エイブリィ・デニソン（AVY）2026年第3四半期決算説明会：オーガニック売上高4%増で業績予想を上方修正

主要なポイント

• エイブリィ・デニソン（NYSE: AVY）が発表した2026年第3四半期の売上高は前年同期比5%増の23億ドルとなり、有機売上高成長率は4%でした。
• 調整後EPSは2%増の2.42ドルとなりました。経営陣は、顧客の在庫削減（デストッキング）が売上高成長率を約2ポイント、調整後EPSを約0.15ドル押し下げたと推計しており、これらを考慮した実質的な有機売上高成長率は6%、調整後EPS成長率は8%となります。
• マテリアルズ・グループの有機売上高は5%増加し、ソリューションズ・グループの有機売上高は1%増加しました。ソリューションズ・グループの調整後EBITDAマージンは80ベースポイント拡大し、17.8%となりました。
• 当四半期の調整後フリー・キャッシュ・フローは2億4,600万ドル、年初来累計では7億1,600万ドルに達しました。純負債/調整後EBITDA倍率は2.2倍に改善しました。
• 同社は通期の調整後EPS業績予想レンジを10.10ドル〜10.24ドルに縮小し、前年比約7%の増益を示す中間値をわずかに引き上げました。
• ウォルマート「フレッシュ」の本格展開が2027年に持ち越されたものの、経営陣は食品、アパレル、一般小売向けプログラムに支えられ、インテリジェント・レーベル事業が今後数年間にわたり2桁成長を達成すると見込んでいます。

主要財務データ

報告売上高はテイラー・アドヒーシブズ（Taylor Adhesives）の買収により1ポイント以上のプラス効果を受けました。有機的業績は、ローシングル（1%台前半）の値上げとローシングルの数量・プロダクトミックスの成長によって支えられました。

生産性向上によるコスト削減効果があったものの、原材料関連の価格設定に伴うマージン率の希薄化、インセンティブ報酬の正常化、および不都合なプロダクトミックスによって相殺され、調整後EBITDAマージンは低下しました。

事業および業績の動向

マテリアルズ・グループ

マテリアルズ・グループの有機売上高は5%増加し、ベースカテゴリーおよび高付加価値カテゴリーの双方がミドルシングル（5%前後）のペースで成長しました。高付加価値分野の成長は、特殊・耐久性ラベルおよびパフォーマンス・マテリアルズが牽引しました。

顧客による在庫削減がセグメントの有機的成長率を約3ポイント押し下げました。在庫削減の進行が想定より緩やかであったことが、会社側の従来予想を上回る第3四半期売上高に寄与しました。経営陣によると、在庫削減は主に欧州とアジアの一部に集中しており、第4四半期に残る削減の大部分は欧州が占める見込みです。

同セグメントの調整後EBITDA（金額ベース）はわずかに増加したものの、マージンは16.4%に低下しました。価格改定によりドル建て金額ベースでは原材料インフレを相殺したものの、コスト上昇分の価格転嫁による計算上の影響や人件費関連費用の増加が利益率（パーセンテージ）を圧迫しました。

ソリューションズ・グループ

ソリューションズ・グループの有機売上高は1%増加しました。ベースカテゴリーはローシングル（1%台前半）のペースで成長し、高付加価値カテゴリーは前年並みとなりました。

Embelexはワールドカップ関連需要の反動減があったにもかかわらず、ミドルシングル（5%前後）の伸びを記録しました。Vestcomはローシングル（1%台前半）の増加となりました。生産性向上と事業構造改善（リストラ）の効果が人件費関連費用の増加を十分に相殺し、調整後EBITDAマージンは80ベースポイント上昇して17.8%となりました。

インテリジェント・レーベル

全社ベースのインテリジェント・レーベル売上高はローシングル（1%台前半）のペースで増加しましたが、最終市場のトレンドは分かれました。

• アパレルおよび一般小売向け売上高は、プログラムの拡大と一般小売の回復に支えられ、約10%増加しました。アパレル向けインテリジェント・レーベルは約2桁の成長を記録しました。
• 食品向けは、エイブリィ・デニソンが新たな大手食品スーパー顧客への導入を増やし、パイロット運用を拡大したことで力強い成長を示しました。3社目の大手食品スーパーも商用展開の初期段階に入りました。
• 物流向け売上高は、2025年の大幅なシェア拡大の反動減（正常化）と顧客需要の緩やかなりにより、2桁の減少となりました。

経営陣は、優れた投資対効果（ROI）とRFIDへの継続的な取り組みを挙げ、ウォルマートの「フレッシュ」に関する機会に引き続き確信を持っています。ただし、本プログラムの開始は2026年後半以降にずれ込み、本格的な商用展開は2027年中と見込まれています。

業績予想（ガイダンス）

エイブリィ・デニソンは2026年通期の調整後EPS業績予想レンジを10.10ドル〜10.24ドルに縮小し、中間値をわずかに引き上げました。中間値は前年比で約7%の成長を意味します。

