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. [Operator Instructions] Welcome to Avery Dennison's Earnings Conference Call for the Third Quarter Ended September 29, 2018. This call is being recorded, and will be available for replay from 12:00 PM Pacific Time today through midnight Pacific Time, October 26. To access the replay, please dial 800-633-8284 or +1-402-977-9140 for international callers. The conference ID number is 21857413. I would now like to turn the call over to Cindy Guenther, Avery Dennison's Vice President of Investor Relations and Finance. Please go ahead, ma'am.

Thanks, Chris. Today, we'll discuss our preliminary unaudited third quarter results. Please note that throughout today's discussion, we'll be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled with GAAP on Schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that during this call we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. On the call today are Mitch Butier, President and Chief Executive Officer; and Greg Lovins, Senior Vice President and Chief Financial Officer. And now, I'll turn the call to Mitch.

Thanks, Cindy, and good everyone. I'm pleased to report another solid quarter. Adjusted EPS grew 15%, in line with our expectations, and sales were up 6% organically, with both high-value categories and emerging markets continuing to deliver above average growth. Label and Graphics Materials delivered a solid quarter. Sales grew organically by more than 6%, driven by both higher prices and volume. Emerging markets in high-value categories were once again up high single digits. LGM's margin, however, declined more than expected for the quarter, largely reflecting the lag between when we see inflation and when we can adjust pricing. I am confident that we will see meaningful margin recovery here in the fourth quarter, just as I am confident in the strength of our competitive position. We again saw evidence of this in the strong attendance in customer engagement at our industry's recent tradeshow in North America. Much of the energy in our booth focused on two key areas. The first was sustainability, specifically our products that enhance recyclability, and second, our Intelligent Labels platform, which is generating as much buzz among our converter network as it has among retailers and brand owners, which brings us to Retail Branding and Information Solutions. The team delivered, again, another strong quarter, with over 8% organic growth and significant margin expansion. The base business of RBS continued to grow at a healthy clip through ongoing share gain, and RFID grew once again by over 20% in the quarter. We continue to see strong engagement among apparel retailers and brands across all stages of the pipeline, as well as promising early-stage developments in other end markets. Our investments to sustain this growth in form of capacity additions, R&D, and business development resources are all on track. Overall, we're pleased with the progress we've made…

Thanks, Mitch, and hello everyone. As Mitch mentioned, we delivered another solid quarter. Adjusted earnings per share was $1.45, up 15% compared to prior year and in line with our expectations. We grew sales by approximately 6% on an organic basis, as currency translation reduced reported sales growth by 1.3 points in the quarter. Currency translation also represented a roughly $0.03 headwind to EPS, compared to the same period last year. Adjusted operating margin increased by 10 basis points to 10.7%, as the benefit of higher volume was largely offset by the impact of increased investment spending. And we realized $6 million of net restructuring savings in the quarter. Gross restructuring savings, most of which benefited RBIS, were partially offset by roughly $5 million of transition cost for LGM's European restructuring action. We will continue to incur quarterly transition cost of $3 million to $5 million for this large product through the middle of next year, with the cost tapering off quickly in the back-half of 2019. And recall this project is expected to drive $25 million of savings beginning in 2020, providing a strong return on the total investment. Turning now to cash generation and allocation, free cash flow year-to-date was $261 million, up by roughly $5 million compared to prior year. And as we've discussed, we've increased our pace of fixed capital in IT-related spending this year. Gross capital spending year-to-date is up by roughly $20 million. Now, as a reminder, our free cash flow calculation excludes the one-time cash contributions to the U.S. pension plan associated with its termination. And as expected, we contributed $200 million to this plan in the quarter, allowing us to deduct that contribution on our 2017 U.S. income tax return. During the first three quarters of the year, we repurchased roughly 1.6…

Thank you. [Operator Instructions] Our first question is from the line of Ghansham Panjabi with Robert W. Baird & Co. Please go ahead.

Hi, everyone. Good morning.

Hello, Ghansham.

So, I guess, Greg, just to clarify on your comment that 4Q margins for LGM will be comparable to 2Q. Can you just elaborate on that? Is it just pricing that will get you there or some level of pricing and productivity? And I'm just asking because it seems aggressive given higher raws [ph] and some sort of sequential deceleration of volumes due to the pre-buy?

