CCL Industries Inc.

Good morning, everybody. This is Geoff Martin standing in for Don Lang.

You'll find our investor presentation today at www.cclind.com at the investors page and you'll see a set of slides that we're going to talk you through this morning. I'll now hand over -- straight over to Sean who will take you through the numbers.

Thanks, Geoff. I’ll turn everyone's attention to slide 2, and remind you that our businesses face known and unknown risks and opportunities.

For further details of these key risks, please have a look at our 2018 annual report and Management Discussion and Analysis, particularly the section titled Risks and Uncertainties. Our annual and quarterly reports can be found on our website cclind.com or on sedar.com.

Moving to slide 3, interesting quarter before we get to the financial results, we had the adoption of a new accounting standard IFRS 16 accounting for leases. So leases that were -- and rental agreements that were previously accounted for as off balance sheet operating leases are now accounted for on balance sheet as lease liabilities and a right of use asset.

In so doing, we have added at the quarter end, approximately 167 million of lease liabilities and 162 million of right of use assets. In the absence of recording a lease expense, our EBITDA has increased by 10.9 million for the quarter and we've had a corresponding increase in our operating income of 1.7 million and offset by a 1.7 million interest expense for those leases.

In so doing, there's absolutely no impact on our cash flow for the quarter. Turning to slide 4, our statement of earnings.

First quarter of 2019 was a solid quarter for CCL Industries. Sales growth, excluding the impact of currency translation, was 8% to 1.33 billion, compared to 1.23 billion in the first quarter of 2018.

The growth in sales can be attributed to organic growth of 2.9% and 5.2% acquisition related growth. Operating income was $204.8 million for the first quarter of 2019 compared to $200.6 million for the first quarter of 2018.

Geoff will expand on the segmented operating results for our CCL Avery, Checkpoint and Innovia segments momentarily. In the first quarter of 2019, restructuring and other items was an expense of $1.4 million, primarily for severance costs associated with Innovia’s UK operations.

Restructuring and other items was an expense of $3.3 million in the 2018 first quarter, due to Checkpoint restructuring and acquisition related costs. Net finance expense was $22 million for the first quarter of 2019, compared to $19 million for the 2018 first quarter.

The increase in net finance costs is primarily related to the adoption of IFRS 16 leases, resulting in additional lease expense or interest expense of $1.7 million. We also had a slight increase in finance expenses associated with the primarily debt financed acquisition of Treofan.

The overall effective tax rate was 26.7% for the 2019 first quarter, compared to 26% for the 2018 first quarter. The increase in tax rate is associated with a higher portion of taxable income being earned in higher tax jurisdictions.

This tax rate may decline in future periods if the higher portion of our taxable income is earned in lower tax jurisdictions. Net earnings for the 2019 first quarter were $123.6 million compared to $118.7 million for the 2018 first quarter.

Moving to slide 5, basic earnings per Class B share were $0.70 for the first quarter of 2019 compared to $0.67 for the first quarter of 2018. Adjusted basic earnings per class B share were $0.71 for the 2019 first quarter compared to adjusted basic earnings per class B shares of $0.69 for the first quarter of 2018.

The adjustment to the 2019 first quarter basic earnings per class B share included a $0.01 increase for restructuring and other items. The increase in adjusted basic earnings per share to $0.71 is primarily attributable to an increase in operating income of $0.02, a $0.02 improvement in corporate costs offset by $0.02 for a change in effective quarterly tax rate and interest costs.

Moving to slide 6, for the 12 months ended March 31, 2019, free cash flow from operations was 383.3 million – $440.5 million compared to 461.9 million for the 2018 12 months. This reflects a decrease in net non-cash working capital and an increase in net capital expenditures, impacting free cash flow.

Net capital expenditures for the trailing 12 months ending Q1 2019 was $320.1 million compared to almost $270 million for the prior trailing period. Turning to slide 7, the cash and debt summary.

Net debt as at March 31, 2019, was $2.2 billion, an increase of 275 million compared to December 31, 2018. The increase was primarily driven by $167.5 million of additional lease liabilities, a new bilateral loan facility of $27 million and a reduction of cash on hand.

Our bank leverage ratio increased to 2.1 times, reflecting the increase in net debt without a proportionate increase in EBITDA. This goes back to the IFRS 16 new accounting, where we added $167 million of debt in the quarter, but only $10.9 million of EBITDA.

