CCL Industries Inc.

Thank you, operator, and good morning, everybody. We understand we have over 60 people on the call.

So thanks for the early morning start for the fourth quarter update. As all of you probably know, our presentation, which we’re referring to, is on our website.

So hopefully, you’ll follow along. We’ll identify the pages as we flip through it.

And as you see in the announcement this morning, a difficult year last year. But as we get in the details, you’ll see that we’re firing on many cylinders – many of the businesses, just have a couple of isolated areas that we have some challenges, very confident business, which is demonstrated by the increase in our dividend.

So we’re still very excited about the business, still lots of opportunities, which we’ll get into shortly. So with that, I’ll turn it over to Sean Washchuk.

Thanks, Don. I’ll turn everyone’s attention to Page two of the presentation, our forward-looking statement and disclaimer.

I’ll remind everyone that our business faces known and unknown risks and opportunities. For further details of these key risks, please take a look at our 2018 Annual Report and MD&A, which is now filed on our website or on SEDAR under the section Risks and Uncertainties.

Turning to Slide three. The fourth quarter of 2018 was another solid quarter for CCL Industries.

Sales growth, excluding the impact of currency translation, was 7% to $1.33 billion compared to $1.23 billion in the fourth quarter of 2017. The growth in sales can be attributed to consolidated organic growth of 1.5% and 5.1% acquisition-related growth.

Operating income was $189.2 million for the fourth quarter of 2018 compared to $205.1 million for the fourth quarter of 2017. Jeff will expand on the segmented operating results of our CCL Avery, Checkpoint and Innovia segments momentarily.

Please note, we have changed our segmented reporting and have included the results of the former container segment within the CCL segment. In the fourth quarter of 2018, restructuring and other items was an expense of $6.6 million, primarily for Treofan acquisition transaction costs, severance-related expenditures as well as a $3.3 million related to the actuarial pension obligation that Innovia and legacy CCL UK operations.

The expense was the result of the milestone legal judgment equalizing certain historic guaranteed minimum obligations for all of UK-defined pension schemes. Restructuring and other items was an income pickup of $4.2 million in the 2017 fourth quarter due to the reversal of a pre-acquisition lawsuit accrual at Checkpoint.

Net finance expense was $19.8 million for the fourth quarter of 2018 compared to $23.8 million for the 2017 fourth quarter. The decrease in net finance costs was primarily related to a decrease in interest costs associated with pension obligations.

The overall effective tax rate was 23.9% for the 2018 fourth quarter compared to 2.8% for the 2017 fourth quarter. The 2017 fourth quarter was impacted by the U.S.

tax reform in the Tax Cuts & Jobs Act, which affected tax expense by $40 million. Net earnings for the 2018 fourth quarter was $114.2 million compared to $169.4 million for the 2017 fourth quarter.

For the year ended December 31, 2018, sales and operating income improved 8% and 5%, respectively, while net earnings declined 2% compared to 2017. 2018 included results from nine acquisitions completed since January 1, 2017, delivering acquisition-related sales growth for the period of 5.7%, organic sales growth of 2.1% and foreign currency translation was a tailwind of 0.7%.

Turning to Slide four. Basic earnings per Class B share was $0.65 for the fourth quarter of 2018 compared to $0.97 for the fourth quarter of 2017.

Keep in mind, Tax Cuts & Jobs Act had a $0.23 impact on 2017 fourth quarter. Adjusted basic earnings per Class B share was $0.68 for the 2018 fourth quarter compared to adjusted basic earnings per Class B share of $0.83 for the fourth quarter of 2017.

The adjustment to the 2018 fourth quarter basic earnings per Class B share included $0.03 increase from restructuring and other items. The decline in adjusted basic earnings per share to $0.68 is primarily attributable to a reduction in operating income of $0.10 and an $0.08 reduction for the change in effective quarterly tax rates, offset by $0.03 positive from all other items, including interest, foreign exchange, corporate expenses and equity earnings.

For 2018, basic earnings per Class B share were $2.64 compared to $2.70 for 2017. The adjustment to basic earnings per Class B share includes $0.07 for restructuring and other charges and $0.02 for non-cash acquisition accounting adjustments to fair value inventory related to the Treofan acquisition.

2018 improvement in adjusted basic earnings per Class B share were driven principally by the increase in operating income, which accounted for $0.07, while the net impact of net – of interest expense, corporate costs, FX and equity earnings partially offset the improvement by $0.03, resulting in adjusted basic earnings per share $2.73 for 2018 compared to $2.69 per share for 2017. Turning to Slide five.

For the year, ended December 31, 2018, free cash flow was $442.5 million, up compared to $438.3 million for 2017. This reflects the improved operating results, the impact of net non-cash working capital despite a significant increase in net capital expenditures for the comparative years.

Net capital expenditures were $330.2 million for 2018 compared to $272.9 million for 2017. Turning to Slide six.

Net debt at December 31, 2018, was $1.9 billion, an increase of $129 million compared to December 31, 2017. The increase primarily reflects the increase in total debt, primarily coming from the $308 million acquisition of Treofan and the FX translation impact on our foreign-denominated debt, offset against debt repayments in the second half of 2018.