経営陣による通期の前提条件は以下の通りです。

この見通しには、追い風となった為替換算や自社株買い等による株式数減少に伴うEPSの押し上げ効果（純額で約0.30ドル）も反映されています。これらのプラス効果は、支払利息の増加、調整後実効税率の上昇、賃金インフレ、および主にインセンティブ報酬に関連する2025年の一時的なコスト削減の正常化により一部相殺されます。

第4四半期について、経営陣は顧客の残る在庫削減の大部分が年内に完了すると見込んでいます。カレンダーのズレにより、第4四半期の売上高成長率は前年同期比で約1.5ポイント押し下げられ、EPS成長にとっても緩やかな逆風になると予想されます。

リスクと注目点

• 残る在庫削減が第4四半期の重荷になると予想されており、特に欧州で顕著ですが、経営陣は年内にプロセスの大部分が完了すると見込んでいます。
• 第3四半期の原材料インフレは前年同期比でミドル〜ハイシングル（5%〜9%程度）のペースにとどまりました。経営陣は第3四半期から第4四半期にかけて原材料コスト全体は比較的安定すると見込んでいるものの、不透明感が続いていることを強調しました。
• 日用品・消費財（CPG）の出荷数量の改善は緩やかで、1%未満にとどまりました。小売顧客も消費者需要やホリデーシーズンの伸びに対して慎重な姿勢を維持しています。
• 物流向けインテリジェント・レーベルは、シェアの正常化と需要軟化により、引き続き2桁の減少に直面しました。
• ウォルマート「フレッシュ」の展開本格化が2027年に持ち越されたように、大型RFID導入のタイミングは四半期を跨いで変動する可能性があります。
• 経営陣は、更なる不透明感の要因となり得る地政学的動向、インフレ、および国債利回りを注視しています。

アナリスト質疑応答の要点

• 利益率：経営陣はマテリアルズ・グループの利益率低下の大部分について、原材料価格の決定メカニズムと人件費関連費用の増加によるものと説明しました。また、継続的な生産性向上とリストラ効果がソリューションズ・グループの利益率を支えると見込んでいます。
• 価格とコスト：エイブリィ・デニソンは、価格改定と原材料コストの再設計により、金額ベースでのインフレを概ね相殺していると述べました。同社は原材料市場の状況に応じて価格を調整する方針です。
• インテリジェント・レーベルの成長：経営陣は2027年に食品向けが力強く成長し、年間を通じて導入が加速すると見込んでいます。米国および欧州での追加パイロット運用や試行に加え、大手食品スーパー3社が意欲的に取り組んでいます。
• アパレル向けRFID：世界最大級のディスカウント小売業者のひとつへの導入を含め、新規プログラムが第3四半期の好調な成長を牽引しました。経営陣はこの勢いが2027年に向けて続くと予想しています。
• 事業構造改善（リストラ）：同社は2026年に見込むコスト削減額を6,500万ドル超に引き上げました。経営陣は今年とった施策により、2027年に前年比で約0.20ドルのプラスの繰越効果が得られる見込みを示しました。
• キャッシュ・フロー：棚卸資産回転率と運転資本生産性の向上により、年初来のキャッシュ創出が裏付けられました。経営陣は、2026年の調整後フリー・キャッシュ・フロー転換率が100%を上回るとの予想を維持しました。
• 設備投資：約2億4,000万ドルへの下方修正は、長期的な投資の優先順位の変更ではなく、主としてプロジェクト実施時期のズレを反映したものです。

決算説明会トランスクリプト全文

決算説明会の完全なトランスクリプト

経営陣による説明

Operator

Ladies and gentlemen, welcome to Avery Dennison's earnings conference call for the third quarter ended on September 30, 2026. [Operator Instructions] As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website.

I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir.

William Gilchrist

Thank you, Chase, and welcome to Avery Dennison's Third Quarter 2026 Earnings Conference Call. 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-8 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

Thanks, Gilly, and good morning, everyone. We delivered strong third quarter results, continuing to demonstrate the underlying strength and resilience of our business. Organic sales grew 4%. Adjusted EPS grew 2% compared to prior year, and adjusted free cash flow generation continues to be robust at over $240 million.

Considering the impact of customer inventory management, as shown on Slide 5, our underlying business performance remains strong with an estimated 6% organic sales growth and an estimated 8% adjusted EPS growth year-over-year. Reported sales growth was balanced across both high-value and base categories, with each up mid-single digits. As we indicated in our recent investor showcase event, high-value categories are a key part of our growth algorithm and future margin expansion. Q3 results reinforce the value of this portfolio of solutions, which are being driven by both secular demand growth and our differentiated competitive position.

At an enterprise level, our operational priorities remain clear: first, investing in innovation and service-led differentiation to drive share gains and expand opportunities across base and high-value categories; second, executing with commercial and operational agility, combining targeted pricing actions with relentless productivity to mitigate cost inflation; and third, disciplined capital allocation supported by a robust free cash flow as we continue to invest in our business and return cash to shareholders while maintaining our strong balance sheet.

