Ladies and gentlemen, thank you for standing by. Operator Instructions. Welcome to Avery Dennison’s Earnings Conference Call for the Second Quarter Ended July 3, 2021. This call is being recorded and will be available for replay by noon Pacific Time today through midnight Pacific Time July 31. To access the replay, please dial 800-633-8284 or +1-402-977-9140 for international callers. The conference ID number is 21969420. I’d now like to turn the call over to John Eble, Avery Dennison’s Head of Investor Relations. Please go ahead.

Thank you, Operator. 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; and Deon Stander, Vice President and General Manager, RBIS. I’ll now turn the call over to Mitch.

Thanks, John, and good day everyone. We delivered another strong quarter ahead of our expectations, raised our outlook for the second half and announced an agreement to acquire Vestcom, a leader in shelf-edge pricing and branded labeling solutions in the U.S. Vestcom has roughly $400 million in revenue, with a consistent history of strong growth and above company average margins. Vestcom will further expand our position in high value categories, while adding channel access and data management capabilities that have the potential to further advance our intelligent label strategy. Deon will tell you more about the acquisition, both the strengths of the company and how it will accelerate our strategies in a moment. Turning to results. In the second quarter, earnings rebounded significantly, as sales grew 29% on a constant currency basis, reflecting a strong rebound in RBIS and IHM and continued strength in LGM. The quarter was even more impressive relative to 2019 with revenue up 14%, EBITDA margins up 80 basis points, and EPS up 30%. Now, while we are pleased with the results, our strong performance comes at a time of continued uncertainty given the global health crisis and constraints within supply chains. While the rate of new cases among our team remains stable, many parts of the world are experiencing an increase in COVID-19 cases. Certain countries, particularly in South Asia, have experienced a significant rise in infection rates, leading to the recent disruptions at a few RBIS manufacturing locations. While this is impacting July, we don’t anticipate these disruptions will impact demand in the back half of the year. In addition to the effects of the pandemic, supply chains remain constricted, affecting markets and adding to inflationary pressures. This constraint on the availability of raw materials, freight and in the U.S. labor continues to impact the industries in which we operate. Despite these constraints, we’ve been able to deliver record volumes as our team continues to leverage our global network and scale to minimize disruption to our customers. The current environment further reinforces our determination to remain vigilant in protecting the health and well being of our team and agile to ensure we continue to meet customer needs. Now a quick update by business. Label and Graphic Materials posted strong top-line growth for the quarter as demand for consumer packaged goods and e-commerce labels continued to drive strong volume in our Label and Packaging Materials business. Our Graphic and Reflective Solutions business rebounded significantly up from prior year lows. As per profitability, LGM margins remain strong despite increasing inflationary headwinds, including costs from the quarter from the supply chain constraints. Given the increasing inflationary pressures, we are redoubling our efforts on material reengineering and again, raising prices. We are targeting to close the inflation gap relative to mid last year by the fourth quarter. Retail Branding and Information Solutions delivered robust growth in the quarter and expanded margins significantly compared to prior year lows. Compared to 2019, margins expanded further, as the segment grew 25% on a constant currency basis, and 14% organically driven by strength in both high value product categories, particularly intelligent labels, as well as the core apparel label business as retailers and brands continued to gear up for a strong rebound in demand. Enterprisewide, Intelligent Label sales were up 40% compared to 2019. As expected, the strong growth in our RFID business was primarily driven by apparel, while outside of apparel, we continue to see strong momentum building for new applications in all key geographies. In the food segment, for example, a North American restaurant chain recently began rolling out RFID across their network after a successful pilot over the past year. And in logistics, we saw positive momentum, including the adoption of an intelligent label solution at a large global player in the transport of hazardous materials, such as batteries, which requires special shipping protocols. These are just two examples of programs of what will be many in the years to come. In the Industrial and Healthcare Materials segment, sales rebounded off prior year lows, showing positive growth compared to 2019 as the segment is on pace for its fourth consecutive year of margin expansion. Given our strong performance in the second quarter, and our increased expectations for the rest of the year, we have raised our full year outlook for the company, both from the top and bottom lines. Overall, I’m pleased with the continued progress we are making towards the success of all of our stakeholders. Our consistent performance reflects the strengths of our markets, our industry-leading positions, the strategic foundations we’ve laid, and our agile and talented team. We remain focused on the consistent execution of our five key strategies: to drive outsized growth in high value categories, grow profitably in our base businesses, focus relentlessly on productivity, effectively allocate capital and lead in an environmentally and socially responsible manner. We are confident that consistent execution of these strategies both organically and through M&A, such as the Vestcom acquisition, will enable us to achieve our long-term goals, including consistently delivering GDP plus growth and top quartile returns. And once again, I want to thank our entire team for their tireless efforts to keep one another safe while continuing to deliver for our customers during this challenging period. Now, I’ll turn the call over to Deon to provide more color on the high performing and high potential acquisition we announced today. Deon?