Yes, Ghansham, as I indicated earlier, we typically do see a bit of a margin decline Q2 to Q4, largely driven by the fact that some of our higher-value categories like Graphics and Reflective have their high points of seasonality in the third quarter, and then we see a seasonal decline in Q4 sequentially, as well as some other categories like Logistics and Labels that pick up sequentially, which are a little bit lower than our average margin for the holiday period and things like Single's Day in China. So we typically see a bit of decline Q2 to Q4. With the sequential inflation we saw here in the third quarter, margins came in a bit lower than we had expected, as we said. We have implemented pricing actions which have largely already taken effect at the beginning of October. So we're confident that that's a big driver of the sequential improvement that we'll see from Q3 to Q4, so that'll help us be a little bit better than we normally would be from the third quarter to the fourth quarter, and that is the biggest driver that we see improving our margin sequentially from what we have seen historically.

So, does that mean you're getting pricing net of raw material cost because otherwise the math wouldn't necessarily work on that, right --

Yes, I mean, right now we're expecting raw material cost to be relatively stable from Q3 to Q4 sequentially. And the pricing actions that we implemented in the beginning of the quarter then should be a net benefit in the quarter sequentially, versus inflation.

Got it. And then just for my second question, a lot of the CPG customers that reported so far, I mean that seems to be sort of a theme during the earnings season. There's obviously been a function of inflation, everyone's raising prices, there seems to be some level of demand dislocation as inventories are managed tightly, not just in the U.S., but also the emerging markets as well. Are you seeing any sort of caution in terms of inventory management from your customers as we cycle into year-end and into 2019?

Ghansham, we're no thinking anything beyond the normal, but it's hard to comment globally. I mean, if you look at the North American market there's actually quite a bit of buzz in the North American market as far as activity levels. Obviously China relative to where it had been, things a little bit lower growth there. There's no common theme overall as far as what we would call out. We're continuing to see growth and continue to expect in the long-term our -- in the label category specifically, the market to grow 4%.

Got it, thank you.

Thank you.

Our next question is from the line of Anthony Pettinari with Citigroup Global Markets. Please go ahead.

Good morning. Just following up on Ghansham's question, with IHM, the weakness that you say in China, is there any way that you can quantify that either in terms of volumes or earnings? And is that something that sort of worsened over the three months of the quarter, maybe into October, or kind of any color you can give on what you're seeing there.

Sure. So the softness we saw in China in IHM was largely China automotive driven. So across the third quarter -- I'll start back a little earlier. For the first-half of the year China automotive market overall had been relatively strong. In the third quarter, the overall market started seeing declines, I would think around 5% range in both July and August, and then declined a little bit heavier in the months of September. So we did start to see China automotive market in general decline a little bit heavy as we move through Q3. And right now we would expect a softer China automotive market in the fourth quarter as well. China automotive overall is roughly somewhere in the 15% range of our IHM segment in terms of revenue base. But that did have a significant impact on the overall IHM decline in the quarter.

Okay, that's very helpful. And then just stepping back and looking at full-year guidance. I guess as you stand here at the end of October, what are the swing points that could get you to the higher end or the lower end of the range? And then I think in previous years you kind of narrowed the range when you reported 3Q but not this year, any reason for that?

Yes, overall, I think where we're sitting now versus where we were a quarter ago, we still feel like our overall guidance is pretty much in line with our expectations from a quarter ago. There are a little bit bigger currency headwind than we had before, offset by what we think are some operational benefits versus where we were a quarter ago as well. I think in terms of the range or the size of the range, we saw a number of currency movements happening around the world in the third quarter. And our range may be a little bit broader here for the rest of the year to account for potential movements in currencies as we go through the rest of the quarter here, like we saw in Q3. And I think if you look at the range overall, the mid to higher end of the range assumes inflation kind of stay stable, as I mentioned earlier. With the lowering the range potentially you would see some more sequential inflation than we're currently expecting.

Okay, that's helpful. I'll turn it over.

Our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.

