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Welcome to the CCL Industries Second Quarter Investor Update. [Operator Instructions] The moderator for today is Mr. Donald Lang, the Executive Chairman; and joining him are Mr. Geoff Martin, President and Chief Executive Officer; and Mr. Sean Washchuk, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen.
All right. Thank you, operator, and want to welcome everybody on to the CCL investor update for second quarter. The operator informed us that we have a good turnout of over 48 people on the call during a busy summer, so appreciate you joining us. As you know, the presentation today is on our website at cclind.com, so hopefully follow along. We'll identify the pages as we flip through. So with that, I'm going to turn it over to Sean Washchuk for the financials.
Thanks, Don. First off, I'd like to draw everyone's attention to Page 2 of our presentation deck, our updated disclaimer regarding forward-looking statements. 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 2017 annual report and MD&A, particularly the section risks and uncertainties. Our annual and quarterly reports can be found online at the company's website, cclind.com or on sedar.com. Turning to Page 3. The second quarter of 2018 was another solid quarter for CCL Industries. Sales growth, excluding the impact of currency translation was 2% to $1.26 billion compared to $1.25 billion in the second quarter of 2017. The growth in sales can be attributed to organic growth of 1.3%. Acquisition-related growth of 1%, partially offset by 1.4% negative impact from foreign currency translation. Operating income increased 8%, excluding the impact of currency translation to $199.6 million for the second quarter of 2018 compared to $188.3 million for the second quarter of 2017. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint and Innovia segments momentarily. Please note that we have changed our segmented reporting and have included the results of the container operations within the CCL segment. In the second quarter of 2018, restructuring and other items was an expense of $3.6 million, primarily for severance cost associated with the Checkpoint segments, restructuring plan and Treofan acquisition costs. Restructuring and other items of $5.2 million were for the second quarter of 2017 associated with the Checkpoint and Innovia restructuring initiatives. Net finance expense was $20.8 million for the second quarter of 2018 compared to $17.9 million for the 2017 second quarter. The increase in net finance expense is primarily related to an increase in average finance rates for the comparable periods. The overall effective tax rate was 25.5% for the 2018 second quarter compared to 27.7% in the 2017 second quarter, reflecting the impact of the U.S. Tax Reforms and Jobs Act or Tax Cuts and Jobs Act in the current year. The Tax Cuts Jobs Act (sic) [ Tax Cuts and Jobs Act ] legislation will result in an approximate 3% reduction in our overall annual effective tax rate. Net earnings for the 2018 second quarter was $121.1 million compared to $109.9 million for the 2017 second quarter. For the 6-month period ended June 30, 2018, sales, operating income and net earnings improved 8%, 15% and 21%, respectively, compared to the same 6-month period in 2017. 2018 included the results from 8 acquisitions completed since January 1, 2017, delivering acquisition-related sales growth for the period of 5.7%, organic sales growth of 2.3% and foreign currency translation was a headwind of 0.3%. Turning to Page 4. Basic earnings per Class B share was $0.69 for the second quarter of 2018 compared to $0.63 for the second quarter of 2017. Adjusted basic earnings per Class B share were $0.70 for the 2018 second quarter compared to adjusted basic earnings per Class B share of $0.68 for the second quarter of 2017. The adjustment to the 2018 second quarter earnings per Class B share included $0.01 increase from restructuring and other items. The improvement in adjusted basic earnings per share to $0.70 is primarily attributable to the improvement in operating income, resulting in $0.03, tax rate reduction of $0.02, partially offset by foreign currency translation of $0.02 and all other items of $0.01. For the 6-month period, basic earnings per Class B share was $1.36, up $0.23 or 20% compared to $1.13 for the same period a year ago. The adjustment to basic earnings per Class B share included $0.03 from restructuring and other items. The 2018 6-month improvement in adjusted basic earnings per Class B share was driven principally by the increase in operating income, which accounted for $0.16, tax rate reductions adding $0.04 while the impact of increase interest expense, corporate costs, foreign currency translation partially offset the improvement by $0.06, resulting in adjusted basic earnings per Class B share of $1.39 from a $1.25 per share in the 2017 6-month period. Turning to Slide 5. For the last 12-month-ended period June 30, 2018, free cash flow was $464.9 million, an increase of $40 million compared to the LTM June 30, 2017. This reflects the improved operating results, improved net cash working capital and the timing of capital expenditures of the comparative periods. Of note, net capital expenditures were $280 million for the current trailing 12-month period compared to $270 million for the 2017 trailing 12-month period. Turning to Slide 6. Net debt at June 30, 2018, was $1.85 billion, an increase of $77 million compared to December 31, 2017. During the last week of June, the company borrowed the proceeds required to close the Treofan acquisition and the funds were in our bank accounts so that they're in the correct jurisdictions on July 2, 2018, a Canadian bank holiday. Therefore, both cash and debt were above the normal levels for a short period of time. Our bank leverage ratio remained below 2x. Therefore, our bank revolving and term facilities continue to incur interest rate margins of 120 basis points. The company's overall finance rate was 2.9% at June 30, 2018, slightly higher than the average finance rate at March 31, 2018. Finally, in April, the company closed its initial unsecured CAD 300 million, 10-year maturity, 3.864% interest bond offering. These proceeds were used to reduce the Canadian dollar drawn debt in our revolving credit facilities. Geoff?