The company's overall finance rate was 2.65% on March 31, 2019, compared to 3% at December 31, 2018. This decrease in interest rates is a result of a reduction in margins on our variable drawn syndicated debt.

For the balance of 2019, management expects to continue to delever the balance sheet. Geoff, over to you.

Thank you, Sean. Good morning, everybody.

I'm on slide 8, highlights of capital expenditures for the quarter. We're planning to spend about $350 million for the year.

That’s our forecast. And so that's about where we come in for the year of 2019.

Page 9, some views of the CCL segment. We had good organic growth, 4.2% in the quarter.

That was actually reduced a little bit by the performance of CCL Secure, which I'll go into in a minute. And it also impacted our operating margins.

So for each of the last five years, that 18.1% you see there on that slide from the year of 2018, 2014 was 16.4; 2015, 16.8; 2016, 16.7; and 2019, 16.7. So all that points to an exceptional first quarter, really driven by the performance of our currency business last year.

Regionally, the Americas were up mid single digit organically, Europe and Asia Pacific were up low single digit, Asia Pacific, if you divide that into Real Asia and Australia and South Africa, Asia was up double digits and Australia and South Africa were both down. So we'll talk about that shortly on the next slide.

Page 10, a few more highlights for you. Solid quarter at home and personal care, especially in the label and tube product lines, we did have a lower quarter in the United States of aerosol volume.

That held profits to modest underlying increase. Healthcare and specialty, flat; food and beverage continued to drive very strong organic growth across all product lines and geographies.

And that drove improved profitability. At CCL Design, our electronic sales were somewhat surprisingly up double digit organically, really on share gains, and the strong US dollar helped profitability in that space.

Automotive as expected was down slightly and profits impacted by startup costs in Mexico. At CCL Secure, we had good performance in Australia and the US.

Constant currency profit in those operations combined was up modestly. But we had lower profits in the UK and Mexico where we had stellar performance in the first quarter of last year.

And it's really in those two operations that resulted in the lower profitability for the segment -- for both the segment and CCL Secure, although CCL Secure’s margins remain quite significantly above the average for the segment. Page 11, snapshot of our joint ventures, solid quarter in the Middle East in particular, kind of a slow start in Russia on higher cost for a new line we're putting in there.

And page 12 highlights Avery, very good quarter, but somewhat flattered to deceive. If you remember, we had a price increase in the 1 of January 2018.

And that brought forward some sales into fourth quarter of 2017, which gave us a pretty low hurdle to overcome. But even despite that, we're quite pleased with the results, really driven by the continuing rise of our direct to consumer product lines, which grow at double digit pace.

Page 13, Checkpoint. As we expected, difficult hurdle to overcome this quarter, 1.8% organic decline.

Last year, this time, we had a 16.8% organic growth rate, driven by these two large chain wide technology orders we had last year. Excluding sales to those customers, the underlying base business growth is pretty solid.

Panel labels were up double digit, including RFID and we are planning some operational changes in the Checkpoint space that we do have some operations making our panel labels outside of the regions where customers solve and we are planning to make some operational changes that will require some changes to our footprint and where we make products that will result in a $6 million restructuring charge with a one-year payback, we should complete the project by the end of the first quarter of 2020. Page 14, Innovia.

Good news story here, much better results than we expected. The sales growth you see here reported was all acquisition driven, and the legacy Innovia business pricing and mix offset lower volume, but the better mix, pricing and productivity actions we took and stable European resin costs really helped the P&L and Treofan benefited from lower US resin costs and contributed positively.

I’m heading down to Mexico tonight after our board meeting today to have a look at the new BOPP line which we're planning to start up in -- probably sometime in June. So any cost impact from that start up is more likely to impact Q3 than Q2.

So on page 15, there is a summary on this slide, which I’ll leave you to read at your leisure, which shows you the adjustments, gives you a pro forma ‘19 versus ‘18 for each of the segments. And as you can see here, the impact of operating income is pretty immaterial and not terribly material to EBITDA, but it's there for you to read as you see fit.

The page 16, outlooks for the quarter that's coming out, CCL Secure business has all the plants that are currently fully loaded, and where the next quarter we’ll have the reverse of what we have this quarter. Q2 last year, we had a volume hiatus in a couple of operations.