Hi, everyone. Good morning. Thanks for the commentary and the details. I guess, first question I had regarding volumes in LGM. Can you comment how variable information did in the quarter? And the reason I ask during September, we've heard from some companies that box shipments were perhaps a bit weaker, some of the interior protective packaging material was maybe a little bit slower. So it paints a narrative, and perhaps parcel shipments were maybe a little bit slow during September. Did you see that at all in your LGM business exposed to ecomm and shipments?

Yes, so George the -- specifically within the LGM, the variable information labels, where the ecomm did slow a little bit. And I think there's two factors, that one is one you're calling out, hard for us to gauge exactly how impactful that is. And we actually think, as Greg said earlier, Q4 that tends to ramp, and we are starting to see a little bit of that in October. The other reason is we did see a little bit of share in this category basically as we've been moving price we talked about, in North America, we've regained the share that we talked about losing a couple of years ago, but this is one category that we've held firm with the pricing and are willing to, in the near-term, see the better of share, and that's what's happening. So we're seeing it on two fronts.

Okay. And then on that front, a similar question or segue type of question. Given the pricing action, are you seeing any intensified competitive activity beyond variable information and as far as -- and are you seeing, for that matter, kind of related question, any signs of a broader slowdown in your LGM business? Again, didn't sound like it, but just kind of probe the frontier here.

Yes. I mean, growth rates, as you could tell, were robust overall. We are in a competitive market, but this inflation is broad-based, and I think everybody's raising prices to the extent they need to. And you're always going to, in a period of change, have some puts and takes on the sub-segment. So we got to look at the macro, and then we look at the individual customers and product categories. And that one that you called out is the one where we've seen a little bit slower for things to move, but broad-based we're seeing the market adopt the price increases, meaning that converters are taking them because they know that the inflation is coming through. And they're working and passing those through on to the CPG firms and their other end users. As far as broad-based on volume, I mean if you look for the full-year year-to-date, our volumes are up right in the middle of our long-term range for this business of 4% to 5%. Within Q3 they're below the low end. There about half of the growth was price and half was volume within LGM. It's a little bit lower in Q3. And Ghansham, that might've been the question you were trying to get to earlier, but a little bit slow. But that's not unusual in a single quarter to see things move by a point or two. But overall, we're seeing broad-based continued growth.

Okay, thanks for that, Mitch. My last one and I'll turn it over and come back. So you mentioned RFID continue to grow at 20% in the quarter, recognizing we're still early in terms of the adoption phase and it tends to be customer-by-customer, and cliché of clichés, lumpy quarter-by-quarter. Are there end markets that you're seeing particularly good growth? I assume it's mostly apparel, but are you seeing any pickup in the other areas? And do you have any kind of early read on the outlook on RFID for 2019?

Yes, so George, we said our target here was to grow 15% to 20% plus over the longer-term, and we grew more than 20%, and have been on that track. So it's been at the higher end of that range. And we're continuing to see momentum on many fronts, as we've discussed. Over 95% of the revenue is still apparel. And we expect this tremendous amount of momentum continue within apparel. But we are seeing early traction in the other categories as well, particularly food, beauty, and logistics. So helping with the automation of logistics companies, particularly how to automate that last mile -- last leg of delivery. So those are quite a bit of activity. If you just, from a pipeline perspective, I think from the beginning of the year our overall pipeline has increased 30%. Each stage of the pipeline has increased somewhere between 20% to 40% and the non-apparel portion of the pipeline has doubled since the beginning of the year. So a lot of momentum, a lot of traction, but a lot of it, as you said early stage outside of apparel.

Okay, thanks Mitch, I'll turn it over.

Thanks, George.

Our next question is from the line of Edlain Rodriguez with UBS Securities. Please go ahead.

Thank you. Good afternoon, guys. So quick question, so you just mentioned that you might be losing some market share because you're being firm on prices. Like what would you be losing those -- share to? I mean do those guys have of course advantage over you?

So, my comment was about a specific subcategory and a specific region because that's where the question was. So overall, we're actually seeing relatively stable share or gaining share in North America. And in North America, if you look over the last few years, we had lost some share between '14 and '16, we've recovered that. We're seeing stable share in other regions. So, and broad-based, do people have more of a cost advantage? The simple answer is, no. Our scale advantage, our material science capabilities, our process technology, what we see is an advantage relative to the rest of the marketplace. So, no, we don't see that we're at a cost disadvantage or anything else.