Turning to our segment results. Materials Group delivered organic sales growth of 5%, with both high-value and base categories growing mid-single digits. We continue to solidify our leadership position through commercialization of innovative solutions that support industry secular trends. Sales in the quarter came in ahead of expectations due to a more gradual pace of customer inventory destocking than anticipated. While this unwind is taking longer to materialize, destocking is ongoing, and we continue to expect the vast majority of the first half prebuy inventory to unwind by the end of the fourth quarter. While segment adjusted EBITDA margins were down versus prior year, our teams continue to execute at a high level during the quarter, successfully managing volatile cost inflation and volume destocking to drive year-over-year growth in segment adjusted EBITDA.

In the Solutions Group, organic sales increased 1%, with a low single-digit growth in base categories and high-value categories comparable to prior year. Of note, strong growth in Embelex continued despite lapping a significant World Cup headwind. From a profitability perspective, our team executed exceptionally well, delivering adjusted EBITDA growth and strong adjusted EBITDA margin expansion.

Shifting to enterprise-wide Intelligent Labels. Sales were up low single digits compared to prior year, reflecting contrasting dynamics across end markets. In apparel and general retail, sales rose approximately 10%, driven by program expansions and general retail recovery. In food, adoption momentum continues to build with strong growth as we ramp up another large grocery customer, expand pilot activity and continue to move towards commercialization with the largest U.S. grocery retailer. In logistics, sales declined double digits, reflecting the normalization of outsized share gains in 2025 alongside softer overall customer demand. We remain actively engaged across logistics providers and continue expanding pilots with new partners.

Turning to our full year 2026 outlook. Reflecting our strong year-to-date execution, we are slightly raising the midpoint of our range, representing roughly 7% growth at the midpoint on full year organic sales growth of 3.5%. Regarding Q4, operationally, our business remains healthy, and we anticipate that the remaining prebuy inventory will largely conclude by year-end.

On the leadership front, I'm extremely pleased to welcome Helen Sheirbon as our new President of the Solutions Group effective November 3. Helen brings over 2 decades of global leadership, most recently serving as Senior Vice President and Chief Operating Officer of Global HP Solutions. Her proven track record in driving growth, transformation and customer-centric innovation across solutions, and her deep operating experience fit exceptionally well with leading the solutions group moving forward.

In summary, our third quarter results demonstrate improving underlying growth while reinforcing the durability, differentiation and competitive moat of our business. We remain focused on driving our long-term strategies while executing with discipline needed to navigate near-term inventory and cost inflation dynamics. Supported by a robust free cash flow generation and a strong balance sheet, we maintain the financial flexibility to invest in high-value opportunities while consistently returning capital to shareholders. As always, I want to thank our global teams for their support, their leadership and their agility and continuing to make possible solutions for our customers and value creation for all of our stakeholders.

And with that, over to Greg.

Gregory Lovins

Thank you, Deon, and hello, everybody. In the third quarter, we delivered adjusted earnings per share of $2.42, up 2% compared to prior year, coming in above our expectations, largely due to a more gradual pace of customer destocking in Materials Group as well as strong operational execution. We estimate the customer inventory destocking unfavorably impacted sales by roughly 2 points and adjusted EPS by roughly $0.15 or 6 points in the quarter, leading to underlying growth in adjusted EPS of roughly 8%.

Reported sales rose 5% year-over-year to $2.3 billion, with organic sales growth of 4%. This was driven by low single-digit price realization to offset raw material cost inflation and a low single-digit impact from volume/mix growth. Reported sales growth also benefited by more than 1 point from the Taylor Adhesives acquisition. Adjusted EBITDA margin was 15.8%, which was down year-over-year as strong productivity initiatives were more than offset by the dilutive margin percentage effect of passing through raw material-related pricing, the normalization of incentive compensation and unfavorable mix.

Free cash flow generation remained very strong. We generated adjusted free cash flow of $246 million in the quarter, bringing year-to-date adjusted free cash flow to $716 million, a conversion rate well above 100% of net income. And our balance sheet remains strong with net debt to adjusted EBITDA improving to 2.2x.

Capital allocation remained consistent with our disciplined framework. We continue to invest organically in our business with capital spending on a year-to-date basis up versus last year, while we also returned approximately $135 million to shareholders during the quarter through $75 million in dividends and $60 million in share repurchases. This brings year-to-date capital return to shareholders to more than $480 million. In addition, year-to-date, we spent approximately $80 million on venture investments, underscoring our ongoing focus on strengthening our portfolio.

Turning to our segment results. Materials Group sales increased 8.5% to $1.6 billion, with organic sales up 5%. Destocking was an approximate 3-point headwind to segment organic growth. As Deon mentioned, while inventory destocking did begin in the third quarter in Label Materials, it proceeded more gradually than we had anticipated.

High-value categories grew mid-single digits organically, led by Specialty and Durable Labels and Performance Materials. And base categories also grew mid-single digits, supported by end market growth, share gains and pricing and labels. Materials Group adjusted EBITDA dollars grew slightly with margins at 16.4%, which was down roughly 1 point compared to prior year. This was driven by two primary factors: the dilutive impact on the margin percentage from pricing actions to offset cost inflation; and higher employee-related costs. Together, these drivers more than offset strong productivity savings.