Our bank leverage ratio dropped below two times. Therefore, the syndicated spread on our revolving and term facilities and interest margin will be 120 basis points going forward.

The company’s overall average finance rate was 3% at December 31, 2018, just slightly higher than the average rate that was in place at December 31, 2017, due to an increase in the interest cost on our variable rated debt. For 2019, management expects to continue to delever our balance sheet.

Thanks. Geoff?

Thank you. Good morning, everybody.

On Slide seven, capital expenditure highlights for the year, which Sean has already detailed for you. $352 million we’ve spent last year, a chunk of that on the new line for Treofan in Mexico, and the number excludes $23 million of proceeds from capital assets held last year.

We’re planning on spending approximately $350 million in the coming year 2019. Slide eight highlights the CCL segment.

And as we expected, it was a challenging quarter comparatively given the exceptional fourth quarter 2017 we had. So the $179.2 million of EBITDA you see there on the slide in Q4 2017 was $40 million above the same period in 2016.

And if you go back five years, our typical operating margin we report in this period, 13.4% in 2014, 14.8% in 2015, 14.4% in 2016, 17.1% last year. So a big jump, then back to a more normal 14.5% this year.

And so a lot of the issues we faced this quarter are really driven by that exceptional quarter we had comparatively in the fourth quarter of last year. We did report a 4.6% organic sales growth, that was 7% excluding the results in CCL Secure.

We’ll give you some more highlights on that shortly. North America and Europe were both up mid-single digit.

Latin America are up low digit – double digit. Asia Pacific is flat.

So that was a combination of the good growth in the Asian part of the world and a decline in Australia. Strong performances in our consumer businesses were offset by slower sales at CCL Design and CCL Secure.

So the consumer and health care part of our company did pretty well in the quarter. Home & Personal Care solid sales growth.

Solid results in Healthcare & Specialty. Very good results in our Food & Beverage segment, driven by double-digit sales increases across all product lines and geographies.

So that part of the company was in pretty good shape in Q4. At CCL Design, we’ve certainly felt the slowing off of demand in the electronics sales, so – which we’re organically kind of flat for the quarter, up moderately on acquisitions, a little bit of FX, and profitability declined very slightly.

Automotive results were down on our Mexican plant startup and also some slower end markets. And battery labels also declined.

In CCL Secure, we had a good performance in Australia on the bottom line, but revenue was quite a bit below last year. And we had lower results in the UK and Mexico, but that was against an exceptional very strong quarter in the prior year.

And we had slow U.S. stamp sales.

Moving on to the joint ventures on Page 10. I won’t spend a lot of time on this.

Had a record year in Russia, very good results in the Middle East. They’re really the two primary operating ventures we have in the labeled space, and our Rheinfelden on slug plants remains closed impacted by the fire earlier this year.

Page 11, results for Avery. Q4 2017 was boosted on buy forwards in the United States ahead of the January 1, 2018, price increase that boosted our results in the fourth quarter of last year, and we should see some pickup on that in the first quarter of 2019.

It’s really more about timing. Strong results in the direct-to-consumer product lines continue.

We had modest growth in Europe, offset by small declines in Australia and Latin America. Checkpoint on Page 12.

Q4 2017 included the two last technology rollouts we spoke about at the end of last year, and indeed, we’ll have the same experience in the first quarter comparatively. That accounted for about $10 million of top line in the fourth quarter of last year, $5 million to $6 million of incremental operating margin.

So again, it was going to be a tough comparison this year. And recurring revenue product lines posted a solid growth, and apparel labeling profitability improved significantly, high single-digit sales increase, in part aided by RFID.

So I’ll just point out here, 2018 EBITDA margin has now improved 800 basis points compared to the period just before we acquired Checkpoint, so we’d improved EBITDA margins in this space from around 10% to 18.7%. Page 13, the results for Innovia.

Certainly better than the very poor quarter we had last year. Some accounting adjustments in here related to the acquisition in the prior year period.

So the improvement is not really quite as good as it looks. But mix was better this quarter than it was the same period last year.

And productivity, especially in the weeks of operation, aided our results. Resin costs have stabilized.

We haven’t seen a great deal in terms of downward movement. But certainly during the fourth quarter, things stabilized in Europe.

The summer spike that we saw in the U.S. was in our fourth quarter numbers.

So the resins we acquired during the summer period were, by and large, used in the fourth quarter. So it was – low resin prices have declined in the U.S.

back to the way they were in the first half of the year. We won’t feel benefit of that until the first part of 2019.

So that’s why we had a small loss at Treofan, and we’re planning to start up a new line there in the second quarter now of 2019. So summary on Page 14 for each of the businesses.

As I said, very typical quarter comparatively due to the exceptional result we had in the fourth quarter of last year and a very solid year overall. So Page 15, the outlook for the years ahead, things you want to think about for the coming quarter.

So we’ll have a modest FX tailwind at today’s exchange rates, probably quite similar to the results of Q4. We still see a pretty solid order intake in our consumer markets so far in 2019, but demand at CCL Design has definitely muted some in the – compared to the same period last year.

CCL Secure had another exceptional quarter in Q1 last year. That will not repeat again, but then the outlook for the year improved pretty significantly in the remaining three quarters.