Okay, that's what I thought. And one quick one on IHM, I mean, at the end of August you had a management change there. Like what wasn't working right and how quickly you believe you can fix those issues?

Yes, so simply if you look back over the last few years, we've made a few adjustments in each of our businesses. And if I look at some of the shifts we need to do, we need to pivot a little bit more to just focusing on the fundamentals. And I draw the analogy that was one of the aspects we focused on within RBIS. And here, just getting on the fundamentals of excellence in service, in quality, and in cost, that's one area. And then the other would be, and that -- I'd draw the analog of RBIS there, we did other things within RBS, dramatic cost reduction, distributing decision-making, and so forth. But this is more on the first aspect. And then the other is just we're managing a little bit too much to the average. So disaggregating our approach to the markets and having an end-to-end segmented strategy, and that's something we talked about, both when we did the strategic pivots within LGM as well as the strategic adjustments within RBIS, is having a more segmented approach, disaggregating the business, and that's what we're going through right now. So see a tremendous amount of opportunity within the market, obviously within our performance as well. And if I just call back again to those previous changes, LGM was strategic pivot, I would say, and more of just segmenting the business. RBIS was a major shift strategically, as well as a major refocus on the fundamentals. And here, the strategy is right, market is growing, and it's really around focusing on the fundamentals of rebalancing the strategy. And as far as timing, we'll give an update in the next earnings call, as I said, Greg and I going through a deep-dive assessment. We're working through that with the rest of the team. We have a very capable team at the local level, and we're working with them to identify how we further segment this business and get the fundamentals right. So we'll update you in January.

Okay. Thank you, guys.

Our next question comes from the line of [indiscernible] with Credit Suisse Europe. Please go ahead.

Thank you, and good afternoon. I just want to come back a bit to China again. What is happening in China? You called out the automotive, but also on the LGM side. What has changed and what are you seeing heading into Q4 and 2019? And also on the cost inflation side, your base case scenario would be stable inflation. What caused that incremental higher inflation in Q3, and what are you now seeing that you would expect that to stabilize?

Sure. To start the China question, again, the automotive impacts in China really affected the IHM segment. In terms of LGM, we were up modestly in the quarter. Not at the same pace we had been in the first-half, but that was also against very tough comps from prior year where we grew in mid teens in China in Q3 of 2017. So despite those tough comps we're still up a little bit here in the quarter versus prior year. And we continue to see the market growing in the third quarter as well, albeit at a slightly slower pace than what we had in the first-half. And again, right now what that feels to be is just a little bit softness in the macro in China. GDP come down a little bit, and PMI come down a little bit that seems to be affecting overall demand, at least in the short-term here. And that's what we've experienced in the quarter. But we continue to grow here. We continue to be in kind of that mid single-digit rate for year-to-date. So we feel pretty good overall about where we are in China right now. We did see the blip here. The automotive piece had a bigger impact on IHM, but in LGM we continue to grow albeit at a more modest pace in the quarter. On the question -- I think your other question was more about what we saw in terms of inflation sequentially from Q2 to Q3 above our expectations. And at the time, in the second quarter, we had started to see propylene, particularly in the U.S., rise throughout the second quarter. We thought that might soften a little bit in Q3. It did not, it actually went up a little bit early in the quarter, softened maybe a little bit in the back part. But that was part of the impact versus our expectations. And we continue to see paper increases throughout Europe, and in Asia, in particular, as well in the third quarter. Really, overall, Q2 to Q3 was pretty broad-based, it was probably the highest sequential inflation quarter we've seen over the last four or five quarters, which is why we've done a number of pricing actions as well as we started the fourth quarter here.

And also, just one more question on -- as you roll out RFID, and so you're doing that very successfully, are you making any progress in any other markets outside North America, because it seems to be mostly in North America that progress is made.

No, it's actually relatively broad-based. It's in North America, it's in Europe, again largely in apparel. Latin America, we've got a number of key developments going on; Asia-Pacific as well, a lot of that is linked to global companies growing out within Asia-Pacific. So it's relatively broad-based.

Thank you.

You are welcome.

