first one would just be a follow on to the $35 million operating expense, call out that you had around the smart or intelligent labels and sustainability. I guess you've never really specifically called out a number like that before.

So I guess my question would be, is it because something's really changed dramatically versus kind of a normal in terms of investment requirements? Or is it more a function of the revenue opportunity that looks like it's coming in over the next couple of years is just that much bigger? So it's worthy of kind of calling out at this point, I guess, how would you articulate that?.

Yes, so I think one is just the number is larger. And it's been growing, and part of its commensurate with the opportunities that we see. So it's an increase base from what we had in 2021, which was roughly around $25 million or so.

And that was an incremental increase of about $10 million from the year before that, and it's just seeding all these opportunities that we see in intelligent labels, but also around increasing our digital capabilities, and so forth.

So if you look at this, these incremental investments that we've been making over time, we've been funding them through just running the base business, and if you look at our overall level of SG&A and the gearing around that, and so forth, funding it through productivity, and this is something that is part of our core strategy.

If you look at our five strategic pillars, they're all intertwined. And the third pillar is around a relentless focus on productivity. And that's so that we can accelerate our investment in high value categories. And should we continue to invest in productivity to make sure the base is profitably growing, as well as expanding margins.

And that's exactly what we're doing..

Got it. And then maybe just a follow up.

Can you help us to understand the timing on the payback on an investment like this? Is it six month? Is it two years? Is it five years? Like is there a way for us to think about it just in terms of the spending and the timing of the return on that?.

Yes, it is a wide array of investments here, the 18 months to 4.5 years is the right time horizon to be thinking about, and some are seeding completely new markets.

Others are basically adding new capabilities and a new region for a program or a space that we know works in one region, we're expanding in another and we know very much what the commercialization lifecycle is there..

The next question comes from Anthony Pettinari of Citi..

Good morning.

Given the price increases that you've announced and the cost inflation environment continuing in 1Q, based on what you're seeing right now, do you have a sense of when you might be fully caught up on costs or price cost neutral? And what does that lag sort of look like versus previous cycles? Understanding that we're sort of in an unprecedented situation right now on inflation..

Yes, Anthony, so I guess starting with the lag, I think we've been talking about for a few quarters, since we saw the inflation really start to pick up, early to mid-last year, we still expect that lag to be in the quarter to a little more than a quarter of time period.

I think as we move to across the last few quarters, at the end of Q2, we had hoped at that point, we might better cover by the end of 2021.

We continue to see increasing pace of inflation in Q4, though, as we talked about last quarter, and that came in probably around mid-single digit sequentially, Q3 to Q4, we're continuing to see increase in inflation, Q4 to Q1 also around the mid-single digit level, again, a little bit of a shift towards paper now in Q1 versus what it was last year.

So we've continued to increase prices, as we moved across the course of last year, we've continued to announce new increases that took effect late last year or very early this year. So as soon as we see inflation start to stabilize, we'd still say it's a quarter. So for us to be able to close that gap fully..

Yes, and just to build on that, I mean, we've, we kept predicting it was a few months out, when we wouldn't be able to narrow and close that gap. But the forecasts that the indices provide, as well as our own outlooks, consistently, there's been more inflation continuing longer than we had anticipated.

So whatever your own assumption is around when inflation will abate, assume a few months, a quarter after that is when we would catch up..

Okay, that's helpful.

And you indicated, EPS growth for the year would be back half loaded, is it fair to say that 1Q EPS might be down year-over-year? And then in the second half, you accelerate to maybe double digit year-over-year growth? Or is there anything more you can say about the potential cadence of earnings growth as you go through the four quarters of the year?.

Yes, certainly, as you said, Anthony, Q1 has been more challenged, last year inflation was really just starting in the first quarter.

So we just talked about a second ago, we still have a bit of a price inflation gap here in Q1 versus prior year, we also have the biggest currency impact on the year will be in the first quarter, that was the strongest currency rates last year as well.

So I think we said about $25 million of the currency headwinds in the first half, and the bulk of that is in Q1 also. At the same time, as we talked about a minute ago, as well, we've been increasing the pace of our investments since the first quarter of last year.