Thanks, Mitch. Turning to Slide 14. Vestcom is a market-leading provider of pricing and branded labeling solutions for the retail shelf-edge powered by advanced data management capabilities. It’s a high growth, high margin business generating roughly $400 million in annual revenue. Vestcom is a highly synergistic adjacency to RBIS, building on our pricing and data management capabilities in adjacent markets, and increasing our presence in high value categories. Vestcom, led by an excellent management team, has been consistently growing at a high single-digit rate organically over the long term, with strong track records across cycles, and highly accretive EBITDA margins. As you may recall, back in March at the Investor Day, we outlined RBIS’ key strategies, which include delivering outsized growth in high value categories, unlocking growth and value in food and logistics, growing profitably in the base business and strengthening our digital capabilities and solutions. Vestcom is an accelerator for all of these strategies. In particular, Vestcom provides an opportunity to help accelerate our intelligent labels ambitions in food, through their additional access to end users in retail, grocery, drug and dollar in particular, and to consumer packaged goods companies, who are key decision makers in the food ecosystem, as well as their sophisticated and complementary data management capabilities. Turning to how Vestcom delivers for its customers. As you can see on Slide 15, Vestcom solutions create real value for retailers and brands. And they do so by combining data management with outstanding customer service delivery. Vestcom solutions start with taking multiple data files, including price, promotion, planogram, and brand content files, and merging these to create uniquely integrated shelf-edge labels that have impact at the point where the majority of consumers make their purchase decisions. Their solutions, which provide both productivity and consumer engagement benefits, include Stats, which delivers integrated price and promotion labels to each store in time for store associates to label the shelf with the latest pricing and promotion updates in walk sequence that is sorted and ready to walk and tag based on the exact planogram layout for that particular store. A Slide 16 indicates the reduction in store labor time to execute these weekly price and promotion changes so efficiently is significant. And in addition, the improved level of pricing and planogram compliance drives greater consumer impact and commensurate higher sales lift for the retailer. Vestcom then builds on this effect of productivity and pricing solution by uniquely leveraging the same label real estate to add branded content from CPGs or the retailer to support their time specific marketing campaigns. These consumer engagement solutions include shelf-ads, which allows for highly effective in-store shelf-edge advertising, with the unique advantage of combining all three elements in front of the consumer: the price, the promotion, and the brand message or content. This solution provides real value in both sales lift and return on advertising spend for both CPGs and retailers. The strong return on investments delivered by both their productivity and consumer engagement solutions positioned Vestcom as a strategic partner to their customers, reflected in the deep relationships they have across the grocery, drug, and dollar segments they serve. It is these relationships and solutions in combination with our own that will help complement our strategy to accelerate IL adoption beyond apparel. This is particularly true in food, where we are already investing in our IL and digital capabilities, and where the need for visibility and provenance through the supply chain, inventory and date freshness accuracy on shelf, pricing effectiveness, and managing an increasingly omni-channel environment are key success factors for retailers. Additionally, the combination of our businesses provides the opportunity to create a unique end-to-end inventory management and pricing solution for retail in the next evolution of our data solutions and digital journey, building on the acquisition of ZippyYum and the launch of our atma.io platform. Lastly, we are pleased to add this high performing business to our portfolio. And I’m personally looking forward to both welcoming the Vestcom team and the future prospects of the combined businesses. With that, I’ll hand the call over to Greg.