That won't be the case this year. So we're expecting that business outperform in the coming quarter.

The base CCL global business demand is stable. Avery trends continued at the first quarter rate in April.

The June [indiscernible] demand however will dictate the quarter and how well we do versus the previous year comparatively, very difficult to predict when that starts out. Checkpoint comes with significantly, as the call progresses.

So those technology orders we had last year moved -- ran into the first five or six weeks of the current quarter. And so we had a tough comp in the first part of the quarter, easier comp in the second part.

We do expect Innovia progress to continue, and as I mentioned earlier, the BOPP line starts off in June. And foreign exchange was pretty minimal in terms of its effect this quarter, and we expect the same [indiscernible] coming up at today's exchange rates.

So, with that opening remarks, operator if you would like to open up the call for questions, we’ll take them.

Geoff, a couple on CCL to start, Americas grew at a faster rate than obviously Europe and Asia Pac. Obviously, US GDP growth was good in 1Q.

But there have been a number of signs of a recent slowdown here. So, can you just talk about what specifically in Americas was stronger than in other regions?

And just related to your comment about CCL global business demand being stable in 2Q, can you just talk just about just demand trends in CCL broadly?

Sure. Well, I think the thing to point out, actually, the fastest growing region we had was Asia, but I mean, Real Asia.

So in Asia, we grow low double digits. But Asia Pacific, which includes Australia, where we have the large CCL Secure operation, that kind of dragged down the average to low single digits.

It’s really driven by -- the performance in Asia was really driven by CCL Secure, but on the Americas, it was just solid, it was -- the growth rate across the businesses was pretty solid and we haven't seen much change in April, so we had a pretty good month in April and the outlook for May is no different. So, I think in the consumer goods category, we're seeing reasonably stable demand.

We haven't seen any signs of a real slowdown. We've seen it in automotive as you might not be surprised to hear, but not in other places so far.

So even with all the volatility in 1Q results from the likes of 3M and others, you have not seen many signs of a slowdown other than an automotive.

Yeah, that's correct. In automotive, we for sure see it.

In electronics, I think we have gained share. So we grew double digits in electronics business at CCL design.

But I think a lot of that is share gain, we know that industry is not really growing at the moment, the numbers of devices being sold is kind of flat or even slightly down, but we have picked up some share in some new applications. So that's really what's driving our performance.

And then switching to Innovia, you mentioned results in the segment were better than you expected. They were certainly better than we were expecting.

How much of that was legacy Innovia versus Treofan? And can you just help us with what exactly was better than you were expecting?

Was it US resin costs falling or other factors?

Well, I think mix was a big factor. So we had very good mix in Innovia.

So frankly, a lot of that's to do with the internal sales of security film, which is the highest margin product we have. So that really held the mix.

Resins were stable in Europe. They didn't go down in Europe, but they went down in the United States.

So resin held. And a lot of the productivity initiatives that we started in the large operation in the UK bought some fruition.

So it's really a combination of all three things, all levers, all worked together and results you can see.

I mean it was against a pretty poor first half, so it wasn't going to be too difficult to look good compared to the previous year.

Sure. And just last couple, how much did Treofan contribute in the quarter to EBITDA, that is?

EBITDA, I wouldn't like to say, but I think operating income, a few million.

A few million, okay. And then just for the balance of the year, just given the lack of visibility we have into the combined Innovia business and just all the moving parts with the price increases, falling resin, the new line coming up, how do you have us think about just the total Innovia segment in 2Q and beyond, just very generally?

What I would be surprised if Q2 wasn't similar to Q1 and the comps get easier than they were in Q1, so Q2 last year was not very good. So it's not going to be difficult to show a good distance between last year's performance and the current year.

The second half is more difficult to predict, because we don't know what the impact of this start of this slide in Mexico is going to be. We've said to people in the expo world, well, if that cost us $1 million to start up, we'd be very pleased and if it costs 10 million to start up, we'd be very disappointed and, probably the truth is somewhere in between, where in between is hard to say.

And then just like -- when you say 2Q maybe similar to 1Q, in terms of the year-over-year EBITDA growth, you're talking?

