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Edited Transcript of CCL.B.TO earnings conference call or presentation 12-Nov-19 10:30pm GMT

Q3 2019 CCL Industries Inc Earnings Call

WILLOWDALE Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of CCL Industries Inc earnings conference call or presentation Tuesday, November 12, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey T. Martin

CCL Industries Inc. - President, CEO & Director

* Sean P. Washchuk

CCL Industries Inc. - Senior VP & CFO

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Ben Jekic

GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Mark Neville

Scotiabank Global Banking and Markets, Research Division - Analyst

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

* Walter Noel Spracklin

RBC Capital Markets, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the CCL Industries third quarter investor update. Please note that there will be question-and-answer session after the call.

The moderator for today's conference are Mr. Geoff Martin, President and Chief Executive Officer; and Mr. Sean Washchuk, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [2]

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Thank you, operator, and good afternoon, everybody. Apologies for the late hour this afternoon, we're having a Board meeting at our Mexican operation, and this is the only way we could slide our conference call in to suit the time schedule. You'll find our presentation on our website on our Investor Relations page. And I'll now hand -- turn over to Sean who'll take you through the numbers.

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Sean P. Washchuk, CCL Industries Inc. - Senior VP & CFO [3]

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Okay. Thank you, Geoff. I'll start everyone on Page 2 of the presentation where we have our disclaimer for 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 2018 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 the next slide, adoption of IFRS 16. So reflected in our 2019 quarterly financial results is this new standard for the impact of leases. The standard at its simplest level requires operating leases prior to January 1, 2019, that were recorded on an off-balance sheet financing basis, are now recorded on the balance sheet as a lease liability with the corresponding right-to-use asset. Therefore, there is no longer a lease or a rental expense resulting in an increase in EBITDA but a depreciation expense related to these assets resulting in a slight increase in operating income, and imputed interest expense related to the amortization of the lease liability resulting in minimal to no impact to the profit before tax.

Next slide on Page 4, our statement of earnings. The third quarter of 2019 was another solid quarter for CCL Industries. Sales growth, excluding the impact of currency translation, was 2.3% to $1.36 billion compared to $1.34 billion in the third quarter of 2018. The growth in sales can be attributed to organic growth of 1.7% and 0.6% acquisition-related growth.

Operating income improved 14%, excluding currency translation, to $209.8 million for the third quarter of 2019 compared to $186.2 million for the third quarter of 2018. Geoff will expand on the segmented operating results of our CCL Avery, Checkpoint and Innovia segments momentarily.

In the third quarter of 2019, restructuring and other items was an expense of $1.7 million, primarily for severance costs associated with the CCL segment operations, Checkpoint European ALS operations and other transaction costs. Restructuring and other items was an expense of $1.3 million in the 2018 third quarter, principally for the Checkpoint restructuring and other acquisition-related transaction costs.

Net finance expense was $19.5 million for the third quarter of 2019 compared to $21.1 million for the third quarter of 2018. The decrease in net finance costs was attributed to lower average interest rates in the quarter and a reduction in total debt. The overall effective tax rate was 25.7% for the 2019 third quarter compared to 25.6% rate in the 2018 third quarter.

Net earnings increased to 13% for the 2019 third quarter to $127.7 million compared to $112.7 million for the 2018 third quarter.

For the 9-month period, sales, operating income and net earnings improved 6%, 5% and 6%, respectively, compared to the same period in 2018. 2019 included results from 11 acquisitions completed since January 1, 2018, delivering acquisition-related sales growth for the period of 3.5% growth, organic sales growth of 2.1% with foreign currency translation having a negligible impact.

Turning to Slide 5, earnings per share. Basic earnings per Class B share were $0.71, up 13% for the third quarter of 2019 compared to $0.63 for the third quarter of 2018. Adjusted basic earnings per Class B share were $0.72, up 9% for the 2019 third quarter compared to adjusted basic earnings per Class B share of $0.66 for the third quarter of 2018. The adjustment to the 2019 third quarter basic earnings per Class B share included a $0.01 from restructuring and other items.