Thanks, Deon. Hello everybody. I’d like to first add a few points about Vestcom and I’ll be referring to the transaction summary on Slide 17 of our supplemental materials. As mentioned, Deon already mentioned, Vestcom’s annual revenue is roughly $400 million, with strong historical growth and EBITDA margins above our company average including synergies. The purchase price of $1.45 billion represents an EBITDA multiple below our overall company multiple. And we expect this deal to be accretive to EPS by 2022. We’re currently planning to fund the acquisition through a combination of cash and debt. If the deal closes in Q3 as anticipated, we expect our leverage ratio to be near the low end of our target range at the end of this year, giving us ample capacity to continue executing our capital allocation strategy. Now, jumping back to our Q2 results. As Mitch said earlier, we delivered another strong quarter with adjusted earnings per share of $2.25, which was above our expectations by about $0.10 and roughly $1 per share above prior year, driven by significant revenue growth. Sales were up 29% ex-currency and 28% on an organic basis compared to prior year driven by strong broad-based demand and the benefit from easier comparisons. Given that the pandemic had the biggest impact on our results in Q2 of last year, compared to 2019 our growth has also been strong with organic sales up 11% versus Q2 2019. Our strong growth combined with productivity gains more than offset the headwind of last year’s temporary cost reduction actions, as well as an increase in inflation, and new organic investments to deliver an adjusted operating margin of 12.8% up 210 basis points from last year. We realized $17 million of net restructuring savings in the quarter, the majority of which represented carryover from projects we’ve pulled forward into 2020. We also recorded two items, which largely offset each other in our GAAP results in the quarter. The first is a gain related to the recovery of Brazilian indirect taxes paid in previous years. And the second is a liability related to the previously disclosed ruling in the ADASA legal matter, which the company disputes and remains confident in the prospects of a more favorable outcome upon appeal. Now, as Mitch mentioned, supply chains remain tight and input costs have been increasing. Both raw material and freight inflation were above our initial expectations, and we have continued to see costs rise as we entered the third quarter. With expected sequential inflation in Q3 at a mid-to-high single-digit rate with variations by region and product category. We are addressing the cost increases through a combination of product reengineering and pricing, and have announced additional price increases in most of our businesses and regions across the world. Turning to cash generation and allocation, year-to-date, we’ve generated $388 million of free cash flow with $206 million in the second quarter up significantly compared to previous years. In the first half of the year, we paid $108 million in dividends and repurchased over 500,000 shares at an aggregate cost of $95 million, for a total of $203 million returned in cash to shareholders so far this year. And as I said earlier, our balance sheet is strong, with a net debt to adjusted EBITDA ratio of 1.3 at quarter end. This gives us ample capacity, even after the Vestcom acquisition to continue executing our capital allocation strategy. Now turning to the segment results, Label and Graphic Materials sales were up 17% ex-currency and 16% on an organic basis, driven by higher volume and pricing. Compared to 2019 sales were up 11% on an organic basis. Label and Packaging Materials sales were up roughly 12% organically with strong volume growth in both the high value product categories and the base business. Graphics and Reflective sales continue to rebound nicely compared to the trough we saw in Q2 of last year and we’re up 49% organically. Now similar to last quarter, we do believe that Q2 benefited from customers pulling forward some volume from Q3 ahead of new price increases. Looking at the segment’s organic sales growth in the quarter by region; North America sales were up high single digits. In Western Europe sales were up mid teens, as demand in both regions increased from Q1 and emerging markets overall were up roughly 20% continuing their strength from the first quarter. The Asia-Pacific region grew roughly 20% led by significant growth in India and the ASEAN region, with easier comps given the pandemic impacts we saw in Q2 last year. And then we had low double digit growth in China. And Latin America grew over 30% with particular strength in Brazil. Our LGM adjusted operating margin remained strong; it decreased slightly from last year to 14.5%. This was partially driven by the impact of supply constraints, which led to both increase in inflation and some incremental costs in the quarter, such as expedited freight and overtime to ensure we had supply to service our customers’ needs. Shifting now to Retail Branding and Information Solutions, RBIS sales were up 73% ex-currency and 72% on an organic basis. Growth was strong in both the high value categories and the base business, due in part to lower prior year comps. Compared to 2019 organic growth was 14%. The apparel business continued its strength as retailers and brands prepared for increasing demand with particular strength in value and performance channels and continued double-digit growth in external embellishments. Intelligent Label sales were up organically roughly 65% and up 40% compared to 2019. Adjusted operating margin for the segment increased to 13.1% as the benefits from higher volume and productivity more than offset the headwind from prior year temporary cost reduction actions, higher employee related costs and growth investments. The RBIS team has continued to deliver, increasing their top-line growth and margins significantly over the last four years, with margin expansion of more than four points since 2016. Turning to the Industrial and Healthcare Materials segment, sales increased 39% ex-currency and 33% on an organic basis, reflecting strong growth in industrial categories, particularly in automotive applications, which more than offset a decline in personal care tapes due to tougher comps. Compared to 2019 sales were up 6% on an organic basis. Adjusted operating margin increased 490 basis points to 11.7% as the benefit from higher volume more than offset the headwind from prior year temporary cost reduction actions and higher employee related costs. Now shifting to our outlook for 2021, we raised our guidance for adjusted earnings per share to be between $8.65 and $8.95, a $0.20 increase to the midpoint of the range. The increase reflects the strong performance in Q2, as well as the increased expectation for the rest of the year, driven by continued strong organic sales growth. And as a reminder, this guidance does not yet include the impact of the Vestcom acquisition, which is expected to close later in the third quarter. We now anticipate 14% to 16% ex-currency sales growth for the full year above our previous expectations, driven by both higher volume and the impact of higher prices. We’ve outlined some of the other key contributing factors to this guidance on Slide 12 of our supplemental presentation materials. In particular, the extra week in the fourth quarter of 2020 will be a headwind of a little more than one point to reported sales growth and a roughly $0.15 headwind to EPS in 2021. We estimate Q1 benefited by roughly $0.15 based on the shift of the calendar and then anticipate a roughly $0.30 headwind in Q4. The anticipated tailwind from currency translation is now roughly 3.5 points to sales growth, and $35 million in operating income for the year based on current rates. And we now estimate incremental pretax savings from restructuring, net of transition costs will contribute $60 million to $65 million, down somewhat from our April estimate, as a strong demand environment has led us to delay certain projects. And given the increased outlook for earnings and working capital productivity, we’re now targeting to generate over $700 million of free cash flow this year, which is up roughly 30% from last year and 40% from 2019. Now given the distortion in our year-over-year comparisons due to the pandemic last year, let me provide you with some color on our second half outlook in relation to the first half of this year. There are four primary drivers, which are each worth roughly $0.15 plus or minus in the second half compared to the first half. The first item is the calendar shift I just mentioned a minute ago. Secondly is the impact on the pre-buy of volume from Q3 into Q2. Third, there’s a sequential price inflation gap in the third quarter, which we expect to close in Q4, driven by the timing of passing new pricing increases through. And lastly, given our continued confidence in our business, we are ramping up our pace of investments to drive our long-term strategies. So in summary, we delivered another strong quarter in a challenging environment. And we remain on track to deliver on our long-term objectives to achieve GDP plus growth and top quartile returns on capital, which together drive sustained growth in EVA. We’ll now open up the call for your questions.

