Avery Dennison - Q3 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star zero. Welcome to Avery Dennison's Earnings Conference Call for the third quarter, ended on September 30, 2023. This call is being recorded and will be available for replay from 5 P.M. Eastern Time today through midnight Eastern Time, October 31. To access the replay, please dial 800-633-8284 or +1-402-977-9140 for international callers. The conference ID number is 22020693.

I would now like to turn the conference over to John Eble, Avery Dennison's Vice President of Finance and Investor Relations. Please go ahead, sir.

John Eble (VP of Finance and Investor Relations)

Thank you, Carlos. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules A-4 to A-9 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 Deon Stander, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Deon.

Deon Stander (President and CEO)

Thanks, John, and hello, everyone. In the third quarter, we delivered earnings in line with our expectations, grew volume and margins in both segments sequentially, generating strong free cash flow, and delivered significant Intelligent Labels growth in new categories such as logistics and food. While earnings were in line with our expectations for the quarter, volume was lower than anticipated on broader macro uncertainty and slower consumption, which the team was able to offset through productivity and cost reduction actions. As I mentioned last quarter, we have activated countermeasures to minimize the impact on our bottom line. We have implemented temporary cost reduction actions, ramped up our restructuring initiatives, and paid back capital investments in our base businesses while protecting investments in our high-growth platforms, particularly Intelligent Labels. Now, a quick update on the quarter by business.

Materials Group delivered strong margins, and volume improved sequentially as inventory destocking continues to moderate. Volume was down compared to prior year, as customers were still building inventory in the third quarter last year and have been reducing it this year. As you can see on slide 6, volume in North America and Europe continued to improve at a steady pace in the third quarter. Latest indications suggest that our customers' inventory destocking is largely complete in Europe and will be largely complete in North America by year-end. Demand in these regions has been softer than anticipated on broader macro uncertainty and slower consumption, particularly in Europe. As destocking continues to moderate, we expect volume will again improve sequentially in the fourth quarter, a trend we have seen through the first 3 weeks of October.

Overall, emerging market label demand was solid in the quarter, up high single digits sequentially, with particular strength in Asia. Materials margin was strong, expanding year-on-year and sequentially, as volumes improved and structural and temporary cost-saving actions were implemented. Solutions Group sales were up mid-single digits in the quarter. Sequentially, volume in Apparel Solutions and Intelligent Labels improved, and Adjusted EBITDA margin improved 60 basis points. We expect to drive further margin improvement in the fourth quarter as volume increases. Apparel imports continue to be down compared to prior year in 2019, which can be seen on slide 6. Following a mixed back-to-school season, retailers and brands continue to factor muted sentiment into their near-term sourcing plans. Intelligent Labels in non-apparel categories, particularly logistics and food, continued to ramp significantly and were up roughly 75% in the quarter.

Our execution of these key rollouts in new categories is delivering significant value for our customers and compelling proof points for broader segment adoption. This growth was partially offset by a decline in apparel, resulting in roughly 10% growth for overall Intelligent Labels in the quarter. We expect non-apparel Intelligent Labels growth to further accelerate in the fourth quarter, along with sequential improvement in apparel, enabling us to achieve low- to mid-teens growth for the platform overall in 2023, lower than previously anticipated due to the continued soft apparel market. As adoption in categories like logistics, food, and general retail accelerate and apparel rebounds, we continue to expect the Intelligent Labels platform to deliver 20%+ growth in the coming years as we further advance our leadership position at the intersection of the physical and digital.

Our ability to help address challenges such as labor efficiency and waste in very large volume categories like logistics and food is increasingly resonating with customers, and we continue to invest to capture the significant opportunity ahead of us. Intelligent Labels is a great example of one of our key strategies to drive outsized growth in high-value categories. We continue to shift our portfolio towards these categories, both organically and through M&A, and we expect to benefit from higher growth contributions from these categories over the long term. Another example of this is our external embellishments platform. Earlier this month, we announced an agreement to acquire Silver Crystal Group, an established player in sports apparel customization and application, with roughly $30 million in annual revenue, as we continue to expand our position in this key growth platform. Turning to the fourth quarter at a total company level.