Well, if you look at the EBIT, if you look at, I think probably [indiscernible] because Q2 last year was really not very good as you look at the numbers for last year, you say it wasn't good at all.

Just a quick housekeeping note on IFRS 16. Sean, would you expect the impacts you saw in Q1 would be indicative of the impacts you would expect this year all through the year?

Yeah, roughly about $10 million, $11 million of EBITDA per quarter and the debt number will decline slightly as we roll off the principal payments or add new leases, that’s probably $10 million to $11 million of EBITDA per quarter.

And then just turning to the Avery segment, the DTC segment has been very strong over the last couple of quarters. Can you just talk a little bit about what's driving that strength?

I mean, particularly the double digit growth you saw this quarter?

Well, we've seen double digit growth in direct to consumer first, multiple quarters in a row now and it's just driven by the phenomena of web to print digital printing. We have a number of our label and card products, various URLs on the Internet and where consumers can access some make designs and then order them in small quantities from us digitally printed and it's on a roll, that's just any way I can put it.

So, it's up to about -- we'd like it to be bigger than it is, it's over $100 million now of the annualized revenues at Avery. So its impact is not yet as big as it might be over time.

And we're obviously looking to grow it as fast as we possibly can, both organically and by acquisition.

Okay, and profitability wise, does it carry above average margins?

Around the average. It depends a little bit, if you look at it on the year, so this quarter, it was above the average.

If you look at it over the years, when we get that big bump in the summer in the core business with the back to school business, so you look at it annually, it's average or slightly above, but in the current quarter, it’s quite a bit above.

Okay. Okay, that's great.

And then just turning to Checkpoint, one of the things that you're doing is, I believe, you're sort of in housing RFID inlay. Can you just talk a little bit about what your expectations are in terms of the RFID market opportunity versus maybe where you were a couple of years ago and where you are today?

Well, it's apparel labels, the apparel industry is I think over maybe a decade or two, I think will adopt this technology universally and niches it where we’re not a huge player and if we’re a niche player, and our strength is really in Europe. So we have a number of retailer contracts in Europe for apparel labels in terms of RFID inlays, some of which we used to make in Europe, some of which we now make in Asia.

And the changes we're planning to make to that business really are around about expanding our Asian footprint, particularly in Bangladesh, and making all of our products there in country rather than importing them and moving them across borders and incurring shipping costs and time delays and all the rest of it.

And then maybe just finally, on the CCL segment, you mentioned the electronics business was surprisingly strong. What do you think is leading to your share gains?

I think it's just blocking and tackling, Steve. We've done, since we bought Worldmark in 2015, we made a lot of changes, but I think coming to good fruition.

So really improved our plans, really improved our service capacity to deliver. R&D teams are working on some pretty interesting new applications, which are more functional inside devices rather than decorative on the outside of devices and the changes we've made, I think it just so just working and so I think competitively, we're doing -- we're getting a better share than the market would suggest, given what you hear about when you listen to the calls of people making those devices, which is all kind of flat to down.

So going back to Innovia, when you indicated that you're from 1 million to 10 million in startup costs there and if we split the difference and call it 5, are you suggesting that kind of you run at 25 million for the couple of quarters and then would you drop to 20 or is there offsetting?

It's a start up period. So I don't really know whether it's going to be 5 or 2 or 1 or 9, Walter.

We just don't know. And so, I think it won't take more than the back half of the year to get the line fully up and running.

But it's, this piece of equipment, a good size football pitch and 10 meters wide, it’s the largest line of its kind in the world. We just know it won't be free of charge to start out, but exactly how much, but I'd be surprised if any issue in starting it up, would extend beyond the end of the year.

And hopefully sooner than that, but that's to quantify for you, that's the best we can give you. If it goes well, about 1 million.

If it doesn't go well, about 10 and chances are somewhere in between whether that's 2 million or 8 million, I wouldn't care to say.

That makes sense. And certainly when it's done and when we look into 2020, is your emergence for the first half a good basis is for this new run rate once these are done or should we see even higher margins if the revenue comes in?

Yeah. It depends on that, but sort of across the cycle, depending on what happens at resin, so we would hope to get this business up into the sort of mid to high teens EBITDA margin, that's kind of what we're targeting.

So, with the combination of Treofan and Innovia, so that's what we're working on.