Shifting to Solutions Group. Reported sales were $687 million, down 1.8%, with organic sales up 1%, slightly higher than anticipated. Base categories grew low single digits, while high-value categories were comparable to prior year. Within high-value platforms Embelex overcame World Cup headwinds and grew mid-single digits, Vestcom rose low single digits and Intelligent Labels sales within Solutions Group decline is driven by the anticipated share normalization and softer customer demand in logistics. Solutions Group adjusted EBITDA grew year-over-year, with margins expanding 80 basis points to 17.8% as our teams continue to drive significant productivity, which more than offset higher employee-related expenses.

Turning to our full year 2026 outlook. We are narrowing our adjusted EPS guidance range to $10.10 to $10.24 and slightly raising the midpoint of our guidance. The new midpoint represents roughly 7% growth year-over-year. We anticipate reported sales growth of approximately 5.5% for the year, including organic sales growth of approximately 3.5%, approximately 1.5 points from currency translation, roughly 1 point from the Taylor Adhesives acquisition an approximate 40 basis point headwind from the calendar adjustment.

Key earnings drivers supporting our full year outlook include incremental restructuring savings now exceeding $65 million, a net EPS benefit of approximately $0.30 from favorable currency translation and lower share count, partially offset by higher interest expense and adjusted tax rate, headwinds from wage inflation and the continued normalization of 2025 temporary savings largely related to incentive compensation, and we're forecasting stronger free cash flow, targeting conversion of greater than 100% for the year, with capital expenditures anticipated approximately $240 million.

Regarding Q4, we expect the vast majority of the remaining balance of customer inventory destocking to conclude by the end of the fourth quarter. On a year-over-year basis, Q4 earnings will also have an approximate 1.5% headwind to sales growth and modest headwind to EPS growth from the calendar shift we implemented at the beginning of 2026.

In summary, we delivered strong third quarter results with organic sales up 4% and adjusted EPS of $2.42 outperforming our expectations. Considering the impact of customer inventory management, our underlying business performance has improved with an estimated 6% organic sales growth and an estimated 8% adjusted EPS growth year-over-year.

Our free cash flow generation continues to be very robust and our balance sheet remains strong, and we've continued to invest organically in the business and through portfolio enhancing investments while returning capital to shareholders through a growing dividend and reducing our share count, and we're slightly raising the midpoint of our guidance for the year.

So with that, we'll now open up the call for your questions.

Operator

[Operator Instructions] Your first question comes from the line of George Staphos with Bank of America.

質疑応答

George Staphos

My question is on margin trends, if you could unpack a bit of what happened in both segments. Specifically within Materials, can you talk about the mix effects with the destocking that would seem to help mix? Especially with high value growing, and I think you said mix was a little bit lower. And then within Solutions, can you talk about the productivity benefits and how sturdy those are on a going-forward basis? The performance there was quite good.

Gregory Lovins

Thanks, George, for your question. Yes, overall, Materials Group, when we look at margins from a year-over-year perspective, largely in line with our expectations, but down about 1 point from where they were a year ago. And again, as I said in the prepared remarks, the primary driver of that was the pricing impact on the margin percentage calculation as our focus, as you know, over an inflationary cycle, is to really cover their dollars of inflation through both material reengineering as well as pricing. And then when we're in the deflationary part of the cycle, margins would improve in that instance if we're passing back inflation and as well in the margin percentage would improve. So throughout a cycle, generally even margins across the cycle of inflation. At the same time, year-over-year, we did have a bit of an incentive compensation headwind as last year. Obviously, as you know, we were performing below our original expectations.

And then mix was just a slight impact, I think, in the quarter on a net basis overall. We did have the destocking, which was more in the base. We also had some share gain in the base though. So overall, not a major impact in our growth. And the base was also strong, just like it was in high-value categories within Materials Group.

On Solutions Group, overall, we're continuing to drive strong productivity. The majority of our restructuring benefits are in the Solutions Group as well. That team has been driving a significant number of [ accents ] to grow and improve their margins. And I think we've said over time, even back to the 2024 Investor Day, that we see continued margin opportunities within Solutions, and we're continuing to drive towards that. So overall, we do expect to continue driving those strong margins in the Solutions business.

Operator

Your next question comes from the line of Ghansham Panjabi with Baird.

Ghansham Panjabi

I understand that destocking is obviously very tricky, and you can ask a lot of things in terms of the underlying dynamics in terms of growth. But what do you -- how would you characterize the end markets for your Materials segment overall? A lot of your peers are calling out incremental consumer weakness. The same is being called out at consumer staples companies on a multi-region basis. What are you seeing, Deon? And I'm getting at really the trend line going into 2027?