The increase in adjusted basic earnings per share to $0.72 is primarily attributable to an increase in operating income of $0.08, a decrease in interest expense of $0.01, while the net impact of corporate expenses, equity earnings, foreign exchange offset the improvement by $0.03.

For the 9-month period, earnings per Class B share were $2.09, up 5% compared to $1.99 for 2018. The adjustment to basic earnings per Class B share included $0.03 for restructuring and other items. The 2019 9-month improvement in adjusted basic earnings per Class B share was due to an increase in operating income of $0.09 offset by the net impact of $0.02 related to the change in effective tax rate, foreign exchange, resulted in adjustment to basic earnings per share of $2.12 for the 2019 9-month period from $2.05 in the 2018 period.

Moving to Slide 6, free cash flow from operations. For the third quarter of 2019, free cash flow from operations was $185.3 million compared to $103.5 million for the comparable period in 2018. This reflects the improved operating results, additional proceeds on equity-settled share-based transactions, along with a reduction in cash taxes paid and improved net noncash working capital.

For the 9 months ended September 30, 2019, free cash flow from operations improved to $201.4 million from $180.8 million for 2018. This comparative year-to-date increase was due to improved operating results, a reduction in cash taxes paid offset for the working capital change.

Moving to Slide 7, cash and debt summary. Net debt as of September 30, 2019, was $2 billion, an increase of approximately $52 million compared to December 31, 2018. The increase primarily reflects the increase in total debt as a result of a $151.7 million of additional lease liabilities offset by additional cash on hand and debt repayments. Our bank leverage ratio was approximately 1.85x, reflecting an increase in net debt more than offset by the increase in EBITDA, therefore, our bank revolving facilities will incur interest rate margins of 112.5 basis points.

The company's overall finance rate was 2.51% at September 30, 2019, lower than the 3% average finance rate at December 31, 2018, due to a decrease in interest rate margins on the company's variable rate drawn debt. In absence of significant acquisitions, management expects to continue delevering the company's balance sheet through 20 -- through the fourth quarter of 2019. Geoff, over to you.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [4]

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Thank you, Sean. On Slide 8, capital spending highlights for the year. We've excluded the right-of-use assets additions and depreciation under IFRS 16 leases and $6 million in disposals, so $259 million year-to-date. We expect expenditure for the year to be -- end up at around $350 million, and we're planning for the same in 2020.

So highlights on Page 9 of the CCL segment. We had 2.1% organic sales growth, 0.7% coming from acquisitions, partly offset by 1% negative currency effect, largely due to weaker European currencies. Regionally, Europe and North America were both up low-single digit, Asia Pacific was up high single digit, and Latin America declined low single digit.

Page 10, a few more highlights for you on the -- a bit more color on our business. In Home & Personal Care, there was continuation of the soft market conditions we've seen in the NAFTA region for aerosol and slower Latin American label sales both continue to impact results. In Healthcare & Specialty, declines in the U.S. and Canada were offset by Europe and emerging markets, but we did have a modest profit gain in that part of our business. Food & Beverage sales growth rates moderated, except at Sleeves, which continued to grow strongly, profitability overall declined.

At CCL Design, we had good organic growth in the core business and acquisitions, mainly the one in Vietnam drove solid results overall. Automotive, as you might expect, we've seen softer demand globally, which drove a small profit decline.

In CCL Secure, we had a very strong quarter in polymer currency compared to a weak prior year quarter in the same period last year.

Slide 11, result of our joint ventures, not much to say in here. Flat quarter in both Russia and the Middle East, with a bit of a profit decline. In Russia, our Rheinfelden plant will start helping -- making aluminum slugs for our container operation this quarter and should be in full production in 2020. And CCL Korsini, just to remind you, was acquired by us and is now a fully-owned subsidiary of the company.

Page 12 highlights the Avery. Very good quarter, 3.5% organic sales growth, good North American back-to-school season and continuing strong performance in our direct-to-consumer product lines, which continue to grow at a double-digit pace and those 2 things really drove a very good quarter on the bottom line for the season.

What -- Slide 13, Checkpoint. Another good quarter here. We had some new business wins, which drove exceptional MAS performance in the United States and it was also solid elsewhere in the world. We did see some slowing in apparel labels sales in the base business, but RFID continues to grow quite nicely.