Thank you, Sean, and good afternoon, everybody. I'm on Slide 7, highlights for capital expenditures this year. $205 million approximately gross spending, a little under $190 million net with some disposals we've had in the first half of the year. And we're planning on $325 million roughly this year, excluding the remaining expense on the Treofan new extrusion line in the plant in Mexico. So Slide 8 highlights the CCL for the quarter. We had 3.3% organic sales growth, but that was 6.6%, excluding the low quarter we told you all about, although it's coming for the polymer bank note substrate business. So our core business is up 6.6%, 3.3% net, including the polymer bank note business. North America was up mid-single digits. Europe was down mid-single digits. All that driven by polymer bank note substrate, that's where that issue occurred. Excluding that, Europe was up low single digits. Latin America was up high single digits and Asia Pacific was up in the mid-teens. And we had a very strong performances in both our Home & Personal Care and Food & Beverage business. Few more highlights on Slide 9. Home & Personal Care had a strong quarter both sales and bottom line and across all the products, labels, tubes and aerosols. Healthcare & Specialty business was up modestly, profitability declined slightly on mix. Our Food & Beverage was particularly strong, driven by double-digit sales increases across all product lines in that space. The CCL Design, we had a modest sales gain and profit improvement. Automotive was decidedly down driven by the plateauing market, and our growth rates were certainly plateauing in that business globally, excluding China, of course, but we have a small base to start from there. The CCL Secure, as I explained earlier, we had exceptional Q1 demand, which we had a reduction sequentially from that. And in Q2, we had a difficult comparative period with last year where we had one very large order for a European customer with a new launch for this year, which obviously didn't repeat this year. Page 10, the highlights of our joint ventures. We've moved 2 of these now into fully consolidated operations. Our Chilean business was fully acquired in Q4 last year. And in May, we completed the acquisition of the Korsini 50% interest in the IML venture that we started some while ago in the United States. Rheinfelden's slug business was continuing to be impacted by a fire and didn't make any production this quarter. Slow results in the Middle East, but offset by a very solid performance in Russia.Page 11, the view about Avery. Much better quarter than Q1 where we had been impacted by the demand move into Q4 and the January 2018 price increase, especially in the label category. Like Q1, the sales decline was all in the U.S. largely in binders and similar categories. Our Printable Media business improved quite nicely, sequentially, and we had strong growth in the direct-to-consumer categories, and the mix impact was positive. So that really helped our overall margins. We had a 23% ROS quarter overall. Modest growth in Europe and Latin America more than offset small decline in Australia. Page 12 highlights the checkpoint, another good quarter here, very solid. The 2 large chain-wide technology rollouts we talked about in Q1, completed in Q2, the final tail off of that. Our apparel labeling business posted significantly improved profitability. And we largely wound up our restructuring program, a little under $40 million. We may have a little tail coming in July, but it'll be pretty immaterial. So we're pretty much wound up on that program, and we're pleased with the results from it.Page 13, results for Innovia. This was a disappointment for the quarter. Resins continue to be an ongoing challenge. We also saw low flexible packaging sales in Europe. Label industry sales though were quite solid, but the main issue here, again, was inflation. We did have an operating problem in our plant in the U.K., particularly in the month of April. But we seem to have largely overcome that. So the major challenge here is still resin and pass-through pricing arrangements. On to Slide 14, summary of all of that. So a good solid quarter at CCL Avery and Checkpoint. A little disappointing in Innovia but solid overall, and you can see the numbers there for yourselves. Page 15, outlook for the coming quarter. Modest FX tailwind. So today's exchange rate had been a bit of a headwind in Q2, but I don't think it's particularly material one way or the other. The CCL Secure comps will ease considerably in Q3. We won't have the prior year comparison issue that we had, so we expect that to be a positive. Checkpoint Technology rollouts have now completed. So we didn't have those in the same quarter last year. So we'd expect some progress there but on a normalized level. We do expect back-to-school sales to be below prior year at Avery, especially in the binder business. We may get some offset at that in the positive mix like we did in Q2, but we'll have to see how back-to-school completes in a few weeks from now. We closed Treofan in July, very early in July. But just a reminder, we'll be doing all of our acquisition accounting this coming quarter, particularly on the markup of inventories. And Treofan, like Innovia, has seen no relief on resins. And U.S. resin pricing rose very dramatically in the months of May and June. So they will likely have some pricing lag issues in the coming quarter. And on top of that, we'll have a lower tax rate. That's the end of our prepared remarks. Operator, if you'd like to open up the call to questions, we'll be happy to take them.