So we look at those things, we'll have some volume benefits, of course, year-over-year in Q1 with the continued growth of the business, get a bit of a price inflation gap still in the first quarter. And then the currency headwind and the continued investment. So those are the kind of big buckets, I think about the Q1 [Indiscernible] versus last year..

The next question comes from Josh Spector of UBS..

Yes. Hi, thanks for taking my question. Just similar question on the prior lines around investments that you're making. And specifically on CapEx, it's a pretty big step up that you're pointing towards this year.

Curious if there's anything in terms of one time made your major investments the next couple of years to think about, or if that's a higher level of organic investment, we should be considering longer term for Avery?.

If the investments are essentially just to fund our growth and invest for the growth we're, when you keep compounding the level of growth and earnings we've been posting, you're going to have CapEx growing with that.

Now, as far as larger investments, specifically, the biggest area of investments or capacity for intelligent labels, as you would expect, and this is comes, there's some elements that come in large chunky bits, such as adding buildings and so forth. And then there's adding the equipment, which is more scalable along the way.

So we're looking at adding to our actual manufacturing footprint in 2022, in a couple of locations, we just added Brazil recently, an operation there build out, and we're looking to further expand in each region of the world. Our physical footprint, as well as the equipment capacity.

And so that's the biggest thing that maybe it's a step function in 2022, it will bleed in the 2023 for this investment horizon..

Okay, that's helpful. I just be curious if you would comment, if you're seeing any production impacts now within China, or if your guidance is assuming any further disruption either within China or the rest of Asia, that you're baking into guidance and kind of along with the CapEx question.

Are you investing in additional source supplies to deal with, I guess, further impacts or potential disruptions in the future?.

Yes, so the first question around China, so all of our plants are operational, we're not having any lockdowns or experiencing any of those at the moment. So the things we talked about a quarter ago, we're largely focused in South Asia, Southeast Asia, specifically, those are behind us.

In generally and what we're seeing even in China, where there are stricter protocols tend to be more rather than entire industrial zones, and so forth. It's kind of company by company, or really even plant by plant when they do execute something.

So we're not getting any collateral impacts, if you will, from other things that may be happening, but it's not as I'd say as stringent as what we maybe saw just nine months ago, within that country.

So as far as in our guidance, the way we look at it is even if there's a lockdown for a couple of weeks, or something that impacts a plant, that can have an impact on revenue immediately, but it doesn't affect end demand.

And so we still are see our ability that there will be any inventory in the system will be used up for a period of time, then we will go through overtime and extra shifts to catch up and keep the supply chains running. So that's not a real big impact overall on our guidance..

The next question comes from Jeffrey Zekauskas of J.P. Morgan..

Thanks very much.

In the quarter, what was the amount of raw materials that you couldn't recover by price? Was it about $40 million? And is that number getting bigger in the first quarter? Or is it getting smaller as best as you can tell?.

Yes, I don't know. I mean we didn't quote specifically what the gap was, we still had a gap in Q4 when we look versus prior year. I guess if I look across the last few quarters, as we said we had about 20% inflation in the fourth quarter. And from a pricing perspective, we talked last quarter, we had about five points of price in Q3.

And as we said, here in Q4, we had in LGM high single or very high single digit inflation in the fourth quarter. So we're starting to get closer to cover that. But we still do have a gap year-over-year, and we expect to have a little bit of gap in Q1 as we talked about earlier as well..

So is the gap getting bigger? Or is it getting smaller? And then for my second question, in your slides for intelligent labels. You've got a split now between apparel and non-apparel at 25:75.

What was that split a year ago? And is the change in that split due to the Vestcom acquisition? Whatever the change is? And are the growth rates of the apparel and the non-apparel piece the same, one is growing faster than other? What's happening there?.

Sure. So Jeff, just quick answer to your first question. Generally, the pace is roughly the same, the pace of inflation is higher, and the pace of price increases are the same. So as far as the dollar gap roughly the same. As far as intelligent labels, a 75:25 split. No, that's not from the Vestcom acquisition.