As volumes continue to improve, we expect further sequential earnings improvement. In both of our primary businesses, in past inventory destocking cycles, we've seen the pace of volume improvement accelerate as the industry nears the end of the cycle. In light of the broader macro uncertainty and softer consumption, we continue to anticipate a more measured recovery, as we indicated last quarter. We remain confident that as volumes normalize and non-apparel Intelligent Labels adoption expands, we will steadily increase earnings to achieve a $10+ EPS run rate. We anticipate achieving this at some point in 2024, but the timing of this is uncertain. Stepping back, the underlying fundamentals of our business are strong. We're exposed to diverse and growing markets. We are industry leaders in our primary businesses, with clear competitive advantages in scale and innovation.

We have a clear set of strategies that have been the keys to our success over the long term, across a wide range of business cycles, and we are uniquely positioned to connect the physical and the digital to help address some of the most complex problems in the industries we serve. We remain confident that the strategies we formulated will continue to enable us to generate superior value creation through a balance of GDP plus growth and top quartile returns over the long term. I want to thank our entire team for their continued resilience and commitment to addressing the unique challenges at hand. With that, I'll hand the call over to Greg.

Gregory Lovins (SVP and CFO)

Thanks, Deon, and hello, everybody. In the third quarter, we delivered adjusted earnings per share of $2.10, up $0.18 sequentially, driven by benefits from higher volume and productivity actions. Adjusted EBITDA margin was 15.6% in the quarter, up 90 basis points compared to Q2, and comparable to prior year, with adjusted EBITDA dollars up about 7% sequentially. Compared to prior year, sales were down 10% ex-currency and 11% on an organic basis due to lower volume, largely from destocking, which continues to moderate. GAAP operating margin was 10% in the third quarter, which included $44 million in restructuring charges as we continue to drive productivity across our portfolio. The majority of the charges taken in the quarter were related to footprint optimization initiatives in Materials Europe. Turning to cash generation and allocation.

We generated strong adjusted free cash flow of $310 million in the third quarter, up $170 million compared to prior year. In the third quarter, we continued to make good progress, reducing higher inventory levels in certain components in which we experienced supply disruptions over the last couple of years. Overall, our working capital metrics are in good shape. Our balance sheet remains strong, with a net debt to Adjusted EBITDA ratio at quarter end of 2.6. We continue to execute our disciplined capital allocation strategy, including strategic acquisitions and continuing to return cash to shareholders. In the first nine months of the year, we returned $309 million to shareholders through a combination of share repurchases and dividends, as well as deployed $204 million for M&A. Turning to the segment results.

Materials group sales were down 16% ex-currency and on an organic basis, driven by a mid-teens volume decline as inventory was being built downstream from us last year and continues to reduce this year. On a sequential basis, volumes increased in label materials by mid-single digits in the third quarter. Label volume in combined North America and Europe continued to improve at a similar pace in the third quarter as in the second quarter, which can be seen on slide 6. Volume also continues to improve through the first few weeks of October. Looking at label materials organic volume trends versus prior year in the quarter, North America was down mid-teens and up low single digits sequentially. Europe was down roughly 30% and up mid-single digits sequentially.

Asia-Pacific was up low double digits and up high single digits sequentially, and Latin America was down mid-single digits and up mid to high single digits sequentially. Also, compared to prior year, Graphics and Reflectives sales were down low single digits organically, and Performance Tapes and Medical were up low single digits. Materials Group delivered a strong Adjusted EBITDA margin of 16.4% in the third quarter, up 90 basis points compared to prior year, and up 70 basis points sequentially, as benefits from productivity and temporary cost saving actions more than offset lower volume. Regarding raw material costs, we again saw modest deflation sequentially. As I mentioned last quarter, following a period of significant inflation, these lower costs are largely being passed along in price reductions to our customers. Shifting now to Solutions Group.

Sales were up 5% ex currency and 1% on an organic basis, as high single digit growth in high value categories was partially offset by a mid to high single digit decline in the base business, as retailer and brand sentiment remains muted. Adjusted EBITDA margin of 16.4% was up 60 basis points sequentially, and down 250 basis points compared to prior year, driven by lower organic volume, higher employee-related costs, and strategic investments in Intelligent Labels, partially offset by productivity and temporary cost actions. We expect adjusted EBITDA margin will again improve sequentially in the fourth quarter. Now, shifting to our guidance.

