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Text: Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures.
We remind you that we'll make certain predictive statements that reflect our current views and estimates about our future performance and financial results.
On the call today are Mitch Butier, Chairman, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer.
I'm pleased to report, we delivered another strong quarter.
Our two primary businesses achieved impressive top and bottom line growth and momentum in our Intelligent labels platform continues.
We are in a higher demand environment that comes at a time of continued and increasing challenges.
The ramping up of COVID infections and restrictions in some countries, continued supply chain challenges and additional inflationary pressures are taxing the industry, our customers and our teams.
The biggest challenges have been in LGM North America due to raw material shortages and labor and capacity constraints, and in RBIS Vietnam, where output was significantly constrained in the quarter due to COVID restrictions.
While we are encouraged by recent trends in these businesses as we've been able to increase output in recent weeks, the supply chain constraints continue.
As for inflation, the pressures continue to increase.
We previously expected some abatement in raw material input cost toward the end of the year, whereas, we now expect additional inflation in Q4, as well as Q1 of next year.
Now for context on the magnitude of the inflation, in our materials businesses alone, we will be exiting this year with annualized inflation of more than $600 million.
That's a nearly 20% increase; a rate we have not seen in decades.
We are thus in the midst of another round of price increases.
Despite these hurdles, we continue to achieve impressive results.
The team is doing a tremendous job managing through these compounding challenges, focusing on keeping our team safe and delivering for our customers.
Now a brief recap of the segments.
Label and Graphic Materials posted strong topline growth for the quarter over coming the challenges I just highlighted as demand for consumer packaged goods and e-commerce trends continued to drive strong volume growth in our Label and Packaging Materials business, while growth in our Graphics and Reflective Solutions business continues to rebound.
LGM's profitability remained strong, though margins were down from last year due to the increasing inflationary headwinds and higher costs in the quarter from the supply chain constraints.
Given the increasing inflationary pressures, we have redoubled our efforts on material reengineering and, as I mentioned previously, are raising prices again.
Retail Branding and Information Solutions delivered strong revenue growth in the quarter and continued to expand margins significantly.
The segment grew 22% on a constant currency basis and 14% organically, driven by strength in both high-value product categories, as well as the core Apparel business.
[Technical Issues] Impressive performance is despite the significant constraint in South Asia where we have major manufacturing hubs, once again demonstrating the advantages of our global manufacturing network.
Intelligent Labels sales, enterprisewide, were up 15% in the quarter and we are on track for approximately 30% organic growth for the year versus 2020 and 40% versus 2019, toward the higher end of our long-term target.
As expected, the continued strong growth in our RFID business was primarily driven by Apparel.
Applications outside of Apparel, particularly food and logistics grew faster than the average, though obviously off of a small base.
And in Q3, we also closed the acquisition of Vestcom, a business that further expands our position in high-value categories and has the potential to further advance our Intelligent Labels strategy.
In the Industrial and Healthcare Materials segment, sales continue to rebound off prior year lows and were up relative to 2019 by 11% on a constant currency basis.
As for margins, they are down as inflationary pressures [Technical Issues] and costs from supply chain disruptions have impacted the segment to a greater degree than LGM.
Overall, I am pleased with the progress we're making at the company on our long-term strategies, while also executing in the near term.
We are providing superior service to our customers despite the challenging environment, keeping our team safe and engaged, ramping up investments for the long term and ensuring we continue to deliver for our shareholders.
Given our strong performance in the quarter, we have raised our outlook for the year.
We now anticipate an earnings growth of roughly 25% over last year's record and are on track to achieve all of our five-year companywide goals that we established in early 2017.
With that, I'll now hand it over to Greg.
We delivered another strong quarter with adjusted earnings per share of $2.14, up 12% over prior year, and up 29% compared to 2019, driven by significant revenue growth and strong margins.
Sales were up 17% ex-currency and 14% on an organic basis compared to prior year, driven by strong volume across the portfolio and higher prices.
We also delivered strong growth compared to 2019 with organic sales up 10% versus two years ago.
As Mitch mentioned, our supply chains remain tight and input costs have continued to rise.
Both raw material and freight inflation were above our expectations for the quarter and we've continued to [Technical Issues] cost rise as we enter the fourth quarter.
We continue to address the cost increases through a combination of product reengineering and pricing, and have announced additional price increases in most of our businesses and regions across the world.
Despite the impact of inflation, supply chain disruptions, and the headwind of last year's temporary cost reduction actions, we delivered a strong adjusted EBITDA margin of 15.4%, down 70 basis points from last year and up 120 basis points compared to 2019.
Turning to cash generation and allocation.
Year-to-date, we've generated $639 million of free cash flow, up over [Phonetic] $251 million in the third quarter.
That's up significantly compared to previous years, driven by our strong net income growth and working capital productivity.