As far as any shifts, we did have a shift, we were at 90:10, split pre the Smartrac acquisition, and then Smartrac had a bigger presence outside of apparel. And so that's what moved was the biggest single fuel step functions shift in the mix between those two.

And over time, yes, that has and we expect continue to the apparel to be a bit smaller percentage of a much larger pie. And so that's what we are seeing. And that's what you should expect to see.

Now we're not going to share every single point differential, and so forth for strategic reasons, we will show more the large proportionality of the portfolio. And so the last part of your question, yes, we would expect intelligent labels for food and logistics to be growing faster than what we're seeing for apparel.

Apparel, as I said, in dollar terms will continue to be the majority of the growth for the coming few years. On percentage basis, the other categories will be growing faster. And then on dollar basis, we expect that to be the biggest growth driver post the 2025 horizon.

So that's, we are seeing multiple horizons of growth and opportunity here and seeing a lot of great interest, potential and performance in apparel, adjacent to apparel, so apparel customers moving into new adjacent categories, such as home goods, and so forth, and then obviously in food as I shared the story and logistics and elsewhere so..

The next question comes from Adam Josephson, KeyBanc Capital Markets..

Mitch, Greg and John. Good morning. Thanks for taking my questions. Mitch, you described almost this rolling supply chain crisis earlier first in the US and then in Southeast Asia and now in Europe, just wondering what exactly is embedded in your guidance as far as when this you expect this European situation to resolve itself.

I know the strikes are supposed to go on for another month or so. But it's been one thing after another.

I'm just wondering how you're thinking about the situation and how much longer lasting you expected to be and why?.

Well, we're not going to predict specifically when any specific matter end even the supply chain constraints around, look at what happened with the Texas storm, we actually, the limitations constraints on supply for from just that event didn't end until sometime in the fourth quarter.

And so it's just leveraging global supply networks to be able to manage around all that. And so if you look specifically at this paper range of guidance assumes that this is we're going to continue to have constraints but in Q1 and a little bit going overall on Q, I'm sorry, in H1. And that's what our range of guidance assumes overall.

So if you look at our range of guidance from what Greg had shared around volume growth of low to mid-single digits, and you consider how much intelligent labels is adding, basically our volume growth assumption for right now for LPM is low single digits at the moment.

And so we think the part of that is going to be just because of some inventory that is in the system, as well as the Q1, just where we are both from constraints, but also just tough comps situation overall, if you look at the volumes of where we were the past couple of years in Q1, they were quite high.

And so from that perspective, that's built in as well. So still expect LGM to be GDP plus, overall, the whole company, obviously the GDP plus.

And that's what our expectations are, the biggest questions are really what do you say expecting around the macro?.

I appreciate that. And just one on that LPM volume growth, you mentioned low single digit, can you just compare that to what you've seen thus far.

And then also just give us some flavor of what you're expecting by region? Along those lines this year, obviously, China has had its difficulties, Brazil's having its difficulties, Europe's got, obviously an energy crisis it's dealing with.

So can you just talk about what you're seeing geographically in that - in the context of that low single digit expectation for LPM?.

Yes, so as far as what we're expecting, what we're seeing already, you're asking, I mean the order pattern, we always, so the start of the year, the order patterns are not very meaningful because of the timing of Lunar New Year. And so a big portion of our growth is affected by that. And so that's something that doesn't make it very meaningful.

If you look within what we're seeing in North America and Europe specifically, we basically are seeing high demand high level of order patterns. And our actual output is what roughly within the targeted range that we're talking about here..

The next question comes from Paretosh Misra of Berenberg Capital Markets..

Thank you. Thanks for the slide 9, where you provided this engagements pie chart.

Can you give us some sense as to how much this number of engagements increased versus let's say a year ago?.

Yes, so we're not quoting the number of engagements anymore. Partially just because it's, you got very large engagements and smaller specialty engagements in there, it's more to show the magnitude of how the pipeline looks relative to our current revenue.