Slide 14, highlights for Innovia. We did see reduced European volume, but we also saw some pricing decline in the United States, really a function of the much lower material costs we have in this quarter for 2019 compared to the spike we saw in the third quarter of 2018. So the pass-through present prices contributed about half to the sales decline, the rest is coming from volume in Europe.

The Treofan prior year did include $4.3 million of acquisition accounting adjustments, so you would really have to add that back from the prior year. But you would also have to deduct the foreign exchange gains this business used to report in Mexican pesos, we've now changed to a U.S. dollar functional currency, and there was a one-off gain in this prior year quarter this time last year. So net-net, [6.3 or 4.3] would be a good way to look at it.

So that was all despite start-up expense on the new line in Mexico, which was much less than we thought, so the underlying profitability of the business has improved quarter-on-quarter.

Slide 15 is a summary of all of that. But for everyone's information, a pretty good quarter, all things considered.

Slide 16, the outlook for the fourth quarter. CCL Secure had a very strong Q4 last year. We will have a good quarter this year. I don't think it will be as good as the one we had last year. And the number of our CCL label units are also facing tough comps for the quarter ahead. We do have potential for Avery to have a record year this year. Checkpoint progress is expected to continue, and the resin environment remains benign at Innovia. Foreign exchange are expected to be pretty nominal at current exchange rates.

So those are our prepared remarks. Operator, we'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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Geoff, on the last call, you talked about a very weak June and a really strong July and you're -- you seemed taken it back by just the volatility in terms of your monthly sales/volume. Can you talk about the cadence of sales subsequent to July and whether there were any surprises to you? And then -- and for that matter, what you saw in October?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [3]

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Not really. It was pretty stable going through the quarter. So back-to-school was sort of more July-centric this year but was a bit more June-centric last year so that probably had some -- impacted Avery. But beyond that, we didn't see big differences. So it's pretty stable this quarter and has been so also in October.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [4]

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Got it. By region, you called that LatAm as being weak in your labels business. Europe was fine enough in labels but obviously weak in your Innovia business, and then Asia Pac was up very significantly in your label business. So can you just kind of do a walk-around-the-world for us and tell us what you're seeing by region?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [5]

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Yes, yes. Sure. Well, Latin America, I think a number of our customers are being disturbed by the situation in Argentina. So we have a substantial operation in Brazil, but it's somewhat interconnected with the economic situation in Argentina. So that's really the -- where we're seeing the impact in Latin America. Also in Chile, I'm sure you've read all the noise in the newspapers in Chile, so that's been another black spot. Now our Mexican operation is still doing well but not as well as they were last year. So I think it's probably for sure, the most changed part of the world for most of our customers in the last couple of years.

Europe was stable, solid so was the U.S. Asia Pacific grew nicely, but a lot of that was a strong quarter in Australia in the currency business, so that was really what drove the growth. We have pretty good results in China. Some countries in the ASEAN region were more -- were softer but China was pretty solid. But the big driver for the quarter was the -- were very strong results in Australia.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [6]

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I appreciate your clarifying that. And then you mentioned Europe was stable in labels, but that was -- it seems to be that the source of the entire volume decline in your Innovia business, it sounds like it was about a 5%, your European volumes were down about 5% in the quarter. So can you help us with what's going on there versus what you saw in Europe in your labels business?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [7]

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Yes. So in the Innovia volume, it was flat in North -- in the Americas, Mexico and the U.S., sort of a flat volume in price decline, had a sort of low to mid-single-digit decline in volume in Europe. Some of that was giving up share in categories where we've taken a price point of view. So I wouldn't say it's been something that's a big surprise to us and when we see the effect on the bottom line, we're not frustrated about how things have panned out there.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [8]

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So the quarter in Innovia was about, as you're -- it was a little below what we had. So was it about in line with your expectations?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [9]

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Yes, yes, yes. Sure. Absolutely. Probably a bit better in the Americas and a little bit worse than we expected in Europe.