And overall, we’re expecting fiscal year 2019 to be better than fiscal year 2018. As I mentioned earlier, the comparatives today were eased considerably because we had a very soft Q1 2018 after the fourth quarter 2017 buy forwards.

At Checkpoint, in the first quarter last year, we reported 17% foreign exchange adjusted sales growth on those two technology rollouts, and they will not repeat in the coming quarter. Innovia is continuing to manage its resin cost/price equation.

We are – we do have some price increases rolling out in the first half, but we also have the startup of the new capacity down in Mexico that will begin into the Q2, and that will definitely cost us some money until the line settles in later on in the year. Also, in Q1 2019, our cash flow will be impacted by payments of our 2015-2018 long-term incentive plan, which clipped fast in March of this year, and payouts for that will be a negative cash flow item in the first quarter.

So with that, operator, we’d like to open up the call for questions.

Hey good morning guys. If I can just start with Innovia.

I think in the last couple of quarters, we’ve been talking about sort of the need to adjust pricing mechanisms cost. But I just want to sort of get an update on that sort of the conversation you’re having or that you hard, sort of what we can look for into 2019.

Well, we’ve certainly executed a number of agreements, and they all kicked in, in January or a lot of them kicked in, in January. And so we’re expecting to see some pickup from that.

The thing we don’t know is what impact that will have on our volume. But so far in the year, it’s gone okay.

So a lot of solid impacts on the Innovia side, but the legacy Treofan business has still work in progress. But on the legacy Innovia product lines, we definitely have some price increases kicking in, in the first quarter.

So we’ll have to wait and see what that – how that really materializes, but that’s certainly our expectations.

And the Treofan business, correct me if I’m wrong, they were really – there really wasn’t much of an issue there, just with respect to the pricing. It was more…

Yes. They certainly – now we’re on the inside, not on the outside looking in, the inside looking out.

There’s certainly some works still to do there, but certainly the business mix could be improved I think with the pricing activity, so we certainly see some opportunities better than – it’s better done than it was in Innovia, but it could be done – I think it’s far from optimized. So there’s certainly work to do there, but – and I think the other thing on Treofan market, the – we had the big, big resin spike in the summer in the United States.

So that really colored Q4 because all the resin we bought in the summer of this year was used in Q4.

Yes. And I think in your message I think the price had stabilized.

So it hadn’t come off. But again, it looks like a lot of the resins have come off.

So I’m not sure, maybe it’s the grade of what you’re buying that…

The only problem in resin – so if you look at the BOPP film resin pricing, it come off in the U.S. but it’s – all it’s done is return to where it was in the first half of last year.

It spiked in the summer and then it reduced, but it’s only reduced back to where it was in, say, March. So it just spiked in the summer period and then came down again.

In Europe, it’s declined a little bit, not very much.

Okay. But still well off highs?

Yes. I mean, it’s well off highs.

It’s – well, not in Europe, it’s not well off highs in Europe. It just declined a bit.

But the fact that it stopped going up is certainly a relief. So when these price increases go out, that certainly should be good for us because we’re not having to pay for that at higher resins.

Okay. That makes sense.

And then just on those price increase. Does that cover essentially everything with Innovia, or is it sort of pockets…

No, no, no. I think we’ve still got – I mean, we’re $50 million in the whole from pre-acquisition period, and this isn’t recovering $50 million, it’s recovering a portion of that.

And we have to wait and see the impact on volumes, so I’m not going to get into predicting how much of that will come off. Well, the results will speak for themselves.

Yes. I guess my question, if I wasn’t clear, just the pricing adjustments you made would cover like most of your products or everything you’re selling?

Yes, yes. I mean, for sure.

So the prices have gone up on everything to a greater or lesser extent.

Okay. No, I apologize.

I wasn’t asking it correctly, but. And maybe just on the security business, I appreciate that it’s lumpy, but just can you just sort of remind us of – again, I don’t know if you have visibility through 2019.

But maybe the cadence of what happened in ‘18, and just trying to get a

We had a very big launch in – a big new currency launch in Europe in the year of 2017, and – which went through the first quarter of 2018 So that really – we had a great year in 2017, a really great year, and it went through Q1 2018, which is really exceptional. And then that launch finished as we went into Q2, so we’ll have one more quarter of difficult comparisons.

And then the next three quarters, we’ll see gains actually. So that’s really what it was driven by.

It’s really driven by that one large launch.

Okay that’s helpful.

Good morning. Jeff, can you just comment on your – talk a little bit about your China business?

Are you able to talk about, outside of label, do you have much Chinese business at all? And what percentage of label China will represent?

Well, we had a good-sized business in China at CCL label, which is focused on the domestic economy. So it’s not an – our customers who we sell to there, some of them are international players, but it’s all domestic focus.

So they’re making products for Chinese consumers, and that’s doing quite well, even I know there’s some concerns out there about how well that may or may not be happening. And then we have – at CCL Design, we have a large business in China that’s focused on the electronics segment, which is all for export or a big chunk of it is for export, and that makes up the second tranche.

And then the third piece is we make a lot of products there for Checkpoint. Not much of it is sold in China, it’s sold – made in China through export to Checkpoint subsidiaries around the world for resale.

So those are the two components of the – our China business. For CCL business, the CCL Label, it sells to Chinese consumers, that’s around $100 million or thereabouts.