[Operator Instructions] Your first question comes from Adam Josephson with KeyBanc.
Couple on Treofan, Geoff. I assume you're not expecting much of an EBIT or EPS contribution in the quarter, just given the closing date, the acquisition accounting, et cetera?
Correct.
And then also with Treofan, when you announced the deal you said it was about $40 million of EBITDA. I believe in '17, you were targeting $55 million by 2021. Can you just help me with what the EBIT and EBITDA are now, particularly following whatever acquisition accounting adjustments there were and given the lags you're dealing with, the resin inflation, the associated lags? Just help me with -- just what Treofan looks like right now?
Yes, sure. I would say we've still get some of the resin issues that -- and they come very late in the quarter. So polypropylene and resin rose quite dramatically in the months of May and June. And they'll be doing pass-through pricing for that, but of course it won't get through until way into the fourth quarter. So that will have -- it's about a 15% increase in the cost of resin. So it's a good-sized impact. But we're only a few weeks into it, Adam, so I'd rather wait another quarter until we can give you a bit more color on how things look there.
Sure. Just -- and one on Innovia, Geoff -- can you help me what the price cost drag has been year-to-date? And what you're expecting for the accounts at these -- yes.
Simply all of the business, it's running at the rate of around $35 million.
And do you expect that gap to close much in the second half?
Well, I expect, we'll -- it depends on what happens with resin increases. So if resin stabilizes and we do the pass-through increases, then we'd expect to start eating back into that, certainly by the time we got into the first half of 2019. But it really depends on what happens with the price of resins. We've got hurricane season coming up. So if resins stay as they are, I would expect sometime in the fourth quarter or sometime early Q1, we'd start to do some catch-up, but we've got quite a backlog to get through.
Okay. So no, you're not expecting to make up much, if any, of that $35 million in the back half just based on -- okay.
I would say it would be limited.
Okay. And then just one on M&A and I'll turn it over. What are your thoughts regarding M&A? Just your leverage is below 2. Obviously, a good thing. Obviously, you saw one of your large global packaging peers announced a very large acquisition at a very high multiple, which seems to be the cost of doing business these days. So just -- and to -- given your -- what you've said about where you think we are in the cycle, given how high multiples appear to be, I'd love to hear your thoughts.
Well, I think multiples are beyond high. They're certainly beyond that. And we can't understand, quite honestly, particularly if you're buying these things for cash, obviously if you use paper, it might be -- you may have a different viewpoint of it. But if you're borrowing money in a rising interest rate environment, buying things at 11, 12, 13x EBITDA, it's very hard for us to understand how you get a return on capital on that. And -- so we're very much focused on things that are in our normal valuation range. And when we bought Innovia, we announced that at 7x, and clearly, it's a multiple higher than that today. But if we'd bought it at 11 or 12, we'd be in a different ballgame than we are now. So I think maintaining valuation disciplines is one of the things we want to keep going. And particularly, I think this was -- we're clearly at the top of the cycle.
Your next question comes from Mark Neville with Scotiabank.
I guess, just back on the Innovia. Without the Treofan, I'm just trying to, I guess, understand sort of where the pricing is at versus the costs? Like how far are you behind at this point? I guess, I was just...
We're a long way behind, Mark. It's -- we've made very little dent in it. It's risen so quickly, and we haven't -- the lag, the time lags and the windows that they're allowed to raise prices in, we haven't done anywhere near enough to recover the cost of resin. It's nowhere near enough. So we're a long way behind the 8-ball, lot of work to do on that. And Treofan has better arrangements in that than Innovia had. But the recent increases in the U.S. were very high. So they're going to have the same problem, but they haven't -- they did a good job in 2017 of recovering the raises in 2017, which Innovia we definitely didn't do.
Okay. I mean, can you maybe just high-level, just how those arrangements work for the both of them? How they differ?
Some of them have automatic sort of 90-day increases. Every 90 days, you're allowed to adjust your price based on the 90-day moving. Some of them have corridors. So you have a time constraint on a corridor. So if the resin increases, it's beyond a certain percentage up or down. You're allowed to make a change after a certain period. And some of them, you're only allowed to change once a year.