Turning over to CCL, food and beverage has been a great contributor for that division. I think you're discussing a lot of premiumization, your shrink wrap on some of your consumer goods, when do we start to lap that?

Or is there another line that's going to come down the pipe that's going to keep this growth going, or you -- is there a period where there has been this push for that and you've had some great products to fill that need by a lot of your customers? And is there a point where we start lapping these growth rates?

Well, I don't see any sign of it right now. And if you listen to the commentary from most of these companies, premiumization is how they’re growing their revenue.

It's not by unit volume of liquid. So, it feels to us as though that trend is there for a good while to come.

And more and more than the targeting that -- the ABC consumer, the consumer that has money and wanting them to pay more for the product in the channel where they're selling it and it's hard to see how that can change in the near term.

And are you seeing your existing customers just buying more of that, or are you getting more and more customers who are shifting to that?

Bit of both. More premiumizing it, the customers we already have and then some new customers coming on board that we didn't have before, a combination of the two.

Okay, last question here. You mentioned a footprint change in Checkpoint.

Can you give us a little bit detail what happened or what's going on there?

Yeah, it's really just, as I mentioned to Stephen on the call there, it’s about manufacturing apparel label products in the countries where our customers source materials, source finished apparel and we make some of those products in developed world markets today. And we're planning to move that production in country where these products are sold.

So we're putting a pretty big expansion on our facility in Bangladesh. And we've got a large operation there already, which we plan to expand and that's really what it's about.

Just -- most of my questions have been answered, but just a couple of questions on the CCL division and core labels. Are you gaining market share with the big brand customers?

Well, I would say in the personal care space, we have done in the last year or two. I would say in the food and beverage space, we've just written that trend I was talking to Walter about with a pre devising phenomena.

And I think in the rest of the CCL business, I would say the answer is no, we're just growing with the customer. So the places where we've been gaining a bit of share have really been in food and beverage and HPC.

Okay, and are you seeing any pricing pressure or is premiumization really insulating you?

Well, we always have pricing pressure. I mean, all these consumer companies have got their own challenges with changes in the retail world.

So pricing pressure never goes away. But it's always a combination of pricing pressure and the need to innovate.

And so it's the combination of those two things. We're always in discussion with our customers and obviously we prefer the conversations about innovating to the ones about lower prices, but it's definitely a mix of the two.

Okay, and last question, are you seeing any changes in customers supply chain demands? In other words, are customers trying to better manage their working capital and finding ways that CCL can help?

Well, they always want longer term. So every customer on the planet wants longer trade turns.

And that's a constant battle and a constant challenge, but we're doing our best to keep an even keel.

Maybe if we can just talk about the secure business a minute, just so I understand sort of the language you're using? I guess my understanding was, I guess, Q2 through Q4 of last year, no major bank runs or bank runs.

And it sounds like, I think, you said fully loaded in the MD&A for talking about that segment. So I’m just sort of trying to understand the quantum of improvement, if there's sort of a big note that you're running this year, or if it's sort of more steady growth over the last year, as opposed to sort of some big step-up, if that makes sense?

Yeah, well, Q2 and Q3 last year were pretty dry, and they won't be -- so the Q2 will not be dry at all this year. And Q3 is also down quarter in that business, but it won't be as down this year as it was last year.

And Q4, it’s hard to say, it’s been a bit too far out, but we expect to be up pretty significantly for the year. We've got one large volume note running in Europe, which is a big part of that.

Its margin profile isn't the same as some other notes we’ve run there in the past, but that's having an impact on the revenue picture, certainly for the second quarter, and we've got some new issues going on in a couple of countries. No, no, no, no big conversions anywhere in the numbers, but just banks issuing new notes, a couple of denomination increases in a couple of territories, but we do expect to be up reasonably significantly for the year as a whole.

We were down in Q1 because we had such an exceptional Q1 last year, but it was the only good quarter we had in that business for the whole year.

That's very helpful. Thanks for that.

Maybe just on Innovia, a few questions, I guess. You mentioned mix, I’m just sort of curious, I think you talked about pruning some stuff before that.

I'm just curious if that was sort of like a purposeful thing or just sort of what came out in the quarter?

Yeah. We definitely pruned off some low margin stuff, particularly in Europe.