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

Yes. Thanks for taking my question. I guess, one of the things I guess I'm a little curious on is the Label and Graphics, the margins obviously came under pressure on the raw material front, yet it looks like the industrial and healthcare materials margins, which I would think have somewhat similar overlapping raw material trends didn't really take much of a hit I guess, can you help us understand why that might be, or are we often in terms of what the relative raw material baskets might look like for these?

Yes. So, John, basically if you are asking why it didn't it come up under the same pressure as LGM…

Yes.

-- I think that was your question. Last year, there was quite a bit of acquisition/integration costs, one that weighted down, and then -- so that's basically overall. And then second, a lot of the inflation, still a lot of it going on in chemicals and resins, but it's also in paper based, a big portion of it as well as on the paper based inflation does not hit IHM.

Got it, fair point. And then I guess, speaking of M&A, we haven't seen much from you guys recently I guess, given the markets sell-off, are you seeing more opportunities out there, or are you seeing guys less willing to sell just given the -- maybe they're thinking evaluations are too low at this point. How should we think about that?

Yes, the recent market, John, I would say it's too recent for to change our expectations and behavior within the M&A -- our M&A pipelines, the M&A pipeline we continue to work and engage with parties, and I think that you shouldn't expect anything really to convert this year, but we have a number of active engagements that we are working through, and as we have said, we are in a position of strength -- there would be some sustained adjustment and evaluations and so forth. And that's what we are continuing to work through.

Great. Thanks very much.

Our next question comes from the line of Adam Josephson with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning, everyone.

Hi, Adam.

Hi.

Mitch, just on the trade war between the U.S. and China, can you just talk about what impacts -- trade war could have on your RBIS business as well as any impact on the other businesses?

Yes. So, specifically with for RBIS, the big question would be if there, and it's very small today, the amount of tariffs associated with the apparel, but if there was a broad-based tariff on apparel. I think you can see a bit of more of an acceleration of the migration out of China into other regions for apparel sourcing. That will take time. There's just such a huge infrastructure within China. That would take some time. But it's actually where we would be from a position standpoint, very well positioned. We are -- can support our retailer and brand owner partners as well as the mega apparel manufacturers and helping migrate that volume, because that's something that we see as the position of strength for us, something we can provide tremendous partnership and support to our customers through that migration. I think bigger question, and you have to draw your own conclusions if there was a major tariff in the timeframe what would that do to end pricing and so forth, and ask the broader question of trade conflicts between major economics.

Yes. Thanks. Just a couple others, on the organic sales growth, the 6%, how much was volume versus price?

Within LGM, it was roughly equal mix, price and volume.

And how does that compare to previous quarters?

It's ramping as you would expect, because we've had -- on the price side, because we've had sequential price increases every quarter for fourth quarters now.

Okay, yes, sure. And FX-wise, what are your assumptions for the euro and renminbi, and can you just remind us what your sensitivity is to those currencies, and just -- relatedly have the FX fluctuation, have they had any impact on your margins, positive or negative?

Yes. So I think our assumptions on a year are right around 115; renminbi, I think, it is 0.145 type of range in terms of our assumptions for the rest of the year. And we have had some number of impacts -- we talked a little bit, I think we talked a little bit about Argentina, Argentina we did move this quarter to U.S. dollar base functional currency, given the high inflation environment there, and that certainly is something where we are managing through and a number of other countries, particularly in South Asia, we've seen some weakening over their currencies against the dollar. And there are some of their raw materials that are purchasing dollars. So we are also doing pricing actions and some of those countries to manage that currency driven inflation at the same time. So, we had a little bit of an impact on our margins this quarter as well. And that is some of the sequential pricing that will see from Q3 to Q4, as you manage through some pricing actions driven by that currency related inflation as well.

We've got it. Thank you, Greg.

Our next question comes from the line of Scott Gaffner with Barclays Capital. Please go ahead.

Hi, there good morning.

Good afternoon.

Hi, Scott.

How you are doing? Mitch or Greg, if you look at the LGM margins, based on the assumption that you gave us for the fourth quarter essentially flat 3Q margins from or 4Q from 3Q, are you still have down margin zero over year, is that -- how much has a price cost impacted margins year-over-year ended 2018? And Greg, I think in your prepared remarks you talked about cumulative cost recovery, does that imply that, we should still see more recovery as we move into in to 2019, even if raw materials remained flat?