Okay. And that's, I guess, you have all 3 of those, I guess across the business?
Yes, we have all of those. So I'd say Treofan has a more -- most of their business is in its sort of 90-day corridor. But they will have had -- the problem is, the Q2 polypropylene rise is pretty significant. So they will be implementing price increases around that in Q3. They've also had -- there's also been a problem at Innovia. They've had a lot of nonindexed cost increases, things like titanium dioxide, which is an ingredient we use to turn light clear film white, has gone up very significantly. Freight and some other things, which are not in their price indexes, have also been part of the problem. So we're going to have to make some changes to how we -- how these mechanisms work much more holistically than -- before, we'd have to do -- to take into account all the raw materials and all the variable costs of the business, not just 1 index.
I mean, have you started having those discussions with customers, yet?
Well, we're beginning to now, particularly after we saw how things unfolded in the summer, and we'll be having a lot more of them in the September, October, November time frame. And -- and so -- and those same customers are having those same discussions with us. So this is a phenomenon I think is going on right across our industry.
Okay. Maybe I'll move on to something else. Just on the Secure business, I just want to make sure I'm reading it right. On easy comps in Q3, and Q4 you're expecting a stronger quarter, is that sort of?
Yes, CCL Secure had an easy -- had a difficult quarter last year. It is a low season. I think we'll do better than we did last year. And Q4, we expect to be good, whether it's as good or better than last year we'll have to wait and see. We'll give you some more color on that at the end of Q3. But Q4 is usually strong, we expect it to be strong this year. The big problem last year, we had this one note, I won't tell you who it was, but it was one, one very large note that we've -- to do in a complete ramp up this time last year. And it was also very profitable. So it had quite a significant impact on the -- both of the profitability of the CCL segment and the growth rate.
Okay. And just maybe if I can just sneak a last one in. I'm just curious at this point on the Avery business, how much of these binders -- it feels like it's been declining since you bought it. I mean, I guess it was. I was just curious, how much of this business is actually left?
About $100 million.
Your next question comes from Walter Spracklin with RBC.
So going back to just the acquisitions, I know Geoff, you mentioned that it was -- it's fairly toppy in terms of multiples. Is there any areas in which you don't see that? Or is it across the board?
No. I think there's plenty of -- I'm not saying that there's things we can't buy at prices we want to pay. There's a lot of things we'd like to buy that are available at prices we don't want to pay. So you've got -- we've got a good list of the businesses we'd like to buy, valuations that we think are reasonable, that we're working on. And there's another list of things we would otherwise would like to have been interested in, but have rejected on the basis of the valuation.
I see. And is there -- do you see one coming your way quicker than the other in terms of multiples coming down or more companies that started to pop-up in other areas where you might be...
Well, we have a good -- a healthy pipeline at the moment, particularly in the bolt-ons. We've a good long list of those. And so I wouldn't say the valuation issue has been problematic in that regard. It's just meant some things that we, otherwise, might have been interested in we've had to pass on just because of the 12, 13x EBITDA and how we would make a return on capital. If anyone has any math on that, they can show me how we can, I'd love to see it.
Okay. Moving on now. In your CCL division, I want to see if there's any inflection points of some of the trends that you're highlighting. You mentioned Home & Personal Care very strong. Is there anything that you're seeing in there that would suggest that, that is not going to continue through the rest of the year and into 2019?
Yes. Well, I would say if you read through the results of our big customers in that space, and they're not many of them, they're all well-known multinational companies. They're -- most of what we call Home & Personal Care is really personal care, premium personal care products. And that's the part of that business that those customers are doing well in right now, and particularly in the emerging markets. And we've got a good footprint to cover that. So I don't see that's likely to change anytime soon. And so we're growing in that space -- we almost grew double digits in the last quarter. So it's really going quite well. And -- but that's the reason why and we're in that sort of premiumized personal care space where those customers are doing well, and in the geographies where they're doing well.
I see. Are using the same kind of trends in Food & Beverage where you are posting double-digit increases? Is that...
Well, yes. The increases there are actually in the mid-teens, but it's really about the premiumizing phenomena. So where brands are using labels and packaging to take a product up market into a different channel at a different price point, and that's all we do. We don't make what I would call meat and potato type of Food & Beverage products. We're in that sort of premium -- all in those premium categories. And those are the categories where our customers are growing, and they want to do more of that because that's the only way they're raising their revenue.
Okay. And then last question here, again, on the Healthcare & Specialty. You indicated a mixed effect, and we know that can shift quarter-to-quarter or year-to-year. Will that continue to be kind of a drag on your results for the rest of the year, you think?