Deon Stander

Yes, Ghansham, I think what we see at the moment hasn't fundamentally changed. If you look at where GDP and retail sales volumes, they are roughly 2% and 1%, respectively. And we don't necessarily see that fundamentally changing as we move forward, unless the material change in the macro.

I think if I break it down by our individual customer segments overall, end customers for our Materials Group being largely CPGs and then some of our industrial customers, I still think there's a degree of caution just given the inflationary environment. We have started to see a little bit of unit volume expansion in CPGs, but it's still very muted, still below 1%, but at least it's seemingly picked up from last year where it is typically flat. And mostly are really, we're seeing it in both -- in HPC and food as well.

Majority of our converting customers around the world say that they're not necessarily seeing any signs of significant growth from CPGs at the moment. That could change as we move forward. But most of them are managing with the constraints of where they are at the moment.

If I turn to -- and I'll just address this now. If I turn to our customers more on the Solutions side of the business, our retailers, I think, generally, retailers overall still remain cautiously focused on what the consumer is going to do in this next 6 months, given again the higher inflation. I know in our apparel customers, and we've talked to them, they've had, as expected, back-to-schools, not too bad, most of it relatively price-driven. And the outlook for holiday is also pretty cautious, but they're expecting some growth again, largely on price.

What we're hearing is clear signs of bifurcation of consumer behavior. It's not surprising given where the inflationary pressures at the moment. And of course, we remain vigilant looking at how inflation and price dynamics will play out consistently between this quarter as we go into next year as well. I think the biggest watch out that we're continuing to look at is just how does both the broader geopolitical situation unfold as well as the subsequent impacts on inflationary and including bond yields as well.

Operator

Your next question comes from the line of John McNulty with BMO Capital Markets.

John McNulty

Maybe one on Intelligent Labels. It sounds -- by the sound of the Walmart ramp, et cetera, it looked like 4Q, you should have a decent inflection. I guess, as you're looking out a little bit further to 2027, I guess, can you speak to some of the pros and cons that you're seeing at least at this point, maybe annualizing some of the logistics headwinds or at least difficult comps, the ramp in food? And it sounds like you've got some increased pilots in logistics as well as maybe a new grocer in terms of a new expansion or platform. I guess, can you unpack that a little bit for us as well?

Deon Stander

Sure, John. Let me actually deal with Walmart right upfront because it's a key part of our growth algorithm as we move forward. We remain highly confident in the opportunity around Fresh, and actually strong progress across all of our customer pipeline.

Regarding the Walmart Fresh program, our confidence there has always been based in our experience that they have with RFID in driving material change to their business. The ROI for them is very strong. They see that across the categories that they've implemented already, and they continue to believe that's the case when they roll out Fresh overall. I actually recently met with their leadership team with this commitment to the technology was reaffirmed as well.

As is typical with sort of large-scale deployments, these time lines can sometimes vary quarter-to-quarter. And in this case, the start dates for this program have moved past the second half. We're expecting literally the commercial ramp as we go through '27. And we're continuing to work right now very closely with the deployment team on what are the key commercialization milestone as we look forward.

I will say in addition to that, we're also seeing significant traction, as you highlighted, within the food category. I'm very pleased that we have a third large grocer now in the early stage of commercial rollout, and we expect that to accelerate as we go through the fourth quarter into next year as well. And it really, to me, reinforces my conviction in the long-term opportunity of this end market segment. We have more pilots, more trials happening in food overall, largely focused on fresh, largely focused on the benefits that get driven from lower inventory, higher fresh product, less markdowns, greater labor productivity in stores.

If I look at the other segments overall, we touched on the fact that we're going through that period where, particularly in logistics, particularly with our largest customer, we're seeing double-digit declines largely on the share normalization that we talked about earlier during the year. That should -- which started somewhat in the big end part of the first quarter, and as we get through the end of the year, will be largely mitigated. We continue to see an increase in pilots in logistics overall. And again, timing of those, which are highly independent specifically to each logistics company, depending on whether they look at first mile or last mile, will still play a key part in our thinking as we look into next year overall.

I'd say more generally, if I took a step back, apparel, retail and general merchandise continues to be positive. That's largely on new customers that we've driven early in the year, some customers also in the later part of this year and what we should see is the aggregated benefit of those rollouts as we go into next year. You will recall that in our Investor Day, in the event, I did make the point that we're anticipating sort of double-digit growth over the next couple of years in order to get to our growth algorithm, as we laid out.

Operator

Your next question comes from the line of Josh Spector with UBS.

Joshua Spector

I'd just be curious on the Materials side, going back to margins. Where are you kind of on the price cost journey? I guess, how much was that a positive or negative in 3Q? What's baked in the fourth quarter? And are we at the point where you're more than covering it? Or is there still some catch-up you'd expect that carries into 2027?

Gregory Lovins

Yes. I think when we look sequentially from Q2 to Q3, we continue to see a bit of deflation sequentially, particularly in paper. I think that is probably low single digit -- or inflation, I should say, sorry, from Q2 to Q3, largely from paper. And we've had some sequential pricing that impacted Q2 to Q3 as well.