Thank you very much. Operator Instructions. And our first question comes from the line of George Staphos with Bank of America Securities, Inc. Research. Please go ahead.

Thanks, Operator. Hi, everyone. Good morning. Thanks for the details. Congratulations on the progress so far this year. I guess my first question is on Vestcom, obviously, pretty big topic today. And, given the rundown, Deon that you gave, I understand why the customer would like it. I understand how it utilizes data management, and so on and mentioned how the brand owners and retailers would like it. How does it really leverage Avery’s core capabilities and smart labels? And why did you need this? In your view, what were the one or two primary issues? And can you comment a bit on what the competitive landscape is, how does Vestcom rate versus its nearest peers? And I don’t know if there’s even a share, if you could offer a market share, you could offer there. Thanks.

Thanks, George, for the question. So, let me just start by saying for us, the acquisition is perfectly aligned with our strategic initiatives and our strategies overall. It firstly increases our exposure to high value categories, given the high performing, high value business as it is. And second it is highly synergistic, as you pointed out George, to our RBIS business, with complementary channel access, and strong variable data management capability. And the third thing is it really helps to leverage and grow our IL ambitions particularly in food, where they specifically have access and deep relationships in a channel that we are just starting to build traction in. And secondarily, in combination with our variable data management capabilities, we’re able to execute more efficiently. And then finally, I think, more importantly in the longer term, is that the combination of both businesses I think will accelerate the innovation that is really needed at retail level to provide better and more integrated inventory management, pricing and consumer engagement solutions. From a competitive position there are clearly the market leader in their segment by some distance. And we believe that the complementary skill sets that we both have in variable data management and the access that will create from an Intelligent Labels perspective will be value added to all of our stakeholders.

Okay, thanks that’s a really good rundown. I just want to switch gears, given that we’ve seen inflation and cost increases pretty much climb steadily throughout 2021. Second half earnings would likely be burdened by additional inflation that didn’t hit the P&L in the first half. Now, I know that’s in your guidance. But is there a way to quantify if you agree with that premise, what that burden that you’re getting over roughly equates to in the second half? Thanks. And I’ll turn it over.