Quite likely. It's a -- we've got some very high margin products in that space, and we've also got some fairly low margin products. There's a mix of the 2. And depending on what you have, can drive the profits of that one way or the other. And also in which region of the world where it's more profitable for us in North America than it is internationally. So it's really driven by a combination of those things. I don't see anything on the horizon that's likely to change us from being a slow growth, small improvement, small deprovement, I don't see that changing in the near term.
Presumably when we get into 2019, that makes the cycle normalize, and we won't have as much of a negative drag, is that right?
Well, we'll see when we get to 2019.
Your next question comes from Stephen MacLeod with BMO Capital Markets.
I just wanted to circle around on 2 lines of questioning that we've already talked about little bit. Particularly the CCL segment, so I thought the margin performance was actually quite strong in the quarter. And I'm just curious, was that mostly driven by the Banknote's business?
No, no, no. That was really driven by the 2 businesses we highlighted as strong. So the drive there was the margins in Home & Personal Care and Food & Beverage also combined with strong sales.
Okay.
They were the drivers.
Underlying latent strength, okay...
Yes. Core business really was on fire in Q2, and particularly in those 2 segments. That's really the driver of the performance in the CCL segment.
Okay, that's great. And then just looking at the Checkpoint business, we also had a very strong margin profile there. Is that something that you feel is sustainable?
Well, I think we told everybody when we bought Checkpoint we didn't see a reason why it should have a different profile to the CCL business of EBIT. The EBITDA would be probably a little lower because we don't have as much fixed asset investment in that business, but at the EBIT level, operating income level, we don't see any reason why it should look any different to that. And one of the ways we had to do that was to improve the profit performance of the Apparel Labeling business, which had been a drag, and we certainly saw a quite significant jump there in the last quarter. And all of the cost improvement programs and things we've been working on since we bought Checkpoint have all come nicely to fruition. So we're very pleased with their performance for the first half of the year.
Okay, that's great. And then just final thing, coming back to Innovia, I just want to make sure I fully understand the impact there. Did you say that the drag of $35 million, has that been the pricing drag from resin since you bought the business or through over the...
Yes, I mean it's -- no, it's -- if you compare -- if I went back and I compared the first half of their 2016, so that's 2 years ago for the first half of 2018, the drag is in that magnitude. It's pretty big. So now obviously, they've done some price increases, but nowhere near enough to recover that. Not even close.
Your next question comes from Maggie MacDougall with Cormark.
So I just wanted to circle back on something you said about you're having conversations now with your customers at Innovia around capturing some pricing increases. Wondering how that's going, because I know initially when you bought it and we saw the resin price spike, there was concern about perhaps alienating some customers that absorbed changing resin costs in the other direction? So have they been receptive to this conversation and understanding about recent spikes in raw material costs? How is that going?
It's early days so and obviously, it's -- the time since resins declined is beginning to fade in everyone's memory. So it's 2 or 3 years back now. So -- and you can see the numbers for yourselves. So we don't -- we think it's time -- we have to do something. It's -- we're too far into the hole. So we've only begun to start this recently. So conversations are being had. But it's being had in an industry environment where everything is going up. So paper is going up, adhesives are going up, chemicals are going up, aluminum is going up. I think there is no raw material that we touch today that isn't heading in an upward direction. So industry conversations are really only about that right now. And so it's probably as good a time as any to be starting the discussion. I do think it'll take a couple of quarters for us to do that thoughtfully and do all the proper analysis. And so this is not -- I don't expect to see any impact of this 90 days from now. But our real focus is making sure we start 2019 in a lot better shape in this regard than we started 2018.
Right. I understand that Treofan's pricing is a bit better, but do you think there is anything to tweak there?
Well, I think the thing that they have to rethink through is the other raw materials outside of pure resin, which have all been rising. I mentioned a couple of them on the call that -- titanium dioxide is an obvious one. It's for light film. But so these raw materials have all been rising and they're not in the current resin indexes. So they get price increases based on that resign index and some of these other raw materials have been rising significantly higher than that. So we do have some work to do there, but it's not as difficult as the work we have to do at Innovia.
Okay. And then, excuse me, switching gears. Within Checkpoint, the good profitability was attributed to both completion of large technology rollouts and then also from restructuring efforts in the ALS division. I'm wondering if you are able to sort of categorize margin improvement for this segment as a whole and how much of that actually came from restructuring efforts and how much for these sort of completion of large projects.
I would say in Q2, it's really a combination of all of it. The profit impact on the technology rollouts is really in Q1. There was some of that in Q2, not a significant amount. So Q2, the biggest profit driver in the improvement in Q2 was the improvement in the Apparel Labeling business, it was quite substantial.