And where you can see the increasing activity, great activity within apparel, continued pipeline there as well as broader pipeline activity going outside of apparel.

So generally we saw significant growth, as we talked about in the pipeline overall, particularly in 2020 throughout the early stages of the pandemic, and early 2021, we purposely shifted our focus to not feeding the pipeline as much as far as more so working through the pipeline.

So we've seen a significant shift of pipeline activity moving from business case into custom programs, moving into pilots, and so forth.

And that is having the, yes, expected outcome overall, just things moving through the pipeline, which is why we're expecting the growth on percentage terms to continue to be bigger outside of apparel as compared to what it is in apparel. We still see significant dollar growth from apparel itself in 2022..

Thanks for the color, Mitch, and just as a follow up and sticking with RFID just curious how you're managing the chip supply issues.

Did you see much inflation in chip pricing last year?.

So just as far as the supply chain, I mean, we are, yes, we're completely confident in our ability to hit the 15% to 20% growth that we have targeted long term for this business in 2022. The high end of that to be specifically that we've secured the supply.

We're seeing a lot of from a demand side, we probably could even go a little bit more than that. But we are right now just real time evaluating what are the chip availability through 2022.

If you look at our own assessment, and just broader assessments, the dynamics easing a bit, and I think we'll have a lot more insight here in the next three to six months. So that is a not a constraint to growth of hitting our 15% to 20% goal.

But as far as some of the larger programs we're working on, so forth, those will probably have to be phased a little bit more 2023 given the situation. So given our industry leadership position, we're working with all the key players throughout the supply chain on chips.

And we are, yes, working with them to make sure there's ample supply for us as well as the industry at large. So that's something that we are working through and again, comfortable hit our number this year and continue to see the 15% to 20% growth over the long term. As far as pricing, yes, there has been some inflation on chips as well.

And we are also repricing our own RFID and lays outbound accordingly..

The next question comes from Christopher Kapsch of Loop Capital Markets..

Yes, thank you. So my question is focused on the LGM business. First, there's been some consolidation on the pressure sensitive label stock space recently. So I'm just curious about your perception of that. With the consolidation that's gone on there, create a competitor that would, I guess, influence the otherwise benign, competitive dynamic.

And then the second one is just industry checks have suggested to me that the industries, that industry is pretty tight in terms of meeting customer demand, one might even characterize maybe customers on allocation.

Just curious if you would characterize it that way? And if it's - if this is a dynamic that's only in North America, are you seeing that other regions? And is it would you say, if that is an accurate characterization would you say it's more a function of these logistics and supply chain constraints? Or are more a function of just, kind of robust demand? So there's a few in there, but thank you..

Sure, Chris. Yes, as far as the consolidation, I mean, there's been some consolidation in the last few years in a couple different places, whether it's in Europe or North America, we don't see a significant shift in the overall industry dynamics as a result of that, for your first question.

And as far as your industry checks about, maybe some allocations at the converter level, and so forth. I mean basically, yes, so demand is high. And we expect demand, I mean, just the increased consumption of consumer packaged goods has increased quite significantly, we expect that to be an increased trend - that increased trend to continue.

We've talked about the increase in ecommerce and just variable information labels. We see that as an acceleration of a long-term growth trend that has occurred over the last couple years and see that continue. So demand, basically accelerated within a short period of time. And the industry at large is keeping pace with that.

If you then add in the supply chain constraints, that limit supply, but I think the industry and ourselves as well, I think you're talking about specifically North America, but have been able to manage through a lot of that.

But those headlines create concerns, which then have people order more and order more than maybe they even need, which is why I commented that we believe that some of the growth could be from inventory building downstream from us. So there seems just as we've got higher inventories. It's due to the constraints as well as inflationary pressures.

People throughout the value chain tend to buy a little bit early, just before a price increase and build some inventories.

And then just the, I would say, panic ordering to make sure people are in the queue because they know that lead times for ourselves, and I've commented on this in previous quarters, as well as other players in the industry are getting longer. They're placing the orders even longer, as well.