Yes, so I guess overall, when you look at the margins in '18 verses '17, I did call out in the quarter here, we had some transition costs related to the European restructuring, we also had a little bit of that in the second quarter as well. And that that does for a year basis so far give us about 20 or 30 basis points of impact versus prior year. In terms of inflation, our biggest impact and we had a pretty modest impact price inflation in the first couple of quarters, the biggest impact here has been in Q3 as we said sequentially, we expect that to improve as we move into the fourth quarter. I think, those are really the biggest drivers of margins year-over-year, a lot of give and takes otherwise.

And continued recovery into 2019 or you feel like at the end of '20 4Q a year back…

I think based on the pricing actions we've taken, if raw material environment remained stable in the next couple quarters, we will make up the cumulative gap that we've had over the last number of quarters. So that's our expectation right now, if markets remain stable. As we said before, if we continue to see some more sequential inflation and we need to do more sequential pricing actions we will do that accordingly, it may take us a quarter or so to get that through, but we will take those actions as necessary. If the markets remain stable then we think in the next couple of quarters we will be able to close any gap that we had over the last year or so.

Okay.

And I think one of the things we are trying to communicate is, if you look at it, in addition everything Greg laid out, if you look at our normal seasonal pattern of margins, within this business, Q2 and Q3 are higher than Q1 and Q4. And that has been tracking through all year despite inflation because the timing of the lag was shorter, a little bit longer right now by really just a month or two. And so we saw a dip within Q3, that's if you look at the normal seasonal trend. The other element is we do have transition costs that have coming in for the European restructuring that are hitting the second-half and will continue into through the first-half of next year, which we will start seeing savings in the second-half of next year. So if you are trying to think about normal, think of normal seasonal trends. And as you go into next year, there will be some of the savings start to come in the second-half of next year on top of that because of this restructuring program.

Right? Okay. And then just approaching the M&A opportunity, capital allocation questions a little bit differently, while multiples in the M&A private space might not have changed over the last few months, your stock price definitely has down close to 20% or 25%. From the peek, year-to-date, you've accelerated a little bit of a share repo, but any thoughts around maybe increasing that significantly more from here on a go forward basis?

Yeah, I mean, John, overall, we don't comment on the timing or amount, but what we did do is, I mean, if you look, we paid, funded $200 million of the pension unless our leverage ratio is still well below their newly revised leverage ratio that we have until we have ample capacity and what you can see on a relative basis, we have stepped it up and we will continue to show discipline as we do that. Our objective is not to be well below the low-end of our target range to long-term. We want to be within that range and that's our expectation to get there. Obviously, it depends on timing of M&A and everything else that they said earlier, don't expect anything to convert imminently here, but you shouldn't expect us to be anything other than disciplined and leaning forward more as things prices go down and pulling back a bit as I surge.

Fair enough, just one last one on you throughout the sustainability, comment in regards to the recent conference that you guys attended? Are you actually seeing any order there? Is it just more level of interest is increase? What's kind of happening there from a little bit more granular perspective? Thanks and good luck in the quarter.

Sure. Thanks Scott. So it's broad-based on the sustainability front. So a lot of interest in our products that enable enhanced recycling like our CleanFlake product as an example, which is we brought out four years ago and as the market had greater need for more re-cyclability, we are seen as the innovation leader who can bring those products that they are more interesting or push around using sustainably sourced materials, certified paper, we had a target of increasing that dramatically. We are now at 88% of using certified papers coming from sustainably sourced force and so forth. So overall, there is a desire for the whole sustainability theme. Our customers like to be able to tell a message to the end users around what we are doing around greenhouse gases sustainably and responsibly sourced materials, those are the area that we are working on. And then specifically, the biggest if you look at a specific product, it's a product that enables recycling. And these are products that we've started developing a number of years ago, the biggest one that you'll hear is CleanFlake, which came out four years ago, which enables recycling, we're looking to expand that portfolio and investing our R&D resources to do just that, so more semantics, Scott.

Great. Thanks Mitch. Thanks, Greg.

Thank you.

Thank you.

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

Thanks very much.

Hi, Jeff.

Hi, Jeff.