Your next question comes from Michael Glen with Macquarie.
Geoff, are you able to just speak to with Checkpoint, you've had some deployments go in place with customers, like how should we think about the follow-on revenue with those customers now and the profitability of that follow-on revenue?
Well, it's very -- we have 2 kinds of technology rollouts we do. One is in the electronic article surveillance business where we're doing security products to protect retailers, theft from retailers and e-tailers out of their distribution warehouses. So the recurring revenue from that is, I don't know, 10%, 15%, 20% a year of the value of the hardware rollout, something like that. When we do an RFID rollout, it's almost the reverse. So the consumable business there is much more important versus the cost of the technology rollouts, which for us is more software-driven than hardware-driven most of the time. That's where we have some proprietary technologies. But the label and tag business that goes with that RFID rollout is much more significant than the label and tag business that comes with EAS.
And the deployments that you would have completed in the 1Q predominantly, were those RFID or they were in the more of the...
EAS, most definitely EAS. Yes, yes. So if you do a $15 million program, you're talking about $2 million to $3 million worth of recurring revenue associated with that hardware deployment, roughly. It varies customer-by-customer, but it will give you a rough idea. It's something along those lines.
Okay. And is there an idea -- can we think -- how do we think about the profitability, is it in line with what we see at Checkpoint or we should think about something better?
What's the question? Profitability of what?
On the $2 million to $3 million recurring?
The margins on the recurring revenue is higher than the margin on the deployment.
Okay. Okay. And then just on the RFID business at Checkpoint, I think you've been doing some work there. Can you give an update as to where you stand in terms of maybe winning some business there?
Yes. We make -- as we sell roughly 1 billion units of RFID tags a year, we don't make most of those. The vast majority of them are made by third-party suppliers. We are planning to make all of those ourselves going forward. So that would improve our margins in that space. And then more importantly, this industry phenomena is growing in certain segments of the market, any segment that doesn't have line of sight over a barcode in RFID is now a viable technology, and certainly is in the retail and apparel space where the vast majority of these tags go. And we're in a good position to become a player. We're certainly not going to be the leader but we're certainly in a good position to become a player.
And would you be able to break out say an organic growth rate for that business right now, inside Checkpoint, the RFID business?
Yes, I'm not really in a position to comment on that. It's not big enough to make a comment -- a worthwhile comment on that. If we land something that's material, it's big enough, we'll give you some disclosure on that later.
Okay. And then just one more, are you able to identify -- were you able to get some working capital savings on the Checkpoint deal as well?
We were, we put some of that back in this year because of the sales growth has been so strong. So we've had a little bit of working capital build this year. We had quite significant savings in the first year of the acquisition, and we put some of that back in, mainly in inventory, to support the very strong sales growth you've seen.
Your next question comes from Ben Jekic with GMP Securities.
I have a couple of questions. First question Geoff, on CCL Secure. I think a few quarters ago, CCL Secure had a weak quarter, but you suggested what the operating income would have been if you would remove the CCL Secure for the overall CCL segment. Given that we already know that with CCL Secure the organic growth was 3.3, could you tell us what the operating income would have been if you remove...
I don't think we want to disclose what the operating income of CCL Secure is quarter-by-quarter, Ben.
Okay. Second question is, you were mentioning, I think in the presentation, $16.6 million of asset sales. Can you please qualitatively mention what those entailed?
Yes. there are a few buildings we disposed of. Obviously, we exited our Canadian can plant, and we've now sold the property. That was one of the larger ones. We sold a printing press out of -- quite a large printing press out of one of our businesses. That was another one. Those are the two main ones. There are couple of building sales in the first half of the year.
Okay. And then just for Sean, on the tax rate, so in terms of modeling, what would be a proper tax rate? I have to double check my model. I think I have 25% or 26%.
That's about the right zone, Ben, it's going to somewhere in that range depending how things come out in the back half of the year where the profitability is.
Where the profits are sourced?
Yes, yes.
Your next question comes from Scott Fromson with CIBC.
Most of my questions have been answered. Just one quickly on Checkpoint. Just wondering if you've seen an improvement in the growth outlook with respect to both Asia and e-commerce opportunities?
Yes, certainly in the e-commerce opportunities, I would say the answer to that is yes. All e-tailers have the same issue that retailers have in their store, the e-tailers have in their distribution centers. So we certainly see some opportunities there. We are growing in Asia but from a low base. So we make a lot of products in Asia. All of our Apparel Labeling business is invoiced in Asia to vendors to ultimately come back to the U.S. or Europe. And we are seeing good growth, but from a low base and direct to the retailers in places like China.