And when you talk about the Asia Pacific being flat in the quarter, is that China specific? Or is it

No, no, it is all Australia. So that was very – a function of our currency business.

So that was nothing to do with Asia. So our Asian business was up around 6%, 7%.

Okay. And then – in terms of the label segment, can you remind us how raw material flows might work on that business?

In the label segment, it’s – well, it’s really – we make so many products. So they tend to just get financed through.

So we make millions of SKUs of products at all different shapes and sizes, and they’re changing all the time. So movements of raw materials in the CCL business just gets financed through.

Okay. Is there any sort of lag we should think about from Geoffrey

Not in the label business because it’s millions of transactions. I mean, literally millions, so it just gets financed through.

It’s ups and downs, they’re not really felt one way or the other.

Okay. And then just one more.

On the M&A environment, you talked about a sort of elevated seller expectations in the past. Have you seen any change there?

Or can you provide any additional commentary?

Well, I think we’ve seen – we’ve looked at a number of larger transactions, but certainly multiple – expectations of multiples are still out there. We’ve seen a few things that have failed in sale processes due to expectations, so that’s probably the thing I would say that’s – we’ve noted of late with – some sellers have not got the prices they expected to get, so that’s probably an early indication of things headed in the southernly direction.

And if the economy sort of fades a little bit in the next year or two, then probably multiples for things we might want to buy will probably come down versus go up. But this year, we’re focused more on the bolt-on transactions, paying down debt and building up dry powder.

Got it. Okay thanks for taking my questions.

I just wanted to circle back around on the CCL business. I mean, obviously, the Secure comps are tougher for the beginning of the year.

And it sounds like you also had some CCL Design impacts in the quarter. Can you just talk a little bit about – do you expect that to sort of continue in to the – through 2019?

Yes. I mean, we – at CCL Design, it’s just slow, right?

So it’s not declining or anything like that. But we’re not seeing the growth, we were seeing, in 2017 and the first half of 2018, it’s lower than we expected in the second half.

As you might expect, you look at – some of our customers are – it’s not terribly surprising. And the operating results were impacted by the start-up of this large plant we have in Mexico.

It’s really more focused on automotive and electronics, taking a long time to get that plant qualified. So it’s a greenfield, new country for the business that’s taken longer than we expected, but we expect to make quite a big dent in that in 2019 and hope to get it into profit by 2020.

So thinking about the CCL segment expectations for 2019. Would it be fair to characterize it as if the consumer business is – has strong momentum?

You’re seeing slowing demand in CCL Design, but not negative. And CCL security sort of characterizes as a tough comp for Q1, but you’d expect it to be up Q2, Q3

No, we expect CCL Secure to have a better year in 2019 than we did in 2018. But after a difficult Q1 comparatively, because we have the last quarter of that big launch that will ramp for most of 2017 and into 2018, comparatively, that disappears off the agenda come April.

Right. Okay.

And then you talked a little bit about the margin profile. And you just highlighted kind of the historical Q4s, the normalization back to that number.

Is that something that you would expect out – like is that kind of margin run rate is something you would expect outside of any unusual launches or something like that?

It’s extremely unusual for us to have a 17.1% operating margin in Q4. I mean, it’s 230 basis points in one quarter above the next highest quarter we’ve ever had.

So typical operating margin in the fourth quarter is 13% to 14%. So – and the fourth quarter is always impacted by the Christmas, by the December month.

So you have a strong October, strong November, and then December is kind of like a half month. And last year, we just have this – everything just fired on all cylinders, and we had this huge quarter in the security business, which really drove the numbers up.

Right. Okay.

That’s helpful. And then just finally, on the Checkpoint business.

You cited some aiding in the numbers from RFID. Are you seeing any sort of further adoption of RFID or accelerated adoption of RFID?

Yes, I would say, in RFID, it’s still in the early days of being rolled out. But if you think about this in the longer term, I’m talking decades more than years, but if you think over the next 10, 15 years, I think it’s quite likely it will be broadly adopted in the apparel supply chain.

So everyone is in the apparel supply chain, manufacturers, brand and goods items, retailers. They’re all looking at RFID adoption in that space, and we expect it to continue for some years to come.

Okay. And you’re still executing on the plan to roll in your own in lay manufacturing?

We have started making our own inlays in the fourth quarter of last year. It only just started.

So this year will be the year of impact from our own inlay manufacturing.

Okay. And can you just remind us of what the expected impact would be of that?

Good.

Okay that’s great thanks Geoff.

Okay no problem.

Yes, thanks very much. Good morning everyone.

So Geoff, just on Avery. Just to come back.

I know you were talking a little bit going to 2019 last time we spoke that you are looking for flat, kind of top line flat, flat EBITDA. So that’s still the expectation for 2019?

Yes. Yes, absolutely.

Yes, we think – I think the fourth quarter really is driven by this price increase issue last year, and we have certain high-margin products that we make. But last year, a number of our distributor customers bought forward in advance of a 6% price increase last year.

We had a price increase this year, too, but most of those distributor partners are involved in M&A transactions or a large number of them are. So it’s kind of off their radar screen this year, so it didn’t happen this year.