Yes, George, as I mentioned, being relative to the guidance from the first half to second half perspective, just as you said, we’ve seen inflation increasing throughout the year, increasing throughout the second quarter really, at the end of Q2 and beginning of Q3 we really started to see some more increases in some of the regions. So, we have been announcing new pricing, and it will take a little bit of time for that new pricing and/or finding new ways to take costs out of raw materials to kick in. So, we have a little bit of a gap from the first half to the second half from that timing of passing that through. We think that’s roughly in that $0.15 plus or minus range, so that I talked about a little bit earlier. So, somewhere in that range is what we would expect from our sequential first half to second half gap.

And our next question comes from Ghansham Panjabi with Baird. Please go ahead.

Thank you. Good day, everybody. On the incremental core sales increase relative to prior guidance, I think it’s about 500 basis points at the midpoint. Can you sort of disaggregate for us? How much of that is incremental pricing relative to volume? And then the volume piece, which segment and regions are sort of driving that upside?

Yes, Thanks, Ghansham. So I think when you look at that five point increase at the midpoint, roughly 40% to 50% of that came in the second quarter with the second quarter volumes coming in a bit stronger. Of course, as we already talked about, the rest of that comes in the back half. So the rest of that being kind of 2.5 points is assuming some continued strength in volume and a little bit of incremental price from what we had assumed before. So, probably a little bit more on the volume side versus price when I think about that raise in the back half, but it’s a combination of both of those in the second half from a growth perspective.

Great. Terrific and then my second question on Vestcom, can you just share the historical growth rates, the margin profile over time? And also, is it mostly North America in terms of sales? And also if that is the case, the transferability of the solution to some of the overseas markets, including in Europe? Thanks.

Yes, Ghansham, Vestcom’s historical growth rate has been above the company average as well as the margins. The growth rate, I think we commented, is high single digits over 10 plus years. So, very consistently delivering that level of growth and the margins are above the company average both pre-synergy and obviously post-synergy. So great business, highly synergistic with RBIS. You don’t see very many businesses that are close to what RBIS does as far as integrating and managing variable information to be able to deliver promotional pricing and branded solutions. So just in a new adjacency linked to food, which we see as an opportunity to accelerate the Intelligent Labels strategy. That’s the short of it Ghansham.

Our next question is from Anthony Pettinari with Citigroup Global Markets Inc. U.S. Please go ahead.

Hi, good morning. In LGM, I think you indicated North America was up high single digits and Europe was up mid teens, is that kind of a function of mix or last year’s comp, or maybe the timing of pull forward ahead of some of these price increases or some share shift? I’m just wondering if there’s anything you can tell us about how the recovery that you’re seeing is kind of playing out regionally? And how that might play out in the second half?

Anthony, if your question is why did Europe outpace North America, if you look at last year they both had periods early in the spring with some high levels of growth and then things went off in June and July for both regions. So they’re both comping in the second quarter to Q2 of last year. Within Europe, if you recall last year, we said that we had seen some share gains during that period that we’ve recovered fully within Europe; we have not yet in North America. And that’s basically because we got very long backlog and large order book, we’re going to be seeing a tremendous amount of orders from the demand levels, we’ve got longer lead times in North America than we usually do because of the surge in demand as well as the supply constraints that are disproportionate in North America. So that’s a little bit of a distinction between the two. As far as how it plays out the rest of the year, when we look at it e-commerce demand remains robust. We expect that to continue. As far as the demand for branded labels at the end market, those remain strong. There are clearly some signs that the end market with the CPGs are reporting softened growth from where it was last year when you had a lot of the pantry loading. But overall consumption looks to be pretty high from that standpoint. So there is a question and we talked about this last quarter: at some point are some of the high levels of demand around inventory building and so forth? There is a potential for that. So that’s something in the range of our guidance that we have and why midyear we still have a relatively wide range on our guidance on the top-line.

Okay, that’s very helpful. And then on Vestcom, is there anything you can say about how long you’ve been working at the company as a potential acquisition target? And then I don’t know if you’ve partnered with them or competed with them in the past? Understanding there’s some clear synergies between the two, is it accurate to say that there’s very little apples-to-apples overlap between Avery and Vestcom right now? I’m just trying to understand what you do versus what they do?

