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Good morning, ladies and gentlemen, welcome to CCL Industries' fourth 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.
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 into 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 in the 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 2 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 3. 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 U.K. operations. The expense was the result of the milestone legal judgment equalizing certain historic guaranteed minimum obligations for all of U.K.-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 9 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 4. 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 were $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 noncash 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 of $2.73 for 2018 compared to $2.69 per share for 2017.Turning to Slide 5. 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 noncash 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 6. 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 2x. 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 7, 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 8 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 '17 was $40 million above the same period in 2016. And if you go back 5 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 was flat. So that was a combination of 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 were 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 U.K. and Mexico, but that was against an exceptional 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 2 primary operating ventures we have in the label space, and our Rheinfelden slug plant 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 2 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 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've improved EBITDA margins in this space from around 10% to 18.1%.Page 13, 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 the 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, 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 3 quarters. And overall, we're expecting fiscal year '19 to be better than fiscal year '18. As I mentioned earlier, the comparatives at Avery eased considerably because we had a very soft Q1 '18 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 2 technology rollouts, and they will not repeat in the coming quarter.Innovia is continuing to manage the 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 '19, 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.
[Operator Instructions] Our first question comes from Mark Neville of Scotiabank.
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 or costs. But I just want to sort of get an update on that, sort of the conversation you're having or that you had sort of what we can look for into 2019.
Yes. Well, we've certainly executed a number of agreements, and they all kick in, in January or a lot of them kick 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 expectation.
And the Treofan business, correct me if I'm wrong, 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 work 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 that, I think, the price had stabilized or hadn't come off, but it looks like a lot of the resins have come off. So I'm just not sure, maybe it's the grade or 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 took a spike 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 in higher resins.
Okay, that makes sense. And then sort of 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 hole 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. We'll just -- 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. Yes. No, I apologize. I wasn't asking it correctly, but -- okay. 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 '19, but maybe the cadence of what happened in '18. I'm 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 3 quarters, we'll see gains actually. So that's really what it was driven by. It's really driven by that one large launch.
Our next question comes from Michael Glen of Macquarie.
Geoff, 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 would 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 for export to Checkpoint subsidiaries around the world for resale. So those are the 3 components of the -- our China business. For CCL business, the CCL Label, it sells to Chinese consumers, that's around $100 million or thereabouts.
Okay. And when you talk about the Asia Pacific being flat in the quarter, is that China-specific? Or is i...
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 in 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...
Not in the Label business because it's millions of transactions. I mean literally millions, so it just gets financed through. Ups and downs there are not really felt one way or the other.
Okay. And then just one more. On the M&A environment, you talked about 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 that some sellers have not got the prices they expected to get, so that's probably an early indication of things headed in a 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.
Our next question comes from Stephen MacLeod of BMO Capital Markets.
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 into 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 '18, 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.
Okay. So thinking about the CCL segment expectations for 2019, would it be fair to characterize it as -- the consumer business has strong momentum. You're seeing slowing demand in CCL Design, but not negative. And CCL Secure you sort of characterized as a tough comp for Q1, but you'd expect it to be up Q2, Q3, Q4.
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 had the last quarter of that big launch that would 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 had 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 or...
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 owners, 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 inlay 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.
Our next question comes from Walter Spracklin of RBC Capital Markets.
So Geoff, just on Avery. Just to come back. I know you were talking a little bit about going to 2019 last time we spoke that you were 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 was 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 lines start up in Mexico mid-year. What's the ramp period you think by the time that it takes for that to get up to kind of fully optimized and good...
It is still 2 or 3 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 2 or 3 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 2 where we're trying to get the line up and running full vol.
So we should be into 2020 before we at a 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 there's a -- 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 in the consumer products field, there is a 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 2019, we're only 7 weeks in, but so far so good.
And the margins in those areas in the CCL division, no reason why there's going to be any strong departure up or down versus your 2019 or 2018?
No. The 2 variations we see in that part of the company really, really driven by CCL Design and CCL Secure. They're the 2. 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.
Our next question comes from Adam Josephson of KeyBanc.
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 worst 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 affected. 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 ones 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's 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've had the team there take a lot of care around 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 3 subsequent quarters. So it's just Q1.
Right. But I'm saying for the 1Q outlook, CCL segment as a whole, are you thinking op in that 4Q is just anomalous because the margins were so high in 4Q '17, 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 '17 over Q4 '16, 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 at 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 in that cash flow impact was up operating income, up EBITDA, offset slightly by.
In Q1.
Oh in Q1, what our cash flow impact will be?
Yes. In the outlook slide, the last bullet was about 1Q '19 cash flow impacted by the long-term incentive payments in previous years?
I'm sorry, Adam. Yes, so our 3-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 3-year incentives.
Our next question comes from Scott Fromson of CIBC.
First question, in core labels, are you getting the sense that you're taking market share, getting more traction with customers consolidating suppliers?
I think in 2 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 when 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 there are the 2 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 2 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 an 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, 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 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 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 chain-wide rollout for the size 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 doesn'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, there's a bigger impact. When it's just pure security products, there's not so much software involved in that. So those 2 big rollouts we had last year were both in the security 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.
Our next question comes from Maggie MacDougall of Cormark Securities.
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 U.K. is what I would call local, local. And so we are making products there largely for other manufacturers in the U.K. We had a couple of our plants do export outside of the U.K. But in what I would call in a periodic way, so we may get a large order to ship an order from Labels from the U.K. to an address in France, with a 3-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 do distribute some products around Europe directly from the U.K, 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.
Our next question comes from the Elizabeth Johnston of Laurentian Bank Securities.
Just continuing in talking with Avery here. On your slides 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. And also 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 on 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've 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 -- do you expect it to decline at similar rates that we've seen in the last 3 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 2 phenomenons going on. You've got retailers making their own decisions, 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 you can 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've 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've got lines that are completely full. It makes no sense to have loss-making product lines on assets we've got that are full.
Okay. So it's a matter of really lapping those changes?
Yes. And I'd say you've got -- we've got 2 more quarters of that to go this year.
Okay. And in terms of additional rationalization, do you have plans for that or is it really just one and done here?
Well, I think we've got more of that work to do at Treofan. But the legacy Innovia business, particularly in the U.K. operation, which is the largest plant, I think, and in the other 2 Innovia plants, we're in good shape. So there's probably a little bit more work to do in the U.K. 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 already talked about your intentions for this year to focus on delevering and to free cash flow. But in the past, when you put your leverage below 2x, you have indicated you had more appetite for larger deals. In this case, since that's not true for this year, is that really is the function of valuation multiples being 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 valuations, 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, there's always things for sale, and I'm sure Warren Buffett would tell you the same thing, right? There's always things for sale, but the question is at what price? And that's still an issue for us right now.
Our next question comes from Ben Jekic of JMP Securities -- GMP Securities, sorry.
I have 2 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 there the brands, their 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 than 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 6 or 7. 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've 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.
Our next question comes from Stephen MacLeod from BMO Capital Markets.
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 sort of 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, where 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 will recover $50 million or anything like it, I can tell you that. And -- because that's pretty difficult to do in a business of our 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 there 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.
And our next question comes from Adam Josephson of KeyBanc.
Just 2 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 private 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 2 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, a year or 2 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 #1 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 regulations. 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 of 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.
Thank you. And this concludes our Q&A portion for today. I want to turn the call back over to Mr. Geoff Martin for closing comments.
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.
Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Everyone, have a wonderful day.