So we will have a very easy first quarter comp because of that versus the difficult Q4 comp. But yes, for the year as a whole, we would expect it to be around flat.

Got it. Innovia, just touching on the new line start-up in Mexico midyear.

What’s the ramp period do you think by the time that it takes for that to get up to kind of fully optimized and good.

It is still two or three quarters. That’s – it’s the largest piece of industrial equipment we have anywhere in the company by a significant degree.

And it takes time to ramp it up. So I expect that will go on for two or three quarters.

So I think we’ll see – in this year, we’ll see improvements in the legacy Innovia business. But we’ve got the ramp-up of Z5 in Mexico to factor in, and it’s very difficult to quantify what the impact of that is going to be.

We’ll just have to see how it looks. So it won’t start until Q2.

So the critical quarters will be Q2 and Q3 because they’ll be the first two where we’re trying to get the line up and running full vol.

So it we should be in the 2020 before kind of normalized…

Yes, so that’s still – certainly, the Treofan 2019 will be a transitory year because we’re getting that line started up and the legacy Innovia businesses we’re expecting to see a good improvement in the operating results of that part of the company.

Okay. Last question, on CCL.

As you mentioned, you got some nice growth that you’re generating in your consumer and health care. Just wondering if that gets lapped at any point.

Or are you still seeing the ability to sustain those kind of growth rates? I mean, on an organic basis, going into 2019 here?

Yes. So far so good is how I would quantify it.

There’s a lot of nervousness out there. I mean, I’m sure you know how the consumer product field is, there is lot of nervousness about, will there will be some macro effect on how these companies perform in the coming year or so.

But so far, we haven’t seen much of that. And so it’s 2017, we’re only seven weeks in, but so far so good.

And the emergence in those areas in the CCL division, no reason why there’s going to be any strong departure up or down versus your 2019, 2018.

There are two variations we see in that part of the company really, really driven by CCL Design and CCL Secure. They’re the two.

If they do well, it drives things up. If they have a wobble and it drives it down, kind of like the difference you saw in Q4.

Although I have to say Q4 last year was really exceptional, so we wouldn’t normally expect to see variation of that magnitude.

Okay got appreciate that.

No problem.

Geoff, just one on demand and then a couple on the 1Q outlook, if you don’t mind. Just on CCL Consumer, I think you were just asked about it, but, I guess, to the extent the global economy turns down to some extent, it sounds like you still think CCL consumer organic sales will be at worse flattish, I mean to…

Well, I can tell you what happened in 2009 because that was the last really bad time we had in that space. And our CCL Label business back then still grew – not in the – definitely – the growth rate was definitely impacted, so the parts of CCL segment that will be affected by an economic downturn will be anything to do with the durable goods industry would be stating the obvious.

And our aluminum can business, but that’s $200 million out of the segment. So that – if you go back to 2009, they were the parts that were effected.

So consumer staples get affected a little bit, but not the – people still wash their hair, clean their teeth, I mean that still goes on during recessions. So will I buy a new flat screen TV?

Will I buy a new car? Those are all the free decisions consumers can delay.

Sure. And a couple on the outlook, the 1Q outlook.

So Innovia, you talked about managing resin price cost and the new Mexico capacity. Are you implying that segment profit will be up or down or flat?

Can you give me some.

Well, we would expect the legacy Innovia, the Innovia with a capital I, the once we’ve owned for a couple of years, we’d expect them to do better, hopefully quite a bit better. At Treofan, we’ve got this line start up project.

So that’s a little difficult to quantify. The line won’t start up in Q1, but we need the capacity so the plant not running as well as it should do because it’s got more business than it can currently handle and needs the asset to start up.

And when the asset starts up, there’s some onetime costs associated there that’s a little difficult to quantify.

Could that offset the fairly significant improvement in legacy Innovia?

It’s hard to say. We just don’t know.

I think there, we’re being cautious about it. So we had the team there take a lot of care and how it’s put together and what the plan is going to be, so the marketing and salespeople wanted to start yesterday.

So it’s is a very big piece of equipment. we want to make sure, when it does start up, it goes smoothly, and we don’t have any operating challenges during the process.

So we’re being somewhat cautious about that, but we’ll have to wait and see how it goes.

Sure. And then in CCL, obviously, consumer is still good, but slower demand and slower growth in Design.

Secure obviously will be down. So are you thinking the segment as a whole

We expect Secure only to be down in Q1. We do not expect it to be down for the year.

I very much doubt it would be down in any of the three subsequent quarters. So it’s just Q1.

Right. But I’m saying for the 1Q outlook CCL segment as a whole, are you thinking after, in that 4Q is just anomalous because the margins were so high in 4Q 2017, or could that

No. The gap in the – the gap is nowhere near as big, so we had a plus 41% FX adjusted increase in operating income Q4 2017 over Q4 2016, but it’s not that gap is nowhere near as big in Q1.

But still, Q1 2018 was 20% up over Q1 2017. So that comparative is a bit easier.

So we’d be a bit disappointed if we couldn’t exceed it in the CCL space. The challenge will really be Checkpoint in Q1 because of the big order we had last year and the 17% sales increase which won’t repeat.

I see. And then just on the cash flow impact that you mentioned in the slides.

Sean, can you help me understand that and the magnitude of it?