Hi, when you look at your October volumes, did the trend seem a continuation of what you saw in September? Or did it seem a little bit slower or little bit faster? And in general, how does the overall global economy look to you given that the market seems to be a little bit more pessimistic about economic prospects going forward?

Yes, so as far as, the first few weeks of shipments that we have, we are seeing exactly we would expect consistent with our guidance, kind of consistent with what we saw over Q3 in general and particularly mature doing. China is still a little bit lower than normal growth and the rest of regions continuing on the pace that we talked about earlier. As far as our global outlook, I mean, if you look at where things are U.S. is growing a little bit higher than the average of what we are seeing, Europe has moderated a little bit, they are still growing at a healthy clip. Latin America is stronger than the headlines reveal. Hard for us to tell because we don't have good market data, how much that's market versus just our strength of our position, South Asia doing very well. Part of that we have to recall that coming off of the easy comps from last year, there was quite a few adjustments with India making quite a few adjustments in their goods and service tax as well as the monetary items and China and Korea are both seeing a slowdown in their growth rates. So I'd say overall, pretty broad-based couple, a big country in China being slower growth and the U.S. being a bit faster growth and we are not seeing a shift in that specifically in the U.S.

You contributed $200 million into your pension plan and there's another $30 million coming next year. How much of that, do you get back through tax benefits? And what's the timing of the amounts?

Yes. And if we actually -- as we said we made the $200 million contribution in the third quarter and we applied that contribution to our 2017 tax return. So we saw a benefit in our gap tax rate in the third quarter, I think roughly in the range of $30 million related to that a $200 million contribution we made.

I'm not interested in changing your gap rate. I'm interested in the cash benefit you get from the contributions in the form of a tax benefit?

The cash tax benefits?

In other words, you pay the money, you get some sort of deduction and then that monies -- those monies will be refunded to you in the future, now?

Yes, we have some cash tax benefit. I'm not exactly sure the amount related to versus the amount of the overall tax rate benefits. So that's something I wanted to follow-up on Jeff.

Okay, great. In general, you talked about recouping your raw material and inflation; your gross margins have been under a little bit of pressure for a couple of years now. And when do you expect your incremental gross margin to be higher than your average gross margin that is when do you little tactile, I don't know, the second or third quarter of 2019 or could have come before that or will it will be later? I mean, even with your margins being flat sequentially, your margins will be lower than they were last, your gross margin will be lower than what it was last year. And still, your incremental gross margins will be lower than your average gross margins like right there?

Yes, so a number of things to contribute to that. So we talked about transition cost is going down GP a little bit in as we said, over the last number of quarters, we've increased the pace of our CapEx and we have some depreciation coming in now on those assets that we recently put into service. And we don't have full benefits of them yet at this point either that's weighing on GP percent, in addition to the volume and price benefits or price impacts or sorry price and inflation impacts that we've seen. So we'll start to see price inflation even out as we said, if raw material environment stays relatively stable. And then, as we talked about, we have a number of actions like the year of restructuring, they'll start the benefit as in the back half of 2019. So I think as we move through 2019, we will start to see those improvements benefit us, we will continue to have the transition costs in the first-half of next year. But we will have benefits in the second-half as we execute that action, so that along with the price and inflation dynamics, we expect to see improvements in the back half of next year.

If I could just add, just don't forget the pure math of adding three points of prices, 50 basis points on your margin. So it's just factor that into your thinking too.

And then just lastly, when you think about the I guess, the trajectory of volume growth in your LGM business on -- is it slightly slowing down or is that consistent with what it's been?

Yes.

How do you feel about that overall?

Yes, overall volumes, I think in the third quarter we are a little bit slower than we had, we have a number of these kind of timing related impacts over the last number of quarters, but overall volumes in Q3 were just a little bit slower, really driven by China been a little bit slower than it had been in the first-half. We continued to have volumes in the developed regions, largely in line with where we had been overall and then the other emerging markets continues to grow fairly well. So I think overall the only real slower growth rate we've seen on a broad level is China and the third quarter from what we have previously been seen.

That's great. Thank you so much.

Our next question comes from the line of Chris Kapsch with Loop Capital Markets. Please go ahead.