Yes. So in general, we’ve been looking at and thinking about capital allocation, our investments are focused, as you know, disproportionately towards higher value categories. And we’re obviously looking for spaces within Intelligent Labels space, or adjacent to that. And this fits both of those criteria. So we’ve got, as we’ve talked about before, quite a few companies we have on our radar from an M&A pipeline perspective. So that’s what I’ll say about that. Yes, as far as direct overlap, this is an adjacent market to RBIS with very synergistic and similar capabilities as far as what they do and how they do it. But selling to dollar stores, grocery stores and drug stores here in the U.S. is not something we do a lot of. Where the synergistic overlap is on customers is really around our pipeline development and business development we’re doing for Intelligent Labels and food. We are working with grocery stores on business cases and pilots and we’re working with restaurants, which Vestcom doesn’t focus on, of course. So that’s where I think the emerging opportunity with IL and Vestcom is where we have the opportunity. Deon, anything you want to add to that?

No. I think the other piece Mitch just emphasized as well is both businesses have this strong similarity of managing highly complex data from multiple sources and being able to turn that data into demonstrable value solutions for their customers, albeit in different channels.

Our next question is from Neel Kumar of Morgan Stanley. Please go ahead.

Great, thanks for taking my question. You mentioned 2Q being about $0.10 above your expectations or budget, and the $0.20 full year guidance increase results in the second half numbers being about $0.10 above your prior expectations. Is that concentrated in any particular segment?

Good, Neel. So, I think the second quarter was relatively broad-based. Demand was strong across all the segments in Q2. I think particularly RBIS and IHM are where we saw a little bit more upside in the quarter versus our own expectations. We continued to see strong growth in the apparel business as we talked about as well as Intelligent Labels business within RBIS, and continue to see strong growth in IHM. So our back half guide assumes a little bit of those continued trends as well, some of that strengthened volume demand across the businesses that we’ve seen in the second quarter.

Right, that’s helpful. And then just a couple of questions on Vestcom, could you quantify the potential synergies from the deal? And then I was just wondering, you can touch on the cash flow characteristics, any sense of the capital intensity and free cash flow conversion of the business?

Yes, so it’s highly synergistic overall from a cost synergy standpoint, most of those would be around material supply. And there are other areas of opportunity. But we’re not going to get into specifics around synergies. We don’t do that on our acquisitions in general. Greg, you want to comment on cash flow?

Yes, I think overall it’s a pretty strong cash generating business. We would expect in 2022 probably more than $60 million of cash after the impact of financing costs and everything else as well. So we expect a pretty solid cash contribution in 2022 from this business.

Our next question is from Josh Spector of UBS. Please go ahead.

Yes. Hey, guys, thanks for taking my question. When you talk about raw material constraints in North America in the quarter, can you just give us some color on what materials you’re seeing more shortages of? And what visibility do you have on that improving over the next couple quarters?

Yes, so it’s chemicals and films largely. But in addition to that, it’s just freight. So there’s longer lead times and bottlenecks in the receipt of our material. Just freight companies, things being left in cross-docking stations for an extra day for example, as well as our outbound freight to our customers. So those are the two primary areas. Overall, this is still just further upstream than us working through all the capacity limitations that existed because of the storm in Texas; the industry is slowly working through those backlogs from what we see. We also think that’s what’s driving some of this demand quite high of people building some inventories and so forth. And so it might be a bit elevated across multiple industries. As you see some abatement of that, that should ease on the supply chain. So, we don’t have clear visibility on exactly when this will end; it’s broad-based, but we would expect looking here as we get towards the end of this year things start to ease up.

Okay, thanks. And just on the raw material inflation sequentially, can you characterize how that inflation would look different between LGM and RBIS? And when you talk about recovering that in fourth quarter, is that across both segments? Or when will we expect one to be ahead of the other?

Yes, the largest impacts on raw material inflation are really in our materials businesses. So between LGM and IHM, that’s where we’re seeing the biggest impacts especially from Q2. We’re still in the first half really driven by chemicals and films increases. We started to see some paper increases in late Q2, specifically in Europe. So, we’ve seen increases really on the LGM and IHM side. It progressed probably mid single-digits in Q2 versus Q1. We’re looking at kind of a mid-to-high single-digit increase from Q2 to Q3, really driven by continued increases in chemicals and films in the second quarter and then increases moving into Q3 here on paper. So that’s how we’re seeing the inflation environment evolve right now.

Our next question is from Jeffrey Zekauskas with JPMorgan Securities U.S. Please go ahead.

Thanks very much. In your RBIS business, how much did the non-Intelligent Label solutions area grow?

Jeffrey, our growth for non-Intelligent Labels business, which is really the core business, the base business grew at mid single-digits overall.

Okay, thank you. On Vestcom in your release, you said that its revenues are about $400 million and it has 1,200 people that work there, which seems quite labor intensive. What are the more labor intensive parts of Vestcom?