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Operator [10]

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And our next question comes from Mark Neville from Scotiabank.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Maybe just following on the Innovia conversation. I guess a little surprised to your -- to sort of the drop sequentially in the EBIT. I know you said it was sort of roughly what you expected. But again, was there any sort of onetime start-up cost in that -- in the quarter?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [12]

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Well, we had this start-up -- we had this is start-up of the Mexican plant so that's probably $1 million, $1.5 million. I think we closed about $3 million, $3 million to $5 million in the second half, so we came in at the low end of that range. So [part of this B5] -- was probably $1.5 million, but you got -- all the depreciation kicked in this quarter of the new line. So that was probably $1.5 million, call it, and we don't see anything unusual in the quarter, really. But it is seasonal. So we do have a solid debt because of the European focus as a big part of the business. So it wasn't a total surprise to us.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. So something to keep in mind for us going forward?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [14]

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Yes.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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The CCL segment's Q4 outlook, if I'm interpreting this correctly, your sales were roughly comparable to Q4 of last year? Is that right?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [16]

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Probably is, yes, flat to down, I would say, in the fourth quarter. It's a very difficult one to call because it's -- what we don't know is what will happen in the month of December. So we're slightly more conservative this year about whether any of our customers will call an early end for the year and stop deliveries in December. So that's a factor we're considering. October was quite good. But just given the current external situation in the world, it's probably just the call outlook, some apprehension around that as to what may happen in the latter weeks of the quarter.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [17]

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Okay. And that's a sale to EBIT, that's year-over-year or quarter-to-quarter, just the flat-down? I'm just going ask if you manage year-over-year or quarter-to-quarter or were you...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [18]

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No, no. I meant flat to down year-over-year.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [19]

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Yes, okay. Okay. I appreciate some of that's -- again, you being conservative and not sure how the summer plays out. But again, sort of just, I guess, a higher-level question, just sort of -- I guess, in this sort of macro environment we're in, like would your expectations for this business, or at least near term, be sort of that 2-ish percent growth range in (inaudible) price?

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Sean P. Washchuk, CCL Industries Inc. - Senior VP & CFO [20]

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Yes.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [21]

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Yes, low single digit at the moment. So if you look all of the industry space, in our space, that's kind of what everyone is seeing, and it's what we're seeing, too.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Okay. Maybe if I can ask one last one. Just on Checkpoint, the business wins you called out. I'm just curious when they came in and sort of how significant they were.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [23]

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They were pretty significant because we weren't expecting 8.5% organic growth in the third quarter. So we did have win a few rollouts, principally in the United States, one in Europe, which really helped the goal there.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [24]

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And did those continue to Q4...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [25]

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They came in at the back half of Q2, early Q3.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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And did they continue into Q4?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [27]

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No, no. Well, I think it will continue. I'm not telling you it'll continue at that rate. But we do expect to see solid organic growth in the fourth quarter, probably not at that rate.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [28]

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And they'll wrap up by year-end, those rollouts?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [29]

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Sorry?

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [30]

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Those rollouts will wrap up in Q4?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [31]

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No, no. I think we've done most of the rollout in Q3 so we won them and rolled them out. We have some drift into Q4, but it's -- they weren't as big as the ones that we had in the first half of 2018. But there were multiple offers so we were able to get them all done.

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Operator [32]

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And our next question comes from Walter Spracklin from RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [33]

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So just on -- going back to kind of the label -- the core label division, you talked a lot about premiumization in the past, and now we're seeing a -- kind of a slowdown that you're guiding us to on the low single-digit run rate for next year. How does that play in? Are we seeing less customers now electing to go into premium -- into more premium labeling or is that something else?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [34]

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No, I think it's just a macroeconomics view. So customers are still planning the things they were planning before, just more conservatively. So units, timing, and how aggressively they might do it, but that trend hasn't gone away. But the color is really the economic situation and the macro view of the world is probably people to be a little bit more conservative than they otherwise might have been.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [35]

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And your capacity situation in Food & Beverage, is that constrained still? Are we seeing a little bit more -- less pressure now that...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [36]

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No, no. The new plants are coming online now, so we're in a much better capacity situation than we were a year ago.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [37]