In the fourth quarter, we expect adjusted earnings per share to be in the range of $2.10-$2.25, up significantly compared to prior year, and a steady sequential improvement at the midpoint, despite the softer consumption environment. In the fourth quarter, we expect organic sales growth compared to prior year. Label Materials volume to improve as inventory destocking continues to moderate. Intelligent Labels volume in new categories, particularly logistics and food, to continue to accelerate. Further structural cost reduction actions to be implemented as we continue to focus on driving productivity across our businesses. More than $0.05 sequential headwind from typical seasonality due to less shipping days in the fourth quarter.

We remain confident that we will steadily increase earnings to achieve a $10+ adjusted earnings per share run rate, though given the level of macro uncertainty, the timing is difficult to predict. The sequential improvement will be driven by the normalization of Label Materials volume, the continued growth in non-apparel Intelligent Labels, the impact of ongoing productivity actions and structural cost reductions, and the normalization of apparel volumes. We've outlined additional full-year considerations on slide 13 of our supplemental presentation materials. We continue to estimate that incremental pre-tax savings from restructuring, net of transition costs, will contribute roughly $65 million. We anticipate investing roughly $300 million on fixed and capital and IT projects, down roughly $25 million from our previous outlook, as we've pared back capital investments slightly.

The anticipated impact from currency translation has increased and now reflects a roughly $18 million headwind for the full year based on current rates. We continue to expect our full year adjusted tax rate will be in the mid-20% range. In summary, we're continuing to improve our results, and despite the near-term challenges, we remain confident in our ability to continue to deliver exceptional value through our strategies for long-term profitable growth and disciplined capital allocation. We'll now open up the call for your questions.

Operator (participant)

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. To accommodate all participants, we ask that you please limit yourself to one question, and then return to the queue if you have additional questions. One moment, please, for the first question. Our first question comes from the line of George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director and Co-Sector Head, Equity Research)

Hi, everyone. Good day. Thanks for taking my question. Thanks for the detail. My question, to start, how are you, Deon? How are you, Greg? On the Intelligent Labels. And, you know, the less than expected growth in total, driven by apparel, if I understood the commentary quickly, correctly, and it sounded like it was apparel related to consumer sentiment, that drove the variance. And I guess if you could provide more detail in terms of what was the expectation in terms of market, in terms of consumer demand, in terms of sentiment, in terms of what your customers were saying, relative to what transpired in the third quarter, and then in turn, why, you know, you think that, you know, improves, over the next one to two quarters. Thanks, and I'll turn it over.

Deon Stander (President and CEO)

Thanks, George. If you recall, what we said earlier in the year was that we anticipated that apparel wouldn't recover through the remainder of the year, but we'd see slight sequential and volume improvement. As we showed, I think on slide six, George, you can see that what we hadn't anticipated was that continued apparel imports, which we've done so sequentially, continued over a four-quarter period. And in addition to that, we continued to actually see, somewhat surprisingly, that inventory to sales ratios are also declining. So the combination of that, I think, is really factoring into kind of more muted apparel near-term sentiment as brands and retailers think about their sourcing, their sourcing opportunities.

... In addition to that, you know, we, we have seen the expansion of our non-IL apparel business, significantly, particularly in, in logistics and food, as, as we really are demonstrating the value to our customers that those solutions are able to bring. As I look forward then into Q4, we're anticipating a little bit more recovery in apparel. We also have, as I mentioned the last time, a number of new apparel programs that are in rollout. Sometimes those, they switch between quarters as they ramp. We've typically seen that over time, but that will also add to our, apparel IL volume growth as we go into the fourth quarter, George.

Operator (participant)

Our next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.

John McNulty (Managing Director, Chemicals Analyst)

Yeah, good morning. Thank you for, or good afternoon. Thanks for taking my, taking my question. So I guess my question's really about the guide. So 3Q, you did about $2.10. You know, you're basically looking flat to up about $0.15 in 4Q. And I guess if I think about it, you've got our big RFID improvement, particularly in the logistics. You've got incremental cost saved, which seems like combined, those would put you at the high end of the range without any assumption for less destocking at the core, falling raws, or anything like that. It sounds like maybe a little bit seasonality, but I guess, what am I missing in terms of the bad guys here? Because it seems like the outlook for 4Q, or the guidance for 4Q is kind of unusually or extremely conservative.