The better mix commentary that we referred to on the slide really is a function of the security film. So production volume is security film with high.

So that's really what really drove the commentary about mix.

Okay. And the startup costs in the second half, the 1 to 10, that's in aggregate, not per quarter, correct?

Yeah. In total.

Yeah.

Yeah. And I guess the new plant, should we think about that more as a revenue or margin opportunity, because I think you're talking sort of high teen or?

Yeah. It’s the combination of the two, Mark.

I mean, that site has two really old lines, I mean, sort of prehistoric. And so we’ll be closing those down and moving the production over to the new line, which will run much, much more efficiently, much lower scrap and et cetera, et cetera.

But they'll also create capacity to service the market better in the United States where there's probably more need for a supplier to be able to supply these films in the resins of other regions around the world.

And just on the resin pricing sort of spread dynamic. I appreciate you raised prices, you're benefiting for, I guess, resin sort of moderated.

I'm just curious, I guess qualitatively, because I guess part of the problem last year was just the way the mechanism worked and how often prices would adjust, how the pricing sort of, how the mechanism is -- how it's changed or how it's, if at all?

Well, it's changed a bit, but I wouldn't say we've fully solved that. The problem we had in really 2018 was drinking out of a fire hose of resin going up double digits every month almost.

So, it was really almost impossible to pass it on quick enough. And we certainly didn't have the mechanisms in place to do that.

And so one thing is stable than the resin moves, and we're able to sort of get the right conversations with the customers. So it's been a combination of those two things that’s improved things.

If resin was to gallop up again, I wouldn't have said we've got everything squared away on that front, particularly on the Treofan side. And I think we've done a better job on the legacy Innovia businesses, but we still got quite some work to do on the Treofan side where we've only been inside the business for two or three quarters now.

Okay, and I guess, sort of doing all that or sort of, again, it's less of a concern if resins are stable, but sort of fixing all those pricing mechanisms, is that like a year or two, or is it quarters and just how long that’s sort of?

Yeah, probably realistically, I mean, given what we've got to do yet at Treofan, I don’t think it's something we're going to solve in one or two quarters, it'll take some period of time, but it's where we've made a lot of progress. I mean, so we're pleased with the way it's gone.

And we've got a lot more to do now on the -- in the Americas with how Treofan goes to the market and how they handle these things inside their own business.

Clearly, the results are much better. Maybe just one last one on Avery, again, it's hard to predict back to school, but when I think about Q2, Q3 sort of combined year-over-year, is that flattish or is it still down, just given some of the…?

I think we don't expect to have a down back to school season this year like we had last year, so I can say that. So if Q2 and Q3, we added the two together, we’d be surprised if they were worse from flat and I wouldn't be surprised to see it up slightly.

Just following up on the Avery comments that you've made so far, I'm wondering if we are starting to see direct to consumer LP as your declining categories?

Well, I think we just need to keep the scale of it in proportion. So Avery is a 700 plus million dollar annualized revenue business and direct to consumer is about 120 million at its current run rate.

So, I think it probably has to get up to probably 200 plus before we'll start to see that happen. But once we get up to that pace, I think we will start to see the beginnings of annual organic growth again at Avery once we've got there.

On Checkpoint, you talked about how last year, you had really strong quarter because of the two big orders that you rolled out. And just curious if you were to adjust the growth in Q1 this year for that dynamic, what the base business has been performing at?

Mid single digit.

Okay, great. And then one final question and this is a larger picture question.

I'm curious if you could just provide us a bit of your view on how the current trade status between the US and China and so on may or may not impact your business.

I don’t see anything in our business that’s likely to be impacted by the current trade issues, it may affect some of our customers. So, we know some players in the electronic space have considered moving assembly operations from China to places like Mexico, so we know some people have been considering that.

So, we’ll be affected to the extent that customers are affected that I think long term -- for the long term health, the trade dispute needs to be resolved. But as of right now, I wouldn't say it's particularly hurting our business in China.

And the domestic consumption business in China has been quite strong. So the government has been cutting the rate of VAT to stimulate spending in the country and the consumer goods industry, they're still doing quite well, despite all the noise about tariffs.

Good morning. I have three questions and I apologize if some of them have been answered.

But question number one is on Checkpoint. So Geoff, you mentioned some changes to the footprint.