I think overall, when we look at the combination of material cost reengineering and pricing, still largely on a dollar basis covering the impacts of the inflation. Percentage basis, it's a little bit different, as I talked about earlier, but on a dollar basis, looking to cover that. And we feel good about the progress we've made on that. And while we expect relatively stable raw material basket right now from Q3 to Q4, there's still a lot of uncertainty there. So we continue to track that, and we'll evolve from a pricing perspective as we see how those markets move as we go through the fourth quarter.

Operator

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas

A two-part question. How fast do you expect your food and logistics Intelligent Labels business to grow next year? And do you think the growth will be even through the fourth quarter -- through the 4 quarters? That is, it will start strongly in the first quarter and continue? Or is there a different cadence?

And then for Greg, cost of goods sold is rising faster than your sales now, and propylene values are up. You talked about paper costs going up sequentially. Are your prices also moving up sequentially in the fourth quarter? And do you see more cost inflation and more price inflation?

Deon Stander

Thanks, Jeff. I'll deal with the first, and Greg can deal with the second. Just on our IL food growth, specifically, we're expecting robust growth as we go through next year. And given the timing of some of the rollouts, some we're already seeing now, some will start as we go through the beginning part of next year, I'd say, generally, the phasing -- and while we'll still confirm this as we get into January when we have our next discussion, the phasing is likely to still be at the general ramp as we go through the year overall.

I think the thing that stands out for me in food overall is you have 3 large grocers now actively engaged in this with multiple small pilots and trials happening. And in addition, that's also geographically spread across the world, not just in the United States, it's in Europe as well, we're seeing a lot more action and activity.

So I feel very good in terms of the opportunity ahead of us. So just a reminder, this is a, call it, $200 billion unit at least market space, and we are just at the start of this adoption curve. And so I think while timing of this can always move around, particularly in the early stages of adoption, I think the secular growth drivers support really a significant growth opportunity as we move forward. The whole concept that freshness drives consumer engagement in-store and that the availability of fresher products makes a material difference to consumers, I think, is a key piece that retailers are increasingly picking up on.

Gregory Lovins

Jeff, on cost of sales, as was mentioned a minute ago, we did continue to see inflation sequentially, Q2 to Q3. From a year-over-year perspective, we're looking at mid- or mid- to high single-digit inflation in the third quarter versus where we were a year ago. And we've got, on an overall company basis, a couple of points of price to go with that to help offset that inflation in addition to material cost reengineering that I talked about earlier.

So I think overall, from a cost perspective, material cost price perspective, we're managing that very well, as I mentioned a second ago to Josh's question. We are seeing, obviously, incremental merit-based wage inflation year-over-year as we talked about a quarter ago as well. And we're managing that by driving productivity to help offset that.

We do have some incentive comp. Some of that goes into manufacturing expense as well that impacts us year-over-year also. But I think overall, our teams are focused on driving gross profit. When we look at gross profit, percentage year-over-year is down a bit, again, largely based on the pricing math that we see in Materials Group, but continuing to make progress on the Solutions side from a gross margin perspective.

Deon Stander

And Jeff, the only thing I'd add on top of that is in terms of how the actions the team are taking in terms of matching price and cost overall across the cycle. It's also worth noting that since last year, we've generally gained share in our Materials business across most regions. And I think that's because some of the drivers we're seeing out in the market in terms of the secular drivers around sustainability as customers -- end customers are needing to get to adherence on things like the [ PPWR ] and extended producer responsibility requirements that are coming up in the next couple of years.

We're seeing a significant drive towards more [ filmic ] products where we have an advantage, we're more vertically integrated. And we're also seeing much more emphasis on how we're able to help both our converting customers as well as our end customers over there. I'd also think I called that in the last time, part of our share gain has also come from typically when things get more uncertain and where there is more material pricing inflation that you see out in the market, we tend to see a natural orientation towards ourselves as the largest player with the most global reach and the most consistent service and quality. And that typically also supports the case for our customers reaching out to us as well.

Operator

Your next question comes from the line of John Dunigan with Jefferies.

John Dunigan

I wanted to start off with the destocking. One of your label peers called out very large industry declines quarter-over-quarter in the European market. It looks like it's giving back more than the 2Q gain the market had. Just wondering if this is what you're seeing, how that compares to your portfolio? And maybe if you've seen more destocking there, if it's maybe destocking that you expect in North America to catch up more so here in the fourth quarter?

Gregory Lovins

Yes. Thanks for the question, John. So overall, the stock -- or the stocking and destocking cycle that we've seen have largely been in Europe as well as parts of Asia. And when we look at Asia, we saw some stock build in Q2. We think we're mostly through that destocking and by the end of the third quarter for the most part. In Europe, we saw stock building in Q2, some of that coming out in the third quarter, not to the same extent as the stocking we saw in Q2, though. And that's where largely we expect the remaining destocking in the fourth quarter to come out of Europe.

So I would say that when you look at the chart we included in our slides, you can see that the impact in the second quarter is about double the impact that we saw coming out in the third quarter. So overall, we expect the back half to kind of offset the first half destocking for the most part. So certainly, a bigger impact on stock build in Q2 than we saw destocking happening in the third quarter.