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Okay. Moving over to Avery, you mentioned the real improvement here in direct-to-consumer. And as that part of the business grows, then it's going to obviously take more -- put more emphasis on your overall organic growth rate. Roughly where are we there? What percent would you say, just generally, are we getting into the direct-to-consumer? And to what extent will that going into next year lead from what was expected to be 0 growth in 2019 to perhaps something a lot more closer to the double-digit you're seeing in the direct-to-consumer?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [38]

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Well, 2 things I would say about that. We were hoping we were going to have our first growth year organic this year, which we're pleased to see. I think it's fair to say the tariff situation from China has helped us a bit, so mass market retailers who were free to go offshore saw, a year or 2 years ago, less free to do that today, or they're still free to do it, but there's an economic price to pay. So that's helped a little bit as well. But I would say, we're certainly feeling we've hit the bottom of the barrel as it were, and the next direction is more likely to be up. And we're hoping next year we'll have a low single-digit organic growth rate overall for the business, we hope. But it's somewhat dependent on the economy and what situations occur with the tariffs because that will obviously still has got -- still have some impact to us [car bins] if suddenly they went away for any reason.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [39]

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Okay. And looking next year for Innovia, given there's a lot of moving parts here in the year for you and Innovia with the start-up of the Mexican plant and so on, is there a benchmark or some kind of range that we can look at for revenue growth for next year given that you're starting off now with a cleaner slate? And how would we look at that revenue growth going into 2020 for Innovia?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [40]

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Yes. Well, it's a pass-through business. So I think you have to bear that in mind, the movement and direction, the breath of resin is down more than up. So if dollar revenue increases it would probably be strengthened enough. But we're really focused on improving the quality of earnings. So we do expect to make progress again next year. I think the fourth quarter, it is a business that has most -- makes more of its money in the first half than the second half. So you'll probably see that again in the second -- in the fourth quarter to come -- in the next quarter, but without a decline into -- further improvement in the results at Innovia next year.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [41]

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You'd indicated kind of mid to high-teens as a run rate you're looking for, for next year. Any reason why that's changed?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [42]

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No.

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Operator [43]

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Our next question comes from Maggie MacDougall from Cormark.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [44]

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I'm just wondering if you could update us all on whether you have any changes in your view on the M&A landscape? Or if you see any changes in price expectations from sellers given that the label segment organic growth has started to come down a bit? And then secondary question to that is at what sort of debt ratio, as you're waiting for better prices, do you start considering buybacks or other ways to return to capital to shareholders?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [45]

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Yes. So good question. So I think we certainly have a good landscape of M&A activity on the way. There is 3 areas of the company. So CCL Design is the one that is most prevalent, so we have the most things going on. Probably the second one is Avery, so we have a number of things going on with direct-to-consumer space at Avery. And the third one we're beginning to talk about this bolt-on acquisitions of Checkpoint, principally in the area of RFID delivery into [power].

So I think on the second part of your question, I think our runway track hasn't changed. So once leveraged up, get into those low 1s or even below 1, we'd have to think about other options. But right now, M&A is still #1 priority for right-of-use of excess free cash.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [46]

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Okay. And so I think on past calls, you've commented that the price has been an issue for you. Am I right to understand then that there has been some movement in price to make things a bit more appealing to you?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [47]

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Well, I think in the labels space, this traditional package labels space in our Home & Personal Care and Food & Beverage business, valuations in there are still pretty unreasonable. So we're not -- we don't have a long list of things -- we have long list of things there, but nothing very actionable driven by problematic valuation. But in the CCL Design space with Avery and also Checkpoint, there are definitely things coming along there, which look quite interesting.