So is your ability -- your future ability to offer RFID, your own RFID manufactured source tagging is -- do you see that as a big competitive advantage?
We do. Yes, I think we will -- by the end of next year, we will be a major player in that space.
Your next question comes from Elizabeth Johnston with Laurentian Bank Securities.
Just going back to the growth rate out of CCL segment, and you mentioned the adjusted so to speak rate, if we were to exclude Secure, I believe it was 6.6%.
Yes.
That's really beyond the 3% to 5% range you've been generally quoting, although you have been exceeding that range in the past as well. What are your thoughts on that kind of growth rate going forward, given that you continue to exceed that range?
Well, excluding CCL Secure, because obviously that will either add to the growth rate or take away from it; add to it as it did in the first quarter, take away as it did in the second. I would say it's really a function of how well we do in our Home & Personal Care business, our Food and Beverage business and CCL Design. So CCL Design, because of the nature of the Electronics industry, has become very seasonal for the second half of the year. So we have to wait and see how that pans out. But we've had now -- I'm pretty sure if you do a 5-year compound annual growth rate on the CCL space, it's up in that 5% to 6% zone in an economic environment that's at least been positive. So will that carry on? I mean, we hope so. But that's kind of how we see it today. The Healthcare and Specialty space, that's definitely chugging along now at a lower growth rate, you know, 1%, 2%, 3%, something like that. But the other 2 parts of the business -- and sometimes CCL Design in the Electronic space, we have some quite interesting numbers.
Okay, great. And when you say interesting numbers, the strength that you are seeing, is that -- could you say that's out of Europe or Asia or are you...
It's -- I would say it's been stronger than it has been in for a while in the United States, particularly in Home & Personal Care and Food & Beverage. It's been chugging along at a steady state in Europe at a lower rate. Except in Food & Beverage, Food & Beverage in Europe has been very strong. Asia has been particularly strong for a while now. And Latin America is a bit mixed. So been very good in Mexico. In the last quarter, we had the impact of the trucking strike in Brazil. Many people have commented about it. It affected us a little bit, not too much but a little bit.
Okay, great. Just wanted to go over a couple of other items on Treofan. I know you mentioned that earlier this year there would be some CapEx associated with it. Now that it's closed, can you give us a sense of how much CapEx is left? Is it -- with respect to your estimates earlier, is it in line with that, $30 million, $35 million?
I'm just looking at Sean, I think we paid $35 million for the CapEx.
Treofan, yes.
Yes. Yes, we paid $35 million -- so $35 million of the CapEx was complete at close, with about another $20 million to pay.
Okay. So $20 million for the second half then?
Yes, correct.
And just one more from me on CCL Secure. Since it's -- the growth rate is getting very meaningfully, obviously, it's an important driver for that segment now. Are you able to give us a sense of right now at least, on a run-rate basis, what percent of that makes up of the segment?
It's about a $200 million business.
[Operator Instructions] You have a follow-up question from the line of Adam Josephson with KeyBanc.
Geoff, back to Innovia, Innovia segment. So you have the resin lags that you're dealing with in both legacy Innovia and Treofan. You have the nonmaterial inflation at Treofan that you talked about. You have the acquisition accounting impact in Treofan. So when you put all that together, do you expect to be up in that Innovia segment in 3Q?
No.
You do not?
No.
Okay. Do you expect to be down?
Yes.
Okay. On the inflation thing, I know it cuts both ways so everything is going up now. Everything is going to be going down at some point soon, presumably. But are these pressures that you're dealing with causing you to think twice about buying these businesses that have this exposure to raw material fluctuations unlike your legacy label business?
Well, we have the same pressures in legacy label. It's just a little easier to pass them along and -- because we can finance them with the changes. But I think that all of these business have -- I think specialty films will for sure always be cyclical. But so is our aluminum can business and I think we've done a lot of work on that to remove the impact of the rises and falls of aluminum. So aluminum has gone from around $1,500 a ton in the United States to $2,500 a ton. During the same period, we've had all these resin increases, and you haven't heard me say one peep about what happens around aluminum because we now manage it very, very tightly. And so I think it's -- I'll have to do the same thing in the film space and not allow things to drift in the way they have.
Sure. And just one on polypropylene, oil has been falling a bit of late, is that -- are you thinking that polypropylene is going to follow suit at some point soon or any thoughts along those lines?
Well, we'd like to see a season without any hurricanes. That would be a good start. So we have to get through that. And but yes, I mean, in the end this stuff does ultimately follow the price of oil. And it's a little bit impacted near term by supply and demand and capacity in the cracking where resins are cracked. And a lot of that's in the Gulf. So I'd be kind of surprised if there would be anything happening on the price front until we get through the hurricane risk season and see what happens at the end of that. But every prediction I've ever read about what will happen to resin, is just to me seems to be a lot of graphs that amounts to a wild guess that you're either wrong or right on it.