Well, I think that cash flow impact was up operating income, up EBITDA, offset slightly by.

Q1.

Oh in Q1, what our cash flow impact will be?

Yes. In the outlook slide, the last point was about 1Q 2019 cash flow impacted by the long-term incentive payments in previous years?

I’m sorry, Adam. Yes, sure.

Our three-year incentive plan kicks in, so it just pays out the cash impact of that, so $15 million to $20 million outbound in Q1 for the three-year incentives.

Okay thanks Sean.

No problem.

First question, in core labels, are you getting a sense that you’re taking market share, getting a sense that you’re taking market share, getting more traction with customers consolidating suppliers?

I think in two areas of our business, we are gaining share. So I would say, in Food and Beverage, we’re gaining share.

But it’s being driven in that space more by the premiumization impact. So branded goods owners putting more of their marketing dollar supply on segmenting their brands and pushing things more to the top end where the consumer has money.

So it’s more and more about that and their behavior than us taking share from somebody else. I think in the Home & Personal Care space, it’s pure share gains.

So they are the two areas where we’re – I think where we’re doing that. I think there is some evidence that the label market in total is fairly flat in Q4 and is likely to be fairly flat in Q1.

I’m talking about that in a very holistic broad way, but those two businesses, we’ve been gaining shares. So that’s what’s been driving our growth probably above the average for the industry.

So does that mean as Design and Secure stabilize, that we could see a improving margin profile?

Yes, I certainly feel we’ll see – we’ll come off these difficult comps. So the operating margin we saw in Q4 was pretty unusual.

So just a big spike last Q4 last year, so – and that’s more driven by CCL Secure than by CCL Design.

Okay. And just on the Checkpoint, just talking about the outlook.

Can you talk about in terms of pipeline, new customers, new verticals, new products?

Well as the business is going well, so we got lots going on in it. The retail industry is finding ways to compete with Amazon, it is really what it’s all about.

And the omnichannel retailing and serving consumers online as well as in brick-and-mortar stores. And they need technology to help them do that.

Frictionless retailing has become the new buzz word and everyone wants the systems that will allow consumers to pick stuff in the store and have less hassle at the checkout, and all of those things require technology, so we’re working on all those things. And we’re more than optimistic about the future for that business.

But when you have a chainwide rollout for the sites of retailers that we’ve had, they are onetime events and they don’t repeat and they’re very nice when you have them, but then the comparative quarter one year later, you obviously got a hole to fill.

Well, there’s certainly still lot of friction for traditional retailers and e-commerce. Did you think that these – that increased penetration on the Label side is going to lead to increased technology rollouts?

Can you ask that question again?

I’m just wondering if increased business in the consumable side for…

It don’t work that way, it works the other way around, no one spends money on the consumables without spending money on the hardware first. So hardware, software and then the consumables follow.

So when a retailer wants to make a decision about adopting the technology, there’s a hardware investment, there’s a software investment, there’s usually then a pilot and then you have full scale rollout. That’s kind of the way that works.

So – and it’s more complex in RFID because it’s software the bigger impact. When it’s just pure security products, there’s not so much software involved in that.

So those two big rollouts we had last year were both in the securities space. So much more straightforward and easy to do, and that’s why you see that huge increase in revenue one quarter over another.

Okay. Just one follow-up question.

Has there been any change in tone or content of discussions with customers on sustainability?

No.

It’s okay, thanks very much gentlemen.

Good morning.

Good morning, Maggie. How are you?

I’m great thanks. A lot of my questions have been answered already, so I just have one here.

I’m just wondering how you’re thinking about your European business with regards to Brexit and the possibility for business or economic disruption in the region, if you…

Yes. Most of our business in the UK is what I would call local, local.

And so we are making products largely for other manufacturers in the UK. We had a couple of our plants do export outside of the UK.

But and what I would call in a periodic way, so we make it a large order to ship order from labels from the UK to an address in France, with a three-week lead time and it goes by truck and it’s one large truck and it goes across the border. And so there might be some disruption about that, but I think it’s manageable.

So the one area we’ve been thinking about in term is really around our Avery business. We did distribute some products around Europe directly from the UK, and we’ve made some contingency plans around that.

But it’s a fairly small part of the business in total. So we’re not particularly worried about Brexit disruption.

We’re worried about the impact on some of our customers, but our ability to service them, we’re not too concerned about that.

Okay, okay. Thanks a lot.

Hi, good morning. Just continuing and talk about Avery here.

In your slide, you indicated that the direct-to-consumer business continues to do well. Wondering if you could just comment on some of the drivers in that business.

And what is it that’s really driving results, specifically within that customs direct-to-consumer product?

Yes. Well, it’s the online phenomenon.

So direct-to-consumer business is over $100 million now, I can tell you that. It’s growing double digits quarter-on-quarter, year-over-year.

And we’re continuing to make acquisitions in the space. But that’s organically, it’s growing at that rate on top of that.

And that’s really kind of what we’re doing to offset some of the issues and some of these more legacy product lines like ring binders, and at some point, one will cross the river and we’ll have a bigger business in direct to consumer than we have of these legacy product lines, and then that should return the business overall to growth. That’s kind of what we’re planning.