I think you mentioned some incremental spending. But can you just sort of, for modeling, kind of indicate what some of those expenses will be through 2019?

Yeah. So we're starting to spend about $6 million on making a bunch of changes in our operational footprint in the developed world to move into the emerging world with a one year payback.

So spend 6 million to get 6 million.

Okay, perfect. And then just on Avery, and it was probably asked, but you had organic growth this quarter, but that is still not the beginning sort of a sustainable pace at which the segment is going to grow.

Well, we'll have to wait and see. We've still got some legacy product lines in there.

Spring binders, street protectors, indexes and dividers, much as we all love those products, it's hard to pretend that they’re products that are likely to grow over the longer term, and they are multiple hundreds of millions of dollars between them, 200 and 300, depending on how you look at the category. So, I think we've got to wait and see how these other product lines stabilize and how fast our direct to consumer business grows.

But there are signs of it reaching the bottom and how quickly we’ll start to see that business improve gradually over time and turn into a sort of a dividend segment for the company where it just grows 2%, 3%, 4% quarter on quarter, we'll have to wait and see. But hopefully in the next year or two or three, we'll see that happen.

Okay. And the last question is on the CCL Secure, so I understand there's one launch in Europe and then sort of the rest of the utilization goes to kind of replenishing of the volumes, is that fair?

I think there is one large project in Europe and then a number of denomination that got some countries that have decided to issue a second denomination in polymer. So that's the factor and all the patterns this year versus last year, but we know for sure the business will be in total up this year over last year, with a -- reasonably significantly.

And is that both revenue and profits?

Correct.

Just going back to Checkpoint briefly, in terms of the restructuring, when you say getting -- spend 6 to get 6 back. I assume that's coming through to margin, as opposed to an increased opportunity for revenue growth?

Correct. I think we’ll see better revenue growth too, because it's pretty difficult, if you imagine what we're doing, making labels and tags in Western Europe and the United States, shipping them over to Bangladesh or Vietnam, and then only to bring them back again, it's not very operationally effective.

So we'll probably get some pickup, just being able to service the customers better and quicker than we are being able to do that today. So we do expect to get some revenue growth from these changes.

But the driver is to be just operationally just a lot more effective than we are today the way it's currently set up.

Okay, great. And going back to Innovia, in terms of the pass-through mechanisms that we've gone through, but can you give us some examples of some changes that you've made, just trying to get a sense of, if you're shortening the pass-through period or some other structural changes to help us understand that process better.

I think we've commented about what we want to say really publicly on that, it's pretty obvious we put the prices up. And we lost a little bit of volume on the bottom end, which we weren’t too disappointed to see happen.

And it's still work in progress, how much longer time it'll take us to fix that, particularly with a Treofan thing, we'll just have to wait and see, but I wouldn't like to comment any more than we've already done.

And just finally for me, in terms of your outlook for M&A, you've more recently – you discussed being on the sidelines, so to speak, given where valuations have been, have you seen any change to that.

So big transactions now, we've got a very healthy pipeline of bolt-on transactions that we're working on, primarily in the CCL design and Avery space, direct to consumer at Avery. So those are the sort of two legs of the company we’re most active in right now.

And, but they're all bolt-ons. We don't have anything large or material driven by the size of multiple expectations today.

And given where equity markets are likely to go in the next three years, which probably is more down than up, I think it makes sense to wait on the sidelines to be ready to move when things are a bit more rational.

Maybe just one quick one for me, sorry, on Innovia, in terms of the changing sales mix, should we expect some pressure on that organic growth number in Q2 as well, for the rest of the year. Do you think that you are largely through that process?

Again, I wouldn't like to say, I'd be surprised if you'll see much in the way of organic growth this year. We're not really focused on that.

What we're focused on is getting our cost structure right, getting that line started up, making sure we've got good mechanical pass throughs and we're operationally effective, so whether we're up to or down to is not the big driver for us.

Just two follow-ups. One, Geoff, on Innovia.

So you mentioned high teens EBITDA margins are your target for that business. And you were roughly there in the quarter, and then your sales were about 150.

Is that a fair run rate, the ones, I know you're adding a big line, but I ask if you consider the 150 a good sales run rate, because I know when you bought Innovia?

Our budget for the year is around 600 million. So that's about what we expect the business size today.