So you see the industry responding in various ways, such as just saying, the order patterns can differ too much from your previous order patterns and so forth, just to make sure that we are, yes, appropriately managing demand..

That's helpful. I appreciate it. So it sounds like that particular dynamic is one that's concentrated in North America..

North America and Europe..

The next question comes from the line of George Staphos, Bank of America..

Thanks. Two quick follow on, thanks for taking them guys. There have been some announcements recently in the trade press about some of the logistics and trade companies talking even more positively about RFID. And its application to their business. I recognize you're probably seeing some benefits here is certainly a focus area for you.

Can you stack rank, aside from apparel, the end markets, in terms of the uptick, the growth the pipeline, as it's looking, as we go out over the next four to five quarters? Are you seeing a material pickup in the implementation in the pipeline, and the trial of RFID and smart labels in freight and logistics? And I had a quick knit type question on LGM..

Yes, we're actually seeing I'd say that the momentum and energies somewhat equal between food and logistics, and but answering your question specifically around logistics, we've already are selling our solutions specifically in areas around hazardous materials, working with certain targeted areas for helping get through customs and so forth at the border.

And we are working with a number of logistics players, including some of the large ones about how to drive further automation and so forth across their network. So there's quite a bit of activity, often what happens and so when I talked about the pipeline, one of the steps in the pipeline is around custom solution.

So that would be like dealing with the hazardous materials. And that sounds worse than its batteries that you have to have certain protocols around.

So for how you handle battery, so you'll adopt within a specific category initially while piloting on a broader base, and then eventually look to see how you adopt broader base so that the pilots I would say are, yes, that the whole pipeline each stage is active.

And we're currently working in multiple geographies, by the way, so this is a US, Europe and in China, pipeline that we're currently working..

Mitch, I want to say that I saw a comment from one of these companies suggesting that if they could, if it was possible, they would consider using smart labels on RFID on the majority of their parcels, is that something that's being talked about? I wouldn't say uniformly but increasingly, or is that more fantasmic at this stage? And we're looking at 5 to 10 years there? And then just the follow up question on LGM, kind of a knit question.

When I look at the percentage of total, that's high value this year for '21 versus last year, it ticked down just a little bit, is that just the math of it, you saw more pricing on your lower value added items, hence, they moved up to a greater degree.

And so therefore, they're a higher percentage of the mix than they were last year or is there something else going on in your mix of business that you need to correct? Thanks, guys, and good luck on the quarter..

Yes, so as far as the logistics opportunity around intelligent labels and RFID, this is something that, yes, I mean, if you think about a future, the question is when does that materialize? It's around the big opportunity, once you get past these specific niche programs, like haz mat I mentioned earlier, is really across the entire network.

And if you think through currently, you got a lot of dissimilar packages a high degree of in shape and size, obviously, high degree of skewed complexity. And right now they're doing it through scanning, visual scanning of barcodes.

And some of that can be automated through conveyor belts, but a lot of it does also through handhelds, and so forth, and a lot of labor involved. So as you look at the overall objectives of supply chains in general, and the logistics providers, it's around speed, and lower cost, higher volume, faster and lower cost.

And so that's where technology is being looked to and our technology solutions built around RFID are a key enabler of that. So those are very large unit programs. So the question is, how does - how do you ramp up towards that and so forth? And we're engaging with as you would expect, we're engaging with many players in the industry around this..

Yes, George, I think in your other question, over time, we consistently continue to look at and refine our view of high value and base and you look at things like specially labeled products that start out, especially grow over time and move to the base. So we continue to reevaluate that over time.

And obviously over the last couple of years, we've seen strong growth and kind of based on consumer packaged goods and ecommerce driven growth as well. So I think it's a combination of those things..

And at this time, I'd like to turn the call back over to Mitch Butier for any closing remarks. Please go ahead..

All right, well, thank you all for joining. Just want to reiterate we remain confident in the consistent execution of our strategies, will enable us to continue to meet our long-term goals and make progress each and every year along the way.

And I once again want to thank our entire team for their efforts and continue to focus on the success of all of our stakeholders. Thank you very much..

This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day..