艾利丹尼森 (AVY) 2026年第三季度业绩电话会：因有机销售额增长4%上调业绩指引

核心要点

• 艾利丹尼森（Avery Dennison，纽约证券交易所代码：AVY）公布 2026 财年第三季度销售额为 23 亿美元，同比增长 5%，有机销售额增长 4%。
• 调整后每股收益增长 2% 至 2.42 美元。管理层估计，客户去库存使销售额增速减少了约 2 个百分点，调整后每股收益减少了约 0.15 美元，这意味着潜在的有机销售额增长为 6%，调整后每股收益增长为 8%。
• 材料集团有机销售额增长 5%，解决方案集团有机销售额增长 1%。解决方案集团调整后 EBITDA 利润率扩大 80 个基点至 17.8%。
• 本季度调整后自由现金流达到 2.46 亿美元，年初至今达 7.16 亿美元。净债务与调整后 EBITDA 的比率改善至 2.2 倍。
• 公司收窄了全年调整后每股收益指引至 10.10-10.24 美元，并略微调高了中点，中点代表约 7% 的同比增长。
• 在食品、服装和通用零售项目的支持下，管理层预计智能标签业务将在未来几年实现两位数增长，尽管沃尔玛鲜食（Walmart Fresh）的商业化推广已推迟至 2027 年。

核心财务数据

收购 Taylor Adhesives 为报告销售额增添了超过 1 个百分点的收益。低单位数的提价以及低单位数的销量和产品组合增长支撑了有机业绩。

调整后 EBITDA 利润率有所下降，原因是生产力节省被原材料相关定价带来的利润率摊薄、激励薪酬正常化以及不利的产品组合所抵消有余。

业务与运营业绩

材料集团

材料集团有机销售额增长 5%，基础品类和高价值品类均实现中单位数增长。特种与耐久标签以及性能材料领跑高价值品类的增长。

客户去库存使该部门的有机增长减少了约 3 个百分点。这一去库存过程的启动慢于预期，使得第三季度销售额强于公司先前预期。管理层表示，去库存主要集中在欧洲和亚洲部分地区，预计欧洲将占第四季度剩余去库存的大大部分。

该部门的调整后 EBITDA 绝对金额略有增加，但利润率降至 16.4%。提价举措在金额上抵消了原材料通胀，但转嫁更高成本带来的数学算术稀释效应以及增加的员工相关费用对利润率百分比造成了压力。

解决方案集团

解决方案集团有机销售额增长 1%。基础品类实现低单位数增长，而高价值品类与上年持平。

尽管面临与世界杯相关的高基数对比，Embelex 仍实现了中单位数增长。Vestcom 实现低单位数增长。生产力与重组带来的效益超额抵消了增加的员工相关费用，使调整后 EBITDA 利润率提升 80 个基点至 17.8%。

智能标签

全公司智能标签销售额实现低单位数增长，但终端市场趋势分化：

• 受项目拓展和通用零售复苏的推动，服装和通用零售销售额增长约 10%。服装领域的智能标签实现约两位数增长。
• 食品领域表现出强劲增长，因为艾利丹尼森扩大了对另一家大型食品杂货客户的供货规模并扩展了试点项目。第三家大型食品杂货商已进入商业化推广的早期阶段。
• 物流领域销售额呈两位数下降，原因是 2025 年超常的市场份额增长趋于正常化以及客户需求放缓。

凭借出色的客户投资回报率以及对 RFID 的持续承诺，管理层对沃尔玛鲜食项目的前景保持信心。不过，该项目的启动已推迟至 2026 年下半年之后，目前预计商业化推广将在 2027 年期间进行。

管理层业绩指引

艾利丹尼森将 2026 财年全年调整后每股收益指引收窄至 10.10-10.24 美元，并略微调高了中点。中点意味着约 7% 的同比增长。

管理层的全年假设包括：

该展望还包含了来自有利的外汇折算和股数减少所带来的估计净 0.30 美元每股收益收益。这些收益被更高的利息支出、更高的调整后税率、工资通胀以及 2025 年临时节省（主要与激励薪酬相关）的正常化所部分抵消。

对于第四季度，管理层预计绝大部分剩余的客户库存去化将在年底前结束。日历变动预计将使第四季度销售额同比增长减少约 1.5 个百分点，并对每股收益增长带来轻微负面影响。

风险与关注焦点

• 预计剩余的库存去化将拖累第四季度表现，尤其是在欧洲，不过管理层预计大部分去化过程将在年底前结束。
• 第三季度原材料通胀同比仍保持在中高单位数水平。管理层预计从第三季度到第四季度原材料组合将保持相对稳定，但强调不确定性依然存在。
• 消费包装品（CPG）出货量仅表现出微弱改善，仍低于 1%。零售客户对消费者需求和假日消费增长也保持谨慎。
• 由于市场份额正常化和需求放缓，物流智能标签继续面临两位数的下滑。
• 大型 RFID 部署的时间节点可能会在季度之间发生推移，正如沃尔玛鲜食项目的推进推迟至 2027 年所体现的那样。
• 管理层正在密切关注地缘政治局势发展、通货膨胀和债券收益率，将其视为潜在的额外不确定性来源。

分析师问答亮点

• 利润率：管理层将材料集团利润率的大部分下降归因于原材料定价机制以及较高的员工相关成本。管理层预计持续的生产力和重组效益将支撑解决方案集团的利润率。
• 价格与成本：艾利丹尼森表示，提价举措和材料成本再造在金额上在很大程度上抵消了通货膨胀。公司将根据原材料市场的发展情况调整定价。
• 智能标签增长：管理层预计 2027 年食品应用将强劲增长，且应用普及率有望全年中持续提升。三家大型食品杂货商正在积极参与，同时在美国和欧洲还有额外的试点和试验在推进。
• 服装 RFID：新项目推动了第三季度的强劲增长，包括在全球最大的平价零售商之一进行的推广落地。管理层预计这一增长势头将延续至 2027 年。
• 业务重组：公司将 2026 财年的预期节省金额提高至 6500 万美元以上。管理层指出，今年采取的行动应能在 2027 年产生约 0.20 美元的同比增长结转效应。
• 现金流：存货周转率和营运资金生产率的改善支撑了年初至今的现金生成。管理层维持其对 2026 财年调整后自由现金流转化率超过 100% 的预期。
• 资本支出：下调至约 2.4 亿美元主要反映了项目推进时间节点的变动，而非长期投资优先事项的改变。

业绩电话会议完整文字记录

完整财报电话会议逐字稿

管理层陈述

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.

分析师问答

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.