And in terms of the legacy business, that is, as you said, winding down, is there – can you give us any updated outlook as to how many, I don’t know, years that’s going to take? Or what is the expected to decline at similar rates that we’ve seen in the last three years, let’s say?

Well, it’s declined a lot. So our ring binder business now is down about $80 million.

So I don’t know how much there is left to go, but it’s now something – it’s still over 10% of the business and a bit more than that when you look at it just in the U.S. But some of these things, the math is heading in our favor.

But how long it will take is hard to predict. Because there’s two phenomenons going on.

You’ve got the retailers making their own decisions there and then you’ve got secular use decline with people who use these products and what rate they’ll continue to decline is very hard to predict.

Okay, understood. And just briefly going back to Innovia again.

Just wanted to really clarify here. And I’m looking at the organic growth profile.

I think last quarter, you discussed some amount of rationalization of product lines. If maybe can you just give us some color on what happened…

That’s where all of it is. We only did that in the middle of the year.

So yes, you still got a couple of quarters where you’ll see those – you’ll see that comparatively happen. And that’s not a problem for us.

So cutting the tail off of the low margin stuff, that’s one of the things we have to do to get the margin profile right, particularly in scenarios where we got lines that are completely full. It makes no sense to have loss-making product lines on assets we got that are full.

Okay. It’s just the matter of really lapping those changes?

Yes. And I’d say you’ve got – we’ve got two more quarters about to go this year.

Okay. And in terms of additional rationalization, do you have plans for that?

Or is it really just one done here?

Well, I think we’ve got more of that work to do at Treofan. But the legacy Innovia business, particularly in the UK operation, which is the largest plant, I think, and the other two Innovia plants were in good shape.

So there’s probably a little bit more work to do in the UK to get us where we want to be, but we definitely made some progress.

And are you able to quantify year-over-year what…

I think you’ll have to wait and see what happens in the next couple of quarters before we – let the numbers speak for themselves.

Okay. Understood.

And just one more for me. On M&A, I know you had already talked about your intentions for this year to focus on delivering and to free cash flow.

But in the past, when you’ve put your leverage below two times, you have indicated you had more appetite for larger deal. In this case, since that’s not true for this year, is that really just the function of valuation multiples so high.

Valuation multiples is still a problem for anything that’s large. I think you probably read the Wall Street Journal this morning.

Warren Buffett says there’s nothing out there for him to buy. And we have the same comment.

It’s very difficult to find things at scale that you can buy for the right valuation, and it applies to him, it also applies to us. And we are focused therefore on improving operations.

We’ve still got work to do in the Innovia space. So we want to make sure management also got its eyes focused on the right subjects, not on another major acquisition.

And we will be doing the bolt-ons as you’ve seen last year and will probably continue this year. There’s still plenty of those out there.

And they have all worked out just fine and dandy, so we’d like to do a few more of those.

Okay. So theoretically, there are things for sale, just not at multiples you’re willing to pay?

Yes. there’s plenty of things – lot of things for sale, and I’m sure Warren Buffett will tell you the same thing, right?

There’s always things for sale, but question is at what price? And that’s still an issue for us right now.

Okay. Great, thank you very much.

Good morning. I have two questions.

One has been asked and I think you mostly covered it, but I maybe want to approach it from a different angle. And that’s Food and Beverage business has been quite stellar for several years now.

I think consistently double digits. I think if I can just ask you to maybe elaborate a little bit more on what’s going on.

So premiumization, am I understanding correctly? So it’s basically the customers are moving their product lines into the premium end?

Yes. Well, I think if you want to have a good example is go to the investors page of AB InBev, and they disclosed the brands – the beer brands which are growing and the ones which aren’t.

And it’s pretty clear what they’re doing. So I think that, that applies right across the state.

It doesn’t matter whether you’re talking beer, Coke, mineral waters, juices, yogurts, spirits, brands. Companies like Diageo make more money when they can persuade consumers to buy the top end and when they persuade them to buy the low end.

So the more they can take a brand slightly up market, charge a premium for it, that’s how they’re growing their revenue. And it’s very difficult for them to do that without making change to the package and without making changes to the bottle decoration and that’s really the phenomenon – the underlying phenomenon.

So is it fair to assume that in terms of the consistency of these results that, that dynamic speaks in favor of the consistency? Sustainability of…

Well, we will have to wait and see. We haven’t had a downturn for 10 years.

So most of this phenomenon has happened in the last six or seven. Whether there will be any consumer trading down in a downturn, we’ll have to wait and see.

But we are growing at very significant rates here. So if – even if there is a downturn, I still feel – we still feel quite confident there’s room to grow in this space.

And we have no position in the middle-to-lower tier brands. I mean, we make nothing in the, what I would call, that mid-to-low tier space and where the brands are more vulnerable, the growth is harder to find.

So we’re just in a good place. And we got the right products at the right time and the right places in the world, and we’re capitalizing on it.

That’s fantastic. And then my second question probably simpler, sorry if it was already mentioned and it was on Checkpoint.

You gave a lot of indications on the first quarter. I’m not sure if I heard what do you expect sort of year-over-year?

Yes. Year-over-year, we expect modest, modest growth.

Okay. Both revenue and operating income?

Right. Correct.