Deon Stander

And John, just the only thing I'd add to that is in that third quarter, what we saw really was the destocking in Europe starting to happen a little bit in August, but really accelerating in September. And we continue to see that in October, giving us large confidence that most of it will be done by the time we get to the end of the fourth quarter.

Operator

Our next question comes from the line of Mike Roxland with Truist Securities.

Michael Roxland

Yes, I just wanted to follow up in terms of Intelligent Labels. One of your chip suppliers mentioned that there could be another leg of growth with the large retailer through beauty, personal care and over-the-counter meds right now, which have low penetration. So realizing food is still your largest end market with most growth potential, would love to get your thoughts around that potential expansion and expanding the collaboration with that particular retailer?

Deon Stander

Yes, Mike, one of -- we don't often talk about some of the adjacent segments to general retail overall in specific detail because the other segments are so large in terms of just food and apparel and general retail, we lump together. We do have a number of pilots underway with specific beauty providers as well where we're really focused on trying to understand how we can get to the same outcomes in retail that we typically see in apparel, which is really availability on shelf of items. And there's a separate case that sits behind that for even loss visibility as well.

As we continue to see some traction there, we'll continue to provide information on the opportunity. We currently see it in this sort of all of a general retail and general merchandise opportunity. And if there are specific retailers that are that way orientated, we're going to continue to work with them to make sure that we can bring some of the solutions that we have clearly seen in apparel and make them available in the beauty segment as well.

Operator

Our next question comes from the line of Matt Roberts with Raymond James.

Matthew Roberts

Total apparel was up mid-single digits. How did Intelligent Labels [ opco ] specifically compared to that? How much of the variance, if there was one, was due to new programs versus maybe higher growth or share gains from certain customers? Given the implied double-digit IL growth in '27-'28, what are your assumptions for apparel markets? Or what are you seeing, given some caution around holidays? So what gives you confidence on the apparel side of that?

Deon Stander

Sure, Matt. I think overall, our apparel growth in the third quarter was robust, largely on some of the new programs that we've been rolling out. And we're going to anticipate seeing that also continue in the fourth quarter and roll over into next year as well. There's at least one of the world's largest value retailers involved in one of those programs as well as a couple of other customers. That's both on the rollout of RFID.

And then we continue to see additional traction on some of our [ lost visibility ] solution that we've used historically with somebody like Inditex, we've seen more traction with other customers, though. So overall, my view is apparel is going to continue to be a growth driver for us as we go through '27, and we should see continued momentum during that time as well.

Gregory Lovins

The only thing I would add to that, Matt, is that when we look at apparel in the third quarter, Intelligent Labels were up roughly double digits. Embelex was up roughly mid-single digits, and apparel base was up low single digits. So that's the composition within the overall apparel growth in the quarter.

Operator

Our next question comes from the line of Anthony Pettinari with Citigroup.

Anthony Pettinari

I was wondering, you raised your restructuring savings target to over $65 million. And I think you started out the year at $50 million. Is there any way we should think about maybe rollover or kind of like further momentum on restructuring savings into '27 or maybe like incremental cash costs as that target has gone higher? And just any kind of comments on just sort of the activities that you're undertaking and where you are in that process?

Gregory Lovins

Yes. I think, Anthony, I think, as you said, we raised that number slightly here for the year, and we've delivered a pretty strong amount of savings already through the third quarter. So most of the cost that goes with that savings that we're talking about will be in this year, of course, or some of that may be at the end of last year with the carryover.

But overall, we feel good about the projects that the teams are driving and the progress we're making there. And both groups are continuing to find ways to drive productivity, especially in what's been a pretty uncertain environment as we've gone through this year, and our teams have accelerated the pace of their actions. When we look at next year, certainly, there will be some carryover related to the actions that we're driving this year. I would say that carryover is in the 20% -- or $0.20 or so impact when we look year-over-year into 2027.

Operator

Our next question comes from the line of Hillary Cacanando with Deutsche Bank Securities.

Hillary Cacanando

So at the HPC showcase last month, you had said the food RFID pipeline was up about 40% year-over-year. So with the new third large grocer now moving into the early stages of commercialization, where does the pipeline stand today? And are you continuing to see similar growth as opportunities convert into commercial programs?

Deon Stander

Thanks for the question, Hillary. Yes, in our pipeline measurement mechanism, once somebody moves to commercialization, it becomes the dollar denomination for that whole program moves out of the pipeline into rollout. That's the way we measure it, which means that the dollar denomination for the rest of the pipeline that is not there, clearly, if it's a very big one, goes down slightly. But the number of customers that we have in pipeline has actually gone up since that time as well, Hillary.

Operator

Our next question comes from the line of George Staphos with Bank of America.