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Operator [48]

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And our next question comes from Stephen MacLeod from BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [49]

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I just wanted to follow up on the Innovia conversation. I sort of expected that based on your previous comments, that the back half of the year would look a lot like first half. But I guess, with the past repricing, that didn't happen for Q3. I just wonder would you expect Q4 to sort of look a lot like Q3 at this point?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [50]

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Sure.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [51]

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Okay. And then when you talked about sort of mid to high-teens for next year, you're talking about EBIT dollars?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [52]

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EBITDA.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [53]

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EBITDA dollars in the mid- to high teens. Okay. And then just...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [54]

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EBITDA margins. I think Walter's question on the last call was about EBITDA margin in the mid- to high teens, and that's probably a reasonable number. So if you look at EBITDA margins 9 months period-to-date, they were 15.7%. In fact, we'd expect to make some improvement on that in 2020.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [55]

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Okay, thank you for clarifying. And then can you just talk a little bit about the CCL segment margin. I mean we obviously had some very nice growth on a year-over-year basis. Can you talk a little bit about the drivers and how you expect that to evolve in 2020, or maybe Q4 and into 2020?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [56]

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Well, it was really mix-driven, Steve. So we had said it in our prepared remarks, we had a good quarter at CCL Secure. So that's really what drove the margin to be where it was. So that's -- and we had a bad quarter this time last year. So a lot of the improvement you can see there is operating margin, really a mix effect of CCL Secure. That was by far and away the biggest driver.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [57]

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Okay. Okay, that's helpful. And then in terms of (inaudible) for CCL, I just want to make sure I understand it correctly. You sort of talked about flat year-over-year sales revenue and potentially leading into some low single-digit growth into 2020. Is that the way to think about it?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [58]

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Yes. I think we may have some. I think we may have sort of a flat, flat profitability. I don't think we may have similar sort of organic growth in the fourth quarter in the low single digit. It's really hard to say. The problem is the month of December and we're a bit sort of gun shy after what happened in June when some of our customers called an early shout for the July 4 holiday, and closed plants a little earlier and took some extra vacation. So you never know what could happen in the month of December. It's a bit of a lottery. And that's the thing that's very difficult for us to predict. So October, I can tell you looked a lot like Q3. So -- but in November, we have Thanksgiving and then in December, we have early shoppers for Christmas in most of the regions where we operate. So that's why we're a little nervous about -- given the current state of the world as well as the macro situation.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [59]

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Okay, okay. And sorry, just to clarify. When you talked about flat profitability, do you mean margin profitability or dollar profitability?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [60]

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Flat, flat operating -- flat to down operating income dollars, EBIT. Because I think if we churn any improvement on the amount with regard to that, or really good performance, if it was down a little bit, that wouldn't surprise us.

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Operator [61]

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And our next question comes from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [62]

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All my good questions have been asked, so I'll be a glutton for punishment and ask you if there is any change in the tone of discussions on sustainability?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [63]

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Sure. I mean it's an everyday discussion with all of our customers. They're all under pressure to do something about the world waste stream and we have a whole bunch of product that could help them do that. It's all about helping them recycle their primary packaging, which is the bottle -- where they put their liquids and pills and whatever else they may get inside. And we have a lot of labeling technology that would enable those to be put back into the stream a lot easier than they are today. But it's -- a literally every day conversation because, as you might imagine, they're all under pressure to act. So very heightened and very active.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [64]

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Has it resulted in any change in your raw materials purchases?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [65]

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No. None so far. I think the main thing is how to make bottles easier to recycle. So it means the bottles have to have recycled content in them and you get recycled resin in those bottles you usually buy, taking the old bottle, taking the label off, cleaning it, and then putting the recycled resin in with virgin resin to make up a new bottle with part of the recycled resin in it. And that's flavor of the month right now.

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Operator [66]

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And our next question comes from Ben Jekic from GMP.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [67]

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I have a couple of questions. I guess first question, Geoff, is on the direct-to-consumer growth. We've seen over the last quarters, quarter-after-quarter, generating a double-digit or close to it growth. Can you maybe give, sort of bigger picture, a view of why that is happening? What is the trend behind it? Are you taking share from someone? Or is it just a fact of being a small basin and kind of growing positively?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [68]

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No, it's just the way people are sourcing printed materials. So the history in Avery was to provide software, provide preformatted labels, get them to containers and containers in small businesses and departments at big companies since small departments at big companies would print their own labels or with an inkjet printer or laser printer. And now the world is moving to online imaging and doing that on the Internet, it's very easy to do. And let's just -- we're just riding that wave. So -- and I think we're using our brand position and knowledge of these sectors, labels, tags, badges, things where we have unique consumer insight into what they want and then capturing the growth through understanding how that phenomena can help our business.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [69]