Yes, just a couple follow-ups. On the pricing dynamic and in LGM and specifically to achieve the sort of flattish margins that you mentioned in the fourth quarter, assuming raw material cost inflation is roughly flat sequentially, what order of magnitude of pricing traction do you need on the price increases that you unveiled in early October in order to achieve that sort of flat margin?

Yes, we said we -- overall, our entire -- our view is in making sure we have enough price to offset the material inflation we are seeing, we are seeing inflation in a kind of 5% impact and you would expect to see then pricing in the low to mid-single digit rate in order to offset that. We also have as I mentioned, a little bit of currency driven inflation, we have currency price increase taken effect in the fourth quarter as well. So they go over all in the fourth quarter, you would expect to see kind of low to mid-single digit impacts from pricing within LGM.

And are there any regions where you'd see the traction on the price increase more challenging than other regions in LGM?

I don't think any one region is more challenging than other. We've done price increases early across the -- all of the regions over the last year, year-and-a-half in multiple increases in most of the regions and we don't actually see any one region be more challenging than the others at this point.

Okay. And if I could just follow up a little bit on China, because I think it's important -- and somebody mentioned that the 25% markdown in your stock, if you were to tie that to just two regions there would be, I think, concern over this raw material cost inflation that's precipitated recently and then slow down in China and I think you guys have -- in the context of getting through pricing and restoring margins, I think you've talked about that begin manageable, I think there's still a lot of questions about obviously what happens in China, but can you just talk about the trends and maybe quantify the growth that you saw -- I mean, you talked about slower demand and I'm talking about LGM specifically setting aside the automotive exposure in IHM. Can you just talk about what sort of -- the magnitude of growth that you actually did see there and was that decelerating during the quarter or was it just, you know, consistently softer with just a generally softer Chinese economy, thank you?

Yes, Chris, we saw kind of a low single-digit growth in China in the third quarter. And that had been off really mid single-digits for the first half of the year. So we did continue to see growth there. That was a little bit softer than what we had seen as we said. And really we actually saw growth improve as we move through the quarter with September being a stronger month than July and August versus prior year. There is a little bit of a holiday benefit in their year-over-year as well, but overall, we saw September start to improve in China from what we had seen in July and August.

And has that improvement in China sustained thus far into October? I know we only have a few weeks of orders, but…

I think from a run rate perspective, we continue to feel good about our volumes in China and our ability to continue growing in that region. I think as we said last year in the third quarter we had mid teens growth in China and some of that continued into early fourth quarter last year. But overall, we feel good about the pace of our volumes in China in what we're able to deliver for the rest of this year.

Yes, so Chris, just to build on that. Making broad comments upfront, I think overall, we've remained confident in our ability to offset the inflation that comes through, leveraging our position in the markets and the strength of our markets and the healthy nature of them. You're going to always have in these periods of change, a little bit of pieces moving around but overall, we feel good with the market share position that we have continuing to leverage our competitive advantages and you know, China, right now is yes, growing a little bit slower, we believe, because the macro as well as very tough comps. This business was growing mid teens last year in Q3. But also for me, you talked about the resilience. When we talk about emerging markets as one of our key growth catalysts, it doesn't mean China, it means broad based emerging markets. We're seeing strong double-digit growth in all of South Asia in Latin America, in Eastern Europe, so we've had this before and we've had periods where South Asia slows down and other regions are picking it up. So I think it really speaks to the strength of our position globally in the portfolio. The fact that we have these high value segments which are a third of the overall company that are growing faster than the average. And so our resilience is really what we focus on continuing to build that resilience to be better positioned across the economic cycles. And we feel that we're well-positioned and we continue to offset inflation just like we've done. You may have a bump on a quarter or two or you're a quarter ahead or a quarter behind, but that said, what we expect and what we continue to be confident in.

That's very helpful, thanks for the extra color.

Thank you.

And I will turn the call back to Mr. Mitch Butier.

Okay. Well, thank you, everybody for joining the call, we're again pleased with the continuing strength of our competitive position in healthy growing markets and delivering another solid quarter. We expect the company to continue our strong performance both as we conclude the year and entering next year and really just want to thank the entire team for their commitment and focus on delivering exceptional value for our customers, our employees, our communities and our shareholders. So thank you, everybody.

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.