Gregory Lovins (SVP and CFO)

Yeah, thanks, John. So I would say, you know, when we look at the guide at the midpoint, when you adjust for that seasonality, as you mentioned, we're up about $0.15 sequentially. Obviously at the high end, a bit higher than that. When we look at what's driving that, as you said, we're expecting pretty significant Intelligent Labels growth Q3 to Q4, as we've already talked about. We are seeing the start of Q4 here, sequential volumes in our label business continuing to improve as well as we've talked about, as we see that steady improvement. Now, what we're also seeing, and I think Deon mentioned this earlier, we are continuing to see more macro uncertainty. We've seen the data on retail volumes in Europe continue to decline sequentially in the third quarter.

And generally, I think we're seeing a bit of muted sentiment and cautiousness from, whether it be apparel, retailers and brands, as well as consumer packaged goods companies. And so, you know, we're looking at that and trying to factor into our guidance, a little bit of cautiousness from them as they enter the end of the year. And we'll see how that plays out as we get through holiday, and how that sentiment evolves. So right now, we're just seeing some cautiousness there, on the end user side, so we're trying to factor that into our guide as well.

John McNulty (Managing Director, Chemicals Analyst)

Fair enough. Thanks very much.

Operator (participant)

Our next question comes from the line of Ghansham Panjabi with Robert W. Baird and Company. Please go ahead.

Ghansham Panjabi (Managing Director and Senior Research Analyst)

Hey, guys, good day. I guess going back to your comments on destocking, you know, at the categories that were sort of first in on the destocking curve from 4Q of last year, have they started to inflect higher on a year-over-year basis at this point? And then related to that, you know, it seems like many of the CPG customers are actually being much more aggressive on cutting inventories, just given the higher, you know, cost of holding inventory, given interest rates and also inflation. How is that factoring in in terms of the outlook for the first half of next year, you know, the way you see it at this point, and then also, more importantly, as it relates to the $10 of run rate earnings, the timeline of that?

Deon Stander (President and CEO)

Thanks, Gansham. I think the thing that we've seen more recently is that kind of more broader macro uncertainty and slower consumption. And Greg, I think, called out, you know, particularly in Europe, macro retail data volume is actually sequentially down each month of the last couple of months. And we do see consumer packaged goods volume still below last year, in the large number of consumer packaged goods companies as well. And I think that caution, whether it's in that particular end market or also in apparel, I think is just part of what we're seeing as a consequence of high interest rates and its impact on consumers and how they react. And so, we're starting to see some of the sequential improvement from inventory stocking, particularly for the categories that went in first.

And you've seen that in our results, and you continue to see that even in our forecast for the fourth quarter, Gansham. As I think about it now, given that uncertainty, it makes it very difficult to call when that $10 run rate will happen. That's why we think it'll happen at a point during next year, but the timing of it uncertain. You know, I'm very confident in the fundamentals of our business, and I'm confident that when volume really does return, we can see a clear path to that $10+ run rate as we move forward.

Operator (participant)

Our next question from the line of Jeff Zekauskas with JP Morgan Securities. Please go ahead.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Thanks very much. I have a two-part question. I was looking at your bar graph for volumes on slide 6, and when you measure it, it looks like Q4 of 2022 is 1.2 inches, and Q4 and October is 1.4. So it looks like the volume is up 16%. Is that right? And second, you've got two tranches of debt. You've got, you know, both about 1% rate. You've got $300 in August of 2024, and you've got $533 in the first quarter of 2025. Is your intention to pay those down or to refinance them?

Gregory Lovins (SVP and CFO)

... Yeah, Jeff, so I guess starting on the bar chart, I think, I think with the scale, you know, I think the-- you can't quite make that direct conclusion from that scale. What we're seeing is, if you recall last year in Q4, really in October, we were still seeing some stocking up, particularly in Europe, and then we started to see in November that pretty sharp downturn towards, you know, converters starting to destock, and that's what's carried through. So now when we've gone through Q4, we're still seeing volumes below prior year in Q3, picking up a bit in Q4, closer and closer to where we were, obviously, back to that, early part of the Q4 levels. But overall, yeah, you can't make a direct comparison there.