Understood. And just one on Food & Beverage. Obviously, one of your competitors had a difficult time in Food & Beverage in the quarter, particularly in the U.S. beer market. I know you have different exposures in your Food & Beverage business, but you said you saw I think broad-based strength across all regions, but can you just help me understand a little bit what drove that strength, perhaps compared to what your competitor was dealing with?
Well, I think our business is extremely broad geographically. So we sell these products in Brazil, Mexico, United States, Germany, France, U.K. Thailand, the Middle East, China. We've got a very broad geographic exposure. We have a very broad products exposure, we sell closure labels, we sell pressure sensitive labels, we sell shrink sleeves, we sell In-Mould Labels. And we focus on the brand owners that want to premiumize the spaces they're in. And I think some brands lend themselves to that and some brands don't, and we tend to avoid the customers who have got price-driven or value-driven brands and focus on the customers who want to sell for premium. So Scotch Whiskey producers, Premium Vodkas, Premium Gins, Premium Beer, so we would like to sell to the Stella Artois and the Heinekens more than some other brands in the U.S., for example. And I think that's really the driver for why we've been successful in this space.
And we have a follow-up question from the line of Mark Neville with Scotiabank.
I just want to go back sort of to the Innovia. So I apologize for that. Just on that, the $35 million that you quoted Geoff, that's all resin?
That's all resin. So what that number is, Mark, that's H1's first half '16 pro forma against the first half '18 pro forma. The difference is $35 million. We did recover some of it. I'm not going to get into giving you -- just to give you a flavor for how much it's risen in a short space of time and what we're dealing with. And the numbers are pretty clear, as you've seen on the -- for the quarter, where you've got the quarter-to-quarter comparison. So all of that difference between this year and last year, it's nearly all resin.
Okay. And what I'm thinking at some point, you'll be able to recapture some of this. I guess, just a broad strokes, how much would be sort of contractual or automatic whenever the window opens and how much is a commercial negotiation where you sort of have to go fight for some of that back?
Well, I think to get us where we need to be, we definitely have to open the dialogue about the spread over the resin costs, that's something. And other raw material costs, because there's other things you make here from other than resin. So if we're going to sell a lot of white film, we're probably going to have to think about what we do about TIO2 down the road. So there's other things we've got to think about besides resin.
Right. But I guess again, just on the resin component, I think that for -- hypothetically, if we just...
Well, pretty much all of it has to pass through at some point. And so that's -- you still have to get it done. And some of the products we have in that space we would say we're not happy with the spread. So we've got to do a bit of both. And for things to improve, we've got to see the increases stop because otherwise, you're always behind the eight ball and the time lags are too long. So this isn't something they're going to be able to fix and find $35 million in 2 or 3 quarters or anything like that. But just to give you an idea of the delta involved and how much upside we now have, because our numbers in the first half of the year, which I think have been pretty good overall, have this business not performing, so if we fix this, it's quite a nice upside.
And you have a follow-up question from the line of Scott Fromson with CIBC.
Sorry to beat a dead horse here, but just looking at the Innovia book of pass-throughs, is there some risk that if polypropylene comes down towards the year-end that your annual resets get done at a lower rate, and you kind of -- or is it done on an average value throughout the year?
There is no rule about this that I could comment on that would say it's like this because every customer situation is somewhat different. And -- but we are focused on making sure before we make any changes to the agreements we have with a customer on the pass-through that the spread starting point is in the right place. Because if you haven't got that right, and then you make a change on that on the down curve, you're going to suffer. So we are thinking about both of those things. So we're mindful of not rocking the boat if resin looks like it's set to drop. But I don't see too much on the horizon that says why that should occur, I mean, barring an economic slowdown.
Okay. And just one other quick question on the premium angle. What are you seeing in In-Mould Labels?
We are a small player in In-Mould Labels. So it's a -- the newest injection In-Mould Label decoration, is the newest form of product decoration, and there is a good emerging market for that in the U.S. That's how I describe it. It's a technology that was largely developed in Europe, but it's now being deployed in the United States. We have made an investment in that, we will be a player in that as will others and -- but it's not a move-the-needle kind of event, for sure.
Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Donald Lang for closing remarks.
I want to thank everybody for their interest in calling. And if you do have any follow-up calls, please do feel free to give Sean Washchuk a call. Otherwise, we'll look forward to chatting with you next quarter. Thank you very much, operator.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone, have a wonderful day.