The fourth quarter is always the most difficult one in terms of margin. So we'll have to wait and see what's going on with resin when we get there.

But yeah, if we can have a $600 million business with 16%, 17%, 18% ea margin, we'd be very happy.

And just one on that sales issue, so when you bought Innovia, they had 570 million of sales estimated for ‘17. And then Treofan was a little over 200.

And that again, 570 includes currency, Adam. [indiscernible] in that number.

So you have to pull that out, so the run rate of the film's business was then I think 300 and change 340, 350, something like that. You’ve got a bit of foreign exchange in there.

These are all Canadian dollar numbers I’m giving you, so.

And then just on sustainability. Where do you think labels fit into that discussion?

And just more broadly, as you know, plastic packaging has come under a great deal of scrutiny, mainly in developed markets, even though at least from what I can tell, there's not much of any data supporting the claim that plastic is actually more harmful to the environment than other types of packaging substrates when you consider the entire life cycle of the product. So, where do you come down on this issue?

And what do you think is likely to happen from here?

Well, I think the subject is the container, not the labels. So the labels part of the container.

So whether it's a plastic container or a metal container or some other substrate like paper or corrugated board, so everyone's focused on how do we make these linear recycling process, and, I think a lot of the stuff that's going on right now, to me, doesn't make a whole lot of sense. In the beverage business, people look at glass metal and PET and say, well, aluminum is the most sustainable of those three, which I don't think is necessarily a logical conclusion.

I think it is the only substrate that's worth money. So if you put aluminum into the waste stream, it's going to be extracted because it's got value, whereas the PET bottle today doesn't and neither does Tetra Pak, for example.

So until something's done about in the regulatory environment to make those things worth money, or taxes or deposit schemes on them or whatever, whatever it is, again, it's hard for me to see why consumer behavior will change. I think, people running in a park in New York City are still likely to carry a PET water bottle.

And until somebody does something about the regulatory system to force those things to be linearly recycled, so non-linear recycling, I don't see an awful lot of change really happening, but I think once it does happen, I think you'll start to see more rational behavior take place. And then we'll see where we go from there.

And when you say more rational behavior, what do you mean exactly?

Well, I think well, what I mean, I think it's irrational to say a PET water bottle is bad, because a PET bottle is very easy substrate to recycle multiple times, it'll go around a recycling process 1000 times, but we can see the perception of the PET bottles is trash and not worth anything. So they're more likely to go into the waste stream than an aluminum bottle, but both can easily be recycled.

And I think in the case of PET, using a lot less energy than you would do to.

And have you noticed any significant substrate shifts just in your business.

We've seen some marketing behavior to the consumer sensitivity. So we know a lot of consumer companies are trying to develop products that market to the sentiment.

But I think that's just the edge of a change. If you want to really solve this problem, you have to recognize it's an issue and say we can't carry on doing what we're doing and probably will require some regulatory interference to make that happen.

But what we see going on right now is marketing to the issue more than solid.

But not really changing the packaging that they're using in any kind of meaningful way.

So far, no, but it was a lot of good intent, a lot of marketing to the sensitivity and some of which we’re participating in. We have a whole host of products that are meaningful in that arena.

And, but I think it's a difficult thing to solve, because it's hard for me to see how you can solve this issue without there being some cost to it. And so the idea that we can go from the world we live in today to the world we probably should be in and that would be free of charge to everybody is I think, one of the problems.

There's a reason why plastic is so prevalent to begin with. It's inexpensive compared to other touch bags.

Yeah.

Yeah.

I just had two quick follow ups. One of them was just on the CCL Secure business.

I know in the past, you've identified it as roughly a $200 million revenue run rate business. Is that?

Little bit more than that, 10%, 15% more than that.

And then just with respect to the last set of questions around Innovia, could you just walk through the sales breakdown of Innovia, you were saying films as 340 to 350 and is the balance?

Innovia is all film, so the Innovia segment is all film. It's a combination of legacy Innovia films business and Treofan.

So to put together, it’s those two businesses.

So when you were referring to 340 to 350, is that –

That was the legacy Innovia portion of it.

That’s legacy Innovia. Okay.

Well, thank you everyone for joining us, and we'll look forward to seeing you and talking again in August. Thank you for joining the call.