And we closed the Vestcom acquisition in the quarter for a total purchase price of roughly $1.45 billion.
To fund the acquisition, we used the net proceeds from an $800 million senior note offering in August, along with cash in commercial paper.
Additionally, in the first three quarters of the year, we returned a total of $290 million in cash to shareholders, through $164 million in dividends and the repurchase of over 700,000 shares at an aggregate cost of $126 million.
Our balance sheet continues to be strong with a net debt to adjusted EBITDA ratio of 2.3 at quarter end, at the bottom end of our long-term target leverage range.
This gives us significant capacity to continue the disciplined execution of our capital allocation strategy.
Now turning to the segment results.
Label and Graphic Materials sales were up 15% ex-currency and 14% on an organic basis, driven by strong volume and roughly 5 points from higher prices.
Compared to 2019, sales were up 11% on an organic basis.
Label and Packaging Materials sales were up roughly 15% organically, with strong volume growth in both the high-value product categories and the base business.
Graphics and Reflective sales were up 11% organically.
And looking at the segments' organic sales growth in the quarter by region, North America sales were up low-double-digits, despite raw material availability challenges that have continued to create extended lead times.
Western Europe grew more than 20%, partially due to easier comps, given the impact of the pandemic we saw in Q3 last year.
With that said, the business was still up double-digits versus 2019.
And overall, emerging market sales were up low-double-digits in the quarter, with double-digit growth in both ASEAN and Latin America and mid-single-digit growth in China.
While LGM's profitability remained strong, adjusted EBITDA margin decreased from last year to 15.9%.
This was partially driven by the increased inflationary pressures and the impact of supply constraints, which led to some incremental costs in the quarter, such as expedited freight and overtime to minimize disruptions to customers.
And as you know, our goals are to deliver GDP-plus growth and top-quartile returns on capital, with a focus on driving EVA.
Our approach to price increases in material reengineering is designed to do just that as we looked [Technical Issues] at higher material costs on a dollar basis by the end of an inflationary cycle.
However, the revenue base from such price increases alone, especially the magnitude we are seeing in the back half of this year, reduces operating margin on a percentage [Technical Issues] with no impact to returns.
This pricing impact led to a reduction in operating margin by roughly 0.75% [Phonetic] in the third quarter.
Shifting now to Retail Branding and Information Solutions.
RBIS sales were up 22% ex-currency and 14% on an organic basis as growth remained strong in both the high-value categories and the base business due, in part, to lower prior year comps.
Compared to 2019, organic growth was up 9%.
The Apparel business saw particular strength in the performance and premium channels, and continued double-digit growth in external embellishments.
As Mitch mentioned, Intelligent Labels sales were up organically, roughly 15% and up about 40% compared to 2019.
Adjusted operating margin for the segment increased to 13.8% as the benefits from higher volume and productivity more than offset the headwinds from prior year temporary cost reduction actions, higher employee-related costs, and growth investments.
The RBIS team is continuing to deliver in this high-growth, high-margin business.
Turning to the Industrial and Healthcare Materials segment.
Sales increased 20% ex-currency and 15% on an organic basis, reflecting strong growth in both the Industrial and Healthcare categories.
Compared to 2019, sales were up 6% on an organic basis.
Adjusted operating margin decreased to roughly 10% as the benefit from higher volume was more than offset by the net impact of pricing, higher freight and raw material costs and higher employee-related cost.
Freight, in particular, had an outsized impact on IHM in the quarter, given the significant increases in global shipping costs.
Now, shifting to our outlook for 2021.
We have raised our guidance for adjusted earnings per share to be between $8.80 and $8.95, a roughly $0.08 increase to the midpoint of the range.
And we now anticipate roughly 15% organic sales growth for the full year, at the high end of our previous range reflecting strong volume growth and the impact from higher prices.
In particular, the impact of the extra week in the fourth quarter of 2020 and the resulting calendar shift will be a headwind to reported sales growth of roughly 8 points in the fourth quarter of this year, with a roughly $0.30 earnings per share headwind.
The anticipated tailwind from currency translation is now $30 million in operating income for the full year, based on current rates.
Most of this benefit came in the first half and will thus create a headwind as we go into 2022 if rates stay where they are now.
And we expect a modest earnings per share benefit from Vestcom in 2021, net of purchase accounting amortization, which we estimate to be nearly $60 million on an annualized basis and net of financing costs.
[Technical Issues] target over $700 million of free cash flow this year, up significantly from previous years.
In summary, we delivered another strong quarter in a challenging environment and we remain on track to deliver on our long-term objectives to achieve GDP-plus growth and top-quartile returns on capital, which together will drive sustained growth in EVA.

user
q3 adjusted non-gaap earnings per share $2.14.
sees 2021 adjusted earnings per share range of $8.80 to $8.95.

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