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Okay. And second question, still sticking with Avery. And I'm going to take a swing at asking for some directionality in what you expect in terms of profits. Last year in the fourth quarter, there was a relatively modest, in dollar terms, drop in EBIT in the fourth quarter in Avery. Is that something you would expect to -- this year or will it be more pronounced? Or...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [70]

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Definitely, that's what we'll think about. I'm not going to speculate on what Avery's profit is going to be for the coming quarter, Ben. But we're expecting Avery to have a record year.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [71]

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Okay. And then the last question is just if I could ask you to repeat, you said so for the new -- for the Innovia facility, or rather Treofan, there was $1.5 million in start-up costs.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [72]

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Yes. That's just the incremental impact on the P&L. So depreciation on the line, scrapping the size of extra people, all the things you -- extra energy, all the things you go through when you start up a very large piece of equipment. So I think when we were asked to give guidance on what we thought the impact of that might be, we initially said up to $10 million, then we narrowed it from $3 million to $5 million. I think, at this point, I would say it's at the low end of that $3 million to $5 million range impact on the second half.

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Operator [73]

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(Operator Instructions) And we have a follow-up question from Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [74]

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Just two quick follow-ups. Geoff, one more on the piece of equipment in Mexico. So if you're recurring $3 million-ish of start-up costs this year, which obviously won't repeat next year, plus I would assume you'd get some payback on that investment next year, so are you thinking about it as the bulk of whatever profit improvement you're expecting next year in Innovia will come from that line, specifically the absence of start-up costs plus whatever benefits you would expect to realize from that?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [75]

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That's a very accurate analysis, Adam. I would say, yes, so the area of improvement for the profit next year would largely -- well, a big chunk of it will come from that line starting to deliver some contribution to the bottom line through additional sales and additional throughput margin. So that's where a big chunk of it will come. I think we've also got some things to do in Europe operationally. We have a big plant in the U.K., so that's a -- and that's the other chunk of it. So it's between those 2 businesses, that's where the improvement has to come next year. The other 2 -- the other plants are too small to really move the needle.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [76]

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And so the book on the resin recovery at this point is pretty well closed in terms of what you lost and then what you recouped?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [77]

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Well, I don't think we recouped everything. So we're sort of -- we're still a bit of a hole, but the world also moved on. Resin is benign to down, so that's good. So we're not seeing anything to worry about in the resin environment currently or any other raw materials. So that's also helpful.

We have had some wins this year on currency from the British pound being as low as it's been, so obviously, our export sales for the U.S. have benefited from that. So that will probably go away next year at some point unless there's a complete cataclysm from Brexit. But we may well have a better resin environment, so I think that rounds it up.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [78]

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Yes. And just one last one on CCL organic growth, Geoff. So in years past, you were up 5% to 6% consistently in what was a pretty robust global economy. Now you're in the low 2s, and I don't know what you'd characterize this as, but perhaps a dodgy global economy. So can you give us a sense of kind of what your expectations are, best-case, worst-case scenario for -- in terms of CCL segment organic growth depending on what the macro is doing?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [79]

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Yes. Well, we're going to be -- I mean I think it would be foolish to plan for a 5% or 6% growth in 2020. I don't think any companies in our industry that would be seriously contemplating that, I don't think we are either. So it will be in a flat to low single-digit range. So I'd be kind of surprised if it sort of morphed into an actual decline. And we've had -- some of our businesses have got -- will have good easy comps next year. We've had a difficult year in our aerosol can business, but that's starting to now come back. So we're expecting some improvement there next year. So I think a reasonable planning assumption for us is low single-digit growth. If it was flat or it was down a little bit, I wouldn't be highly surprised by that. But it just depends on what happens in the world really, what the difference between those 2 numbers really ends up being. But I think that we have some counter things going on. I think we're going to have a good year next year in currency. I think we will have a much better year in aerosol cans, so you got a couple of things there. And then the CCL Design space, our electronics business is also -- done very well this year and there's a lot of good things going for us next year. So we see enough things in -- on the horizon that are sort of plus points to give us some confidence for planning a low single-digit growth, a reasonable assumption for planning for next year.