I think in the third quarter, our volumes were down mid-teens versus prior year. And when you look at that, obviously last year, there was stocking up going on in the third quarter. That was actually our highest quarter of stock build last year. And then obviously, we're still taking some inventory down here this quarter at the rate of about, I think, more than a week in North America and a little bit less than that in Europe. So that's how I think about those two things. From a debt perspective, you know, some of that depends on, you know, M&A opportunities and things like that, and how they evolve over the next year or two, and how that capital allocation plays out.

Absence of M&A or, or something major in, from that perspective, then I think we'd be looking at next year, probably continuing to pay down the debt with cash flow. But again, that'll determine a little bit on what the opportunities are and, and how we proceed from an M&A perspective.

Operator (participant)

Our next question from the line of Josh Spector with UBS Securities. Please go ahead.

Josh Spector (Equity Research Analyst)

Hi, yeah, thanks for taking my question. I wanted to ask on margins within the solutions segment. So, you know, your sales were up in 3Q year-on-year, but your EBIT was down. Your margin did improve, but it was fairly marginal. So and I think some of the things you called out was higher investment, the cost, et cetera. So, you know, one, can you give any granularity around those different pieces for 3Q? And then, two, when you look at next year and say you get volume growth within Intelligent Labels, you have some easier comps, what's the right incremental we should be thinking of on that growth? Thanks.

Gregory Lovins (SVP and CFO)

Yeah, thanks, Josh. This is Greg. So I think when you look at overall solutions in the quarter, as you can see, our organic growth in the quarter was about 0.5 point. But the majority of that driven by the Intelligent Labels growth, as we've already talked about, at around 10 points, and base apparel and our base business down in the segment was down. Now, when we look at that 0.5 point of growth, we had a little bit of price up, and volumes overall were down a little bit in the quarter, particularly in the base, as I mentioned a second ago.

And I think as you, as you probably heard us talk about in the past, in the solutions segment, we need a point or so of growth in order to offset things like wage inflation, things like that, that are, you know, an annual increase in cost to that business. So we had year-over-year employee costs go up, as well as the investments that we've been making in Intelligent Labels from a carryover perspective, as well as investments as we were ramping up the new programs here. So those are really the areas that I think impacted margins in the quarter. So we were happy to see the sequential improvement that we made in Q3, even though we're still below prior year.

We do expect further sequential improvement in Q4, I would say a point or so from where we were in Q3. I would expect then, when we look next year, to get back closer to the margin rates we were at last year in the solutions segment overall.

Operator (participant)

Next question from the line of Anthony Pettinari with Citigroup Global Markets. Please go ahead.

Anthony Pettinari (Managing Director and Senior Equity Research Analyst)

Good morning. You know, so you've had this year where organic sales is, you know, down 10%, and I'm just wondering: Do you feel that there's any market share shifts in either materials or solutions? Are you potentially, you know, losing some share, holding, gaining any kind of conclusions you can draw, looking at the last, you know, three quarters, and anything that you would differentiate between materials and solutions, understanding, you know, solutions is getting a bit better?

Deon Stander (President and CEO)

Yeah. Thank you, Anthony. I think our view is that, largely the function of volume being down is just the reflecting the inventory that was built during last year and the slow unwind of it as we go through this year. And we know, having looked at this very closely, that we have maintained or even expanded share across our materials businesses in 2023. We've held and slightly expanded share in our base apparel business, and our overall IL share continues to grow as well, Anthony. And that reflects, you know, our continued focus by the teams on ensuring that they're really delivering excellence of service and quality to our customers and helping them address some of the challenges they themselves are facing right now.

Operator (participant)

Next question from the line of Mike Roxland with Truist Securities. Please go ahead.

Mike Roxland (Managing Director, Senior Equity Research Analyst)

Thank you, Deon, Greg, John, for taking my question. Just wanted to get your insight into what's happening in Europe. One of your peers is cutting label stock production in Europe, citing continued weak demand. So what gives you the confidence that the bottom has been reached at this point, and that demand in Europe will ultimately improve?