So overall, Jeffrey, the way that the business works is they are highly efficient in taking in data and transforming that into unique shelf-edge labeling solutions in a very short time. They’re able to assimilate the data from different sources, and then print it typically on digital assets very similar to our own. Then those printed labels are effectively taken and boxed by individual store across the vast network that they serve for their customers. There is certainly a labor component in that area; they have several people across the 11 distribution centers they operate. That DC network gives them the ability to reach customers in a geographic radius in a very short order of time, which is critical so that those stores can complete their pricing and promotional changes that are absolutely required for them.

And if I can just add to that, Jeff, relative to RBIS, I’d say it has more information technology experts relative to the level of revenue, and then less as far as some of the production. There’s more automation in some of that, but then more on the very back end on finishing and distribution because of the complexity of creating unique packs for every single store in the U.S. of the customers and so forth. That gives you a relative sense.

Our next question is from John McNulty, BMO Capital Markets U.S. Please go ahead.

Yes, thanks for taking my question. Just on the acquisition, if I’m understanding the multiple kind of level that you paid, it kind of backs into an EBITDA level of give or take $100 million or so or EBITDA margins that are in kind of the mid to upper 20s. Are we thinking about that right? Or is there something else that we need to be factoring in here?

Yes, John, given the relative size of this business, we’re not going to get into a bunch of specifics around that. But overall, as we said, the multiple that we are paying is below the company average for a business that is higher growth than the average, higher margin than the average, and so the multiple that we’re paying is less both before and after synergies, of course.

I’ll just add, the way we’ve thought about this in terms of capital allocation and our focus on EVA, we’d expect this business to be EVA accretive, excluding any amortization, within the second year. So we’re literally looking at this being quickly EVA accretive. We’ve thought about this in relation to our long-term targets we issued a few months ago: we expect to continue strong growth rates, expand margins, deliver double-digit EPS growth, and deliver top quartile returns on capital. We see this acquisition as accretive to top-line growth, EBITDA margins and EPS growth, and we think it helps us continue to deliver top quartile returns and meet our long-term targets.

Got it. Fair enough and helpful color. Maybe you can also give us an update now that COVID is not completely in the rearview mirror but the situation seems to be progressing—can you speak to what you’re seeing in terms of the pilot activity around RFID? And some of the new initiatives that you’re seeing from the customer base that’s starting to accelerate at this point now that workers can be in place, et cetera? How should we be thinking about that?

Sure, John. Before Deon comments on Intelligent Labels and pilots, just to say COVID is still an uncertain environment, particularly outside the U.S., Western Europe and China. Some regions are experiencing increases in infection rates. We called out an impact in July from some disruptions in RBIS in South Asia. Given our experience managing through this before, especially since demand is strong, we expect to be able to work that through in the second half. But COVID is still top of mind and something we’re continuing to manage. Deon, do you want to answer the question on RFID pipeline and pilots?

Sure. John, related to Intelligent Labels, we continue to see healthy appetite, interest and focus on leveraging the technology from our customers. Our overall pipeline has increased by almost 20% year-over-year since last year, and bear in mind that was during a period when retailers, particularly in apparel, were also increasing their interest in dealing with COVID and much more of a touchless environment. Specifically in apparel, we continue to see growth and interest in pilots in our pipeline across a number of vectors. The first of which is new customers—apparel retailers and brands that are getting to the point of saying they want to use the technology. The second area is existing customers continuing expansion, using the technology in new categories or new geographies. And then our non-apparel customers broadly, we continue to see a significant uptick in interest; more than 60% of that pipeline increase is largely in non-apparel, particularly in food and logistics. In food, the drive around provenance and freshness and associated labor savings is starting to resonate. We’ve talked about a rollout underway in the United States, and we’re seeing similar demand in Europe and China. On the logistics side, the ability to have line of sight through the supply chain for high value, variable, or hazardous materials is attracting a lot of interest. So we’re seeing expansion across these areas.

Our next question is from Christopher Kapsch with Loop Capital Markets, LLC. Please go ahead.

Yes. Hi, I was hoping you could provide any color on how demand or order patterns trended sequentially during the quarter, maybe with granularity by business or by region. I’m just curious if there’s any pockets of strengthening or weakening as the quarter progressed given how the macro was evolving. And any comments on how those trends may have looked thus far, I guess one month into the third quarter, anything notable there?