George Staphos

I just wanted to confirm with Intelligent Labels that the large retail customer that you were piloting -- the largest -- that the rollout is now, as you put it, is taking maybe a little bit more time and going into '27, but nonetheless, you still feel affirmed that the growth year-on-year in IL will be roughly double digits and also along the lines of intelligent -- high value-added within Solutions. Can you talk about how important some of the programs that retailers are trialing in terms of specific individual pricing strategies are to Vestcom's growth longer term? And what you're seeing in terms of retailer willingness to pursue these programs or maybe some hesitancy that's been coming out in some of the trade [ prices ] recently?

Deon Stander

Thanks, George. Yes, is the short answer to your question on the Walmart account specifically, we've seen timing move just slightly, and we're going to see the ramp really starting in the second -- sorry, in 2027. And the teams are working very closely on kind of what those commercialization milestones looks like. Which, supported by the additional third growth that we have and the amount of pilots and trials, I feel very confident in what we're going to see come through from food next year to support that double-digit growth that we talked about as well, George.

As it relates to kind of Vestcom specifically, I think if you recall at the Investor Showcase day that we did recently, one of the growth drivers that we're seeing for Vestcom at the moment has been the lean forward that we've been able to get out of our new software solution that we have with them. And in that regard, the stalling software, which, as if you recall, basically takes all sorts of data through data composition engine and basically puts it out to either an ESL or an analog label overall. And part of that new software has a service role that is actually now commencing with a very significant U.S. retail -- grocery retailer as well.

So we feel good about that. Typically, the margins that we see in those businesses are at a premium. They more software-related, and they're able to resolve significant issues. At the moment, I don't hear, George, that there are retailers considering any programs that are driving automation and efficiency in store to be reduced. What we've seen actually is the opposite that we've seen more interest in how some of the solutions that we provide or other solutions in the market are going to be able to be accelerated just given where the macro environment is at the moment as well.

Operator

Our next question comes from the line of John Dunigan with Jefferies.

John Dunigan

Appreciate you taking the follow-up. I just wanted to go back to one of your major chip suppliers and some of their comments. They talked about maybe having some shipping constraints and backlogs for some of their customers that have extended into 1Q '27. Just wondering if you've seen any kind of bottlenecking issues and maybe that's what's caused some of the pushout in IL? And then if you could just talk briefly on the lowered CapEx guide, what drove that, and if that delta is being pushed into 2027?

Deon Stander

John, I'm not going to comment on an individual partner supplier's outlook. But what I will say is we're not seeing any bottlenecks ourselves. One of the great strengths that we have as a business being the majority provider in the world is that we're able to balance supply and demand in a very effective way. It's the reason why many of these programs have historically started with us as well.

And we continue to invest ourselves in our capital efficiency of our assets as well. We're continuing to see more productive output. And part of that is to make sure that when there are surges, not only do we have availability of raw materials, which we have, but also that we're able to meet those shorter-term demands. And we're going to continue to do that because we believe that as leaders in activating these new segments, we have to be prepared should they move at any one point in time.

Gregory Lovins

Yes. John, on your second question, I wouldn't say there's any one big reason CapEx is a bit lower. I think it's really just largely timing of projects. And when we look at this year, we've had quite a bit of -- because of the stocking cycle that happened in the first half, particularly Q2 and destocking that we're seeing now, our teams have been pretty focused on managing those swings in volume. So when we look at -- with the Materials Group from Q2 to Q3, roughly 10-point swing in volumes from 1 quarter to the next.

So our teams have been focused on managing those swings within the supply chain, and that's likely pushed some of the timing of projects back a little bit. But no major changes in our ongoing views on CapEx and where we're making our investments, and we're going to continue to invest for growth and continue to invest for productivity.

Operator

Our last question comes from the line of John McNulty with BMO Capital Markets.

John McNulty

And just wanted to drill down into the free cash generation just maybe a little bit more. It looks like year-to-date, you're actually above last year's total. And I know normally, your 4Q tends to be one of, if not the biggest cash-generating quarter. So I guess, anything odd about the cadence this year, the strength that you saw in the 3Q results? Or should we just assume that you're executing well, you're tightening things up, and the cash flow should continue to kind of come in at the normal kind of cadence?

Gregory Lovins

Yes. Thanks, John. So to your point, I mean, I think we are executing well across the business. We've talked to -- I think a few quarters ago about our focus on getting working capital productivity and our teams have been doing a good job there, particularly inventory turns have improved as we move throughout the year. So we are driving and delivering on that working capital productivity we were targeting, and that's one big driver of it.

I would say from a year-to-date perspective, one of the shifts is that I've talked about the headwind we have from a cost perspective on incentive compensation year-over-year. We also then had less cash payouts in the first quarter of this year from an incentive compensation perspective. So from a cash flow perspective in this year related to last year's incentive comp accrual. So I think that's one timing factor. But otherwise, we would expect to continue to deliver above 100% conversion for 2026.

Operator

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

William Gilchrist

Thank you, Chase. On behalf of everyone at Avery Dennison, I want to thank you for joining today's call and for your continued interest in our company. As always, we're happy to address any follow-up questions you may have. Thank you again, and this concludes today's conference call.

Operator

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