Deon Stander (President and CEO)

Well, Mike, I think we highlighted there is a degree of uncertainty as it relates to the macro environment, and we've seen softer consumption in Europe. And I think we've been very clear that we're not necessarily calling the timing of the recovery. We do see slow sequential improvement. And I think the thing that I always go back to is that at the end of the day, we're serving ultimately across a multi-cycle time phase. We serve markets that are both growing and diverse and typically are GDP plus. And so at a point, the markets will recover, demand will come back, and we are ideally positioned in that regard. We have leadership positions in both our businesses, and we have strategies that continue to deliver successfully over the years.

And we have a team that leads the industry in both of our businesses as well.

Gregory Lovins (SVP and CFO)

Mike, I think I would add, just as we talked about, I think last quarter, you know, historically, we've been in a period of a destock or a downturn. We've seen volumes rebound or accelerate kind of quickly at the end of that cycle. And what we've been talking about this year through this period is a little bit more steady improvement over the last number of months and quarters, as you can see in those bar graphs that we showed. And I think that steady improvement reflects a couple of things. One is the, you know, the improvement of inventory levels at our converters and our direct customers over the last quarter or so, but also that cautiousness in kind of the slowdown in consumer demand at the same time.

So I think that those two things hitting at the same time is leading to a more steady increase in our recovery rather than a more, accelerated ramp at the end of that destocking cycle. And I think that's why we're continuing to project a, you know, steady, continued improvement quarter over quarter as we go forward.

Operator (participant)

Our next question is coming from the line of Christopher Kapsch with Loop Capital Markets. Please go ahead.

Chris Kapsch (Managing Director, Senior Equity Research Analyst)

Yeah, it's a two-part question. One, and sort of piggybacks off of some of the other commentary, but just on the comments around the sequential improvement in demand in materials segment thus far into October, just wondering if you could characterize that by sort of by geography and or by category. And then secondly, in Intelligent Labels, there's a number of RFID programs that are very gaining traction, for lack of better characterization, and maybe that improving visibility helps give you confidence in around the commentary about the, you know, the sustainability of the 20% growth CAGR, 20%+ growth CAGR going forward?

I'm just wondering if you could, to the extent that some of these programs are in conventional big box retailers, but beyond apparel, I'm just wondering if there's any evidence that would suggest that, you know, just the addressable, the TAM, is expanding given the use case for this Intelligent Label, given what they're being attached to beyond apparel. So thank you for that.

Deon Stander (President and CEO)

Yes. So, Chris, let me address the first question, then I'll get to the second. You know, we have seen slow sequential improvement in demand, sorry, in volume in our materials business in the first part of October. That's reflected in the bar chart. And I think that reflects both the continuation of the destocking moderating, largely in Europe. As you said, we think it's largely complete now by the end of Q3. There's a little bit to go in Q4 in North America. And so we would anticipate volume to slowly sequentially improve in that regard. As it relates to IL, overall, our Intelligent Labels platform, you know, we have a high degree of confidence in that 20% growth rate. And let me tell you why, Chris.

I think firstly, we are really seeing our non-apparel categories, largely now logistics and food, continue to accelerate, and you can see they're both in Q3 and in Q4. These are actual rollouts that are happening in logistics customers and food customers. They're in flight. They are delivering real value for our customers. And most importantly, as that value becomes more visible, it becomes a compelling proof point for the broader segment to think about adopting. We saw that when apparel first adopted as well, and we're seeing a mirror of that as we anticipate going forward. I think the second thing is, apparel is recovering, and it will bounce back at a point. And when that happens, we are the market leader in apparel IL overall, and it's not just the recovery of the volume in apparel, it'll also be the continuation of new use cases.

I think I spoke previously about our rollout with Inditex on a loss prevention application that is in addition to the inventory productivity we typically see, and we're continuing to see new retailers and brands roll out. I mentioned four previously, and we have another four in flight right now, large ones as well. They will augment the apparel growth as well. I think the other piece to really consider is when you think about those non-apparel categories like logistics, food; they are significantly bigger than apparel. If apparel is around, let's call it, an addressable market of 45 billion units, logistics is at least 65-70 billion, and food is in the order of 200 billion units, and we are just at the start of the adoption in those two categories.

The scale of the opportunity, the potential that lies in front of us, is tremendous. That's the reason, Chris, that we've been investing to ensure that we can maintain and expand our market leadership position. We're not just here to make sure we're solving some of these unique challenges for customers, but actually to try and ensure that we're activating the industries and the segments within. Having seen the impact that we're having on those customers, and the fact of how much they value our market-leading team, it just reinforces the confidence that I have in that future growth rate.