Chris, from a year-over-year perspective it moved around quite a bit, but sequentially I don’t think there was much change as we moved through the quarter. Demand continued to stay strong. We’ve got longer lead times in our LGM businesses in some regions, so that continued throughout much of Q2. Entering the third quarter, we continue to see strong demand and strong shipments out of our LGM business and the other businesses as well. We also talked a little bit about some disruptions from a COVID perspective in South Asia at some of our facilities early in July, but otherwise continuing to stay on track with our expectations.

Got it. And then just as a follow-up in China specifically, that area in IHM in particular, given some overweight auto market exposure was really impacted last year—just wondering how those trends look this year. There’s been some macro data about possibly slowing, so just curious on China specifically. Thank you.

Yes, overall within IHM industrial categories grew about 60% in the quarter with automotive within that growing about 80% in the quarter, so pretty strong across the globe. We’re a little bit heavier weight on China from an auto perspective, so we continued to see strong growth in China from an automotive side as well. We typically are a little bit ahead of auto builds just given where we are in the supply chain, but we continued to see strong growth in the second quarter.

And outside of automotive, the revenue growth trends softened a bit from Q1 and that was largely the pre-buy that we’d seen into Q1 that we talked about last quarter. So overall, the growth within Asia was quite high year-over-year in Q2, but the comps get a bit tougher going into Q3, so we expect it to normalize into Q3 and forward.

Our next question is from George Staphos, Bank of America Securities. Please go ahead.

Yes. Hi. Thanks, everybody. Just a couple of quick ones to finish up. Deon, can you talk at all about what you’re seeing in terms of payback periods and returns to your customers from adoption of smart labels and RFID? And how that might have evolved over the last couple of years, either in aggregate or by channel, recognizing you’re not able to get into a lot of detail here. But just wanted to see what you might be seeing there in terms of what your customers are saying and why you’re seeing growth in the pipeline? Then the second question, to get back to Chris’s question, we’ve seen some signs from our contacts that there was a bit of a June low after very strong April, May. I take from your comments you didn’t see that in your product, but just want to affirm that. Thanks and good luck in the quarter.

George, the payback continues to be significant and strong for apparel customers and increasingly based on pilots and trials we’ve seen for both food and logistics customers. Inclusive, we typically tend to see paybacks within the year from a customer program deployment overall. I’d also say that the ancillary benefits that are starting to accrue at various end customers are increasing. For example, in apparel it might have been much more around inventory accuracy in store; there is now much more use of the same technology or the same labeling to provide supply chain visibility and increasingly to tie that to consumer engagement. Similarly then, in food, where there may be a big focus on productive use of labor in quick service restaurants, that’s now extending backwards to how we also ensure provenance of where products are coming from and ensuring freshness of those items as well.

George, I wasn’t sure what the June low you referred to was specifically. June volumes remained strong for us. If you’re referring to last year, there was a June volume drop, but this year volumes remain strong. From an end market perspective we commented on LGM and RBIS; demand remains strong. Some of the LGM demand could be related to inventory building which we don’t yet know. But end markets look stronger than a couple years ago. Within RBIS, retailers and brands are focused on getting product available and ready for back-to-school and holiday because they’re expecting a rebound pretty big relative to where we’ve been.

Our next question is from Paretosh Misra with Berenberg Capital Markets. Please go ahead.

Thanks. Good morning. Why is food one of the main areas of focus for Vestcom? Is that because food items have shorter expiration dates so you constantly need to update pricing to promote sales, or is it something else?

Just to be clear, Vestcom focuses on grocery, drug and dollar segments and does shelf-edge pricing and branded labeling across categories. Our comment around food is specifically the link we see where Vestcom can help accelerate adoption of Intelligent Labels in the food category. That’s an area where we see a high value strategic opportunity. Vestcom’s solutions cover many categories within those stores; food is mentioned from the lens of our Intelligent Labels strategy.

Got it. Noted. And then are there customers who currently use Vestcom’s pricing and data management and your RFID products? Or is that an opportunity?

That is an opportunity. Some of the customers Vestcom has we’re already engaging with on food in our pipeline, whether that's a business case or pilots. There’s an opportunity to extend beyond those customers to more broadly combine capabilities around data management and the data access Vestcom brings with the Intelligent Label technology and business development capabilities we have within RBIS.

And Mr. Butier, there are no further questions at this time. I’ll turn the call back over to you for closing remarks.

Very good. Well, thank you everybody for joining the call today. I want to thank again the team for their tireless efforts in keeping each other safe and continuing to deliver for our customers. We are focused on the success of all of our stakeholders. Thank you very much.

And ladies and gentlemen, that does conclude our conference call for today. We thank you all for your participation and ask that you please disconnect your line.