But most of it and all that will come in the second, third and fourth quarters once we get through this very difficult comparison. We did have 17% organic growth in Q1 2018.

So that’s a pretty substantial amount in decline.

Perfect, thank you. Thank you, Geoff.

Hi, Geoff. I just have one follow-up question.

And I know it’s been asked before. But just in terms of Innovia, I know you are pretty hesitant to give a goalpost around what EBIT could potentially look like given the pricing that’s come through.

But is there anything you can give directionally around where you would expect given the noise around Innovia underlying and the Treofan launch you would expect EBIT to be in the quarter or relative – or sorry, in the year? Maybe just relative to what it could be.

I think the answer is no, we can’t. And I think we’re not in the – I think you need to let the numbers unroll themselves.

We have taken actions that will see the price equation improve in the legacy Innovia space. It’s not – we have not put out price increases that we’ll recover $50 million or anything like it, I can tell you that.

And – because that’s pretty difficult to do in a business of that size. So it will take us more time to do that.

And some of it’s around improving mix, as well as it’s about just pure raising of prices. And, I mean, the only reason we’re hesitating to give you any more clarity around that is the start-up of that line in Mexico is a bit difficult to quantify.

I do not expect in Q1 to be any impact in Mexico around that. So Q1 will probably look quite similar to the second half of last year.

We might get a bit of pickup in resin because we had that spike in the summer that really affected Q4. So we might get a little pickup there.

But it’s really – the Q1 will be driven by how well Innovia does. And then so we’ll just have to wait and see.

So I think – if it goes well, we’ll have a lot more confidence about the balance of the year.

Right. Okay, and that’s helpful.

I appreciate the situation. Thanks Geoff.

Thanks Geoff. Just two follow ups.

Geoff, the comment you made about M&A and some of the prices for deals out there coming down and for whatever reason. Can you just elaborate a bit on why you think that’s happened?

Why some of these sellers are not getting the price that they’re asking for?

Well, I think large company, usually public equity-owned or public, and private equity sellers have high expectations and public markets have all-time high multiples. So getting premiums above that is, I think, quite difficult.

And you’ve got buyers out there who are a bit more nervous than they would have been three years ago. So I think getting deals done at the kind of multiples that some people expect, I suspect it’s getting harder than it was say one year or two ago.

And then we’ll see what unfolds. So our plan is to get things organized on our side of the fence, get our debts paid down a bit, and we think the market will be a lot better to buy in a year from now than it is right now.

And we’ve seen a couple of transactions in our space fail through expectations that weren’t really very realistic, and that’s first time we’ve seen that for a while and that’s I think an encouraging sign for us.

Yes. It makes perfect sense.

And just on the sustainability question. I appreciated your answer to it earlier.

But just to elaborate a little bit. We hear from some of the other packaging companies, particularly purveyors of aluminum beverage cans that sustainability is a huge opportunity for them, that there’ll be a shift away from plastic bottled water and all…

It’s understandable, Adam. I mean, the PET bottle is public enemy number one in many parts of the world and aluminum cans are collected by people who – because they’re worth money.

So the collection of aluminum beverage cans is much, much better than it is of PET bottles. Whether it’s really more sustainable, I have – I’m not so sure I agree with that argument.

But it’s – you can’t dispute the fact that aluminum beverage cans are better collected for recycling than PET bottles. Both are very recyclable.

And one is worth – is perceived to be worth money and the other one is perceived to be worth nothing. So we know in the aluminum beverage space, there is some interest in the switch from glass to aluminum.

I’m not so sure there’s so much switch between aluminum and PET, but we certainly know there is quite a switch going on between glass bottles and aluminum beverage cans.

Sure. Yes.

That’s been happening for years for that matter. Do you see any others switches among substrates in the years to come just based on just the CPGs and governments increasing focus on the perceived evils of plastic?

I think it will have to be driven by regulation. So the more governments are prepared to regulate, so I’m sure if you put a deposit on every PET bottle that’s sold in the United States, you would suddenly see PET bottles being collected and accumulated and recycled at a much higher rate.

So I think regulation will have to be part of the process. We see some assets around the fringes to improve the use of certain kinds of plastics than we saw say 10 years ago.

But I wouldn’t call it systemic. It’s so in our Home & Personal Care space, HDPE bottles are still used by and large for putting shampoos and skin conditioner creams and plastic tubes and things like that.

And we don’t see any signs of any real change there. So those bottles are also heavily recycled today.

So it’s probably not surprising.

So it’s really just about improving the recycling rates? And if we can do that then…

Yes, I mean if you listen to what – you read here and listen and hear about on the radio and the TV, you don’t hear people complaining about shampoo bottles in the waste stream. You hear them complaining about PET water bottles and empty bottles or coated color and things of that order and of course, it varies a lot in which part of the world you’re talking about.

So it’s very different in Japan to India. So but in terms of absolute behavior, do we see real change going on?

We hear a lot of talk and we hear a lot of customers commenting about it same as you do, but – and we see some switches where the decision would be obvious and economically driven, but we wouldn’t call it systemic.

Thanks so much, Geoff. Appreciated.

Well, thank you, all, for joining the call, and we’ll look forward to talking to you at the end of the first quarter. Thank you very much.