Operator (participant)

Our next question is from the line of Matt Roberts with Raymond James. Please go ahead.

Gregory Lovins (SVP and CFO)

Hey, good afternoon, everybody. When I think about the investments you're making in Intelligent Labels, as well as you, you referenced carrying some inventory earlier, when I think about the cash conversion cycle for Intelligent Labels, is that different than the rest of the system? Like, is there a longer lag in, in when you have to invest in, in that inventory to when you're able to book the revenue versus everything else? If there's any color you can provide, that'd be really helpful. Thank you. Yeah, Matt, I think in general terms, the answer would be no. It's relatively similar to what we've been experiencing in the Intelligent Labels business over the last number of years. I think over the last few quarters, as I've talked about, we had built up some inventory in chips.

That's something we had driven, you know, starting last year when we were starting to see some of the inventory challenges there. So that's why we started that. But overall, I think when we look at that from a normal ongoing process, I wouldn't expect any difference from what we've seen over the last few years.

Deon Stander (President and CEO)

Matt, the only thing I'd add to that is, typically, when we look at some of these large-scale rollouts, our focus is on consistent and flawless execution. We have to make sure that we deliver not only the, the business case, the proof of economics, but actually the reliance on ensuring that we can provide everything they need. So we typically tend to invest to make sure that we have the capacity to both do that, and from a people and from asset and from a working capital perspective. But as that program then continues to roll out, we typically end up normalizing, relative to all of our other working capital cash collection cycles as well.

George Staphos (Managing Director and Co-Sector Head, Equity Research)

Great. Thank you all very much.

Operator (participant)

We have a follow-up question from the line of George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director and Co-Sector Head, Equity Research)

Hi, everyone. Thanks for taking the follow-on. Deon, can you talk to, you know, what the payback return, payback period is on some of the newer markets relative to, for IL, relative to what you've seen with apparel? You know, arguably, especially with logistics, perhaps given the value of the products for your customers, the payback might actually be quicker and the return higher. Can you talk to that? Can you index it somehow? And then just a quick follow-on. I, I, at the end of the day, I wasn't clear, are you expecting label materials to be up year-on-year in volume in the fourth quarter? I know you're making sequential improvement. I know the comp was tough in October, and then November last year, things dropped off.

What would you have us know about your guidance for the fourth quarter in terms of what it means for material volume year-on-year in the segment? Thank you.

Deon Stander (President and CEO)

Thanks, George. The way that we've seen, the payback period, particularly in apparel, I'll start there, George, has typically been in that sort of less than a year payback cycle, typically. And that varies by retail and brand, depending on the complexity of their retail estate, depending on the complexity and the length of their supply chain and the diversity of their supply chain as well. And you're right, that in logistics, we will be seeing shorter paybacks because the supply chain is more compressed. It may not be as globally oriented initially in some of the pieces we've seen. And we're at the infancy of some of the food work that we're doing right now.

Our anticipation is that the food payback cycle will be similar to apparel within that year period as well, because there is a supply chain across multiple suppliers that will also have a similar resonance to the way we've seen apparel in the past. As to your second question, we do anticipate sequential label volume improvement as we go through the fourth quarter, and that reflects both the inventory destocking moderating further, and some slight demand improvement as we move as well forward, George.

Gregory Lovins (SVP and CFO)

George, also, I'm not sure if your question, that your last question was year-over-year, sequential. Year-over-year, we also expect to see volumes up in the label business, as Deon said, the same reason we start to lap that destocking last year. We still got some destocking in North America in Q4, a little bit less in Europe, as we've already talked about. So we do start to see volumes up in the fourth quarter versus prior year. The other thing I would say when you're looking at the sales line, as we've seen that sequential deflation as we move through the last couple of quarters, we do have some price down, as we've talked about as well. So it'll offset some of that volume increase, but certainly we expect volume to grow a little bit year-over-year in the fourth quarter.

Operator (participant)

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

Deon Stander (President and CEO)

Thank you, Carlos, and thank you all for joining us on the call today. While the environment remains dynamic, we are extremely confident in our position and prospects and our ability to generate GDP Plus Growth and top quartile returns over the long term. Thank you all.

Operator (participant)

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.