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Operator [80]

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And we have a follow-up question from Mark Neville from Scotiabank.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [81]

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Maybe just a couple of quick follow-ups. Just on the new line entry in -- and I apologize if I forget -- forgetting this right now. But Geoff, can you remind us the -- I guess, the incremental sales capacity, if any, with the new line or is it more sort of just a margin opportunity?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [82]

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I think -- we definitely have 20,000 or 30,000 tons of capacity to fill. So -- but we're not seriously expecting to do that in 1 year or 2 -- even 2, frankly. So the quality of the incremental volume is more important than the quantity, but it's pretty significant the amount of capacity we have to sell. What's more -- I think it's -- more important to us is what price we that capacity and our intent is to be pretty disciplined about it. But the capacity load is quite significant. So that's what we now have is in the form of Treofan operations, we now have quality 80,000 tons of capacity load we can sell, and that's quite a bit more than we had certainly in 2019.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [83]

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So the 80,000 in this -- the legacy, you're adding 20,000 to 30,000?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [84]

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80,000 is what we now have -- now have is total capacity terms. And we have probably 25% of that available as incremental over what we had before.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [85]

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Right. Okay, now that would make sense. Maybe just the last one just on Avery. The business is clearly trending much better year-to-date. I think the quarter sales up 5%, year-to-date, 4%. Is it sort of safe to assume that essentially, again, maybe back-to-school is a bit better, but essentially all the growth, is that direct-to-consumer business?

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [86]

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It's -- a big chunk of it is direct-to-consumer. We did have a good back-to-school in North America, so that's (inaudible) faster. It's a combination of the 2 things. First of all, media businesses was kind of flat.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [87]

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Right. So again, I guess without getting too specific, but next year, if this business does grow low-single digits and it's direct to consumer-driven, directionally margins should go higher.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [88]

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Yes. That's the good thing. So we made good margins in direct-to-consumer. We can have possibly what we call the organizational product business is low margin. So if we get $1 of sales, replace it with $1 of sales there, obviously, we get the margin impact uplift. And we've seen that this year, we've seen that in the third quarter. I think we'll see a bit of it in 2020.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [89]

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Okay. And when you're buying these businesses in direct-to-consumer, what kind of multiples are -- roughly of these assets selling for? Or are like the expectations...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [90]

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Well, they're all public. We published all of them. They're all on the website if you want to have a look. But there's -- we bought them all in the 4x to 6x EBITDA range. And they have no cap -- and they no real capital needs. So it's a knowledge business. So the free cash flow profile is more than interesting.

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Operator [91]

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And we have a follow-up question from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [92]

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Just a quick one on Innovia. Now that you've had Treofan for about 1.5 years and have got the new Mexican line open, do you envision any restructuring, any significant restructuring of the sales force or...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [93]

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Yes, I think you may see us a few -- I think we will take some actions in -- at Innovia to restructure the overhead structure of the division in total. And we may -- depending on what happens with volume, we may take some downsizing actions in -- for the last -- some of our operations around the world. But it will be dependent on what the volume outlook is. But we're certainly planning to do some -- continuing to make changes to make the operations run better. But in terms of material, not big -- not large numbers of people and not big time -- one-time expense.

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Operator [94]

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And we have a follow-up question from Stephen MacLeod from BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [95]

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Just a quick follow-up question here, Geoff. Just on the CCL segment, I just wanted to just talk about what would be the major year-over-year margin drivers in Q4 that would cause profits to be flat? Because when I look at last year, it looked like last year was a reasonably -- well, last year...

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [96]

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So we had a -- one of the big variances was in the security business. So we had a lousy Q3 last year and a bumper Q4, and we haven't had that divergence this year. So a lot of it is really around the CCL Secure. And I think the rest of it just some conservatism or what we see in the packaged goods industry and some concerns about what people may do in terms of just demand levels in the fourth quarter. If -- because we -- our demand is really driven not by what we sell but what we are producing. So if they decide to close down a plant or 2 a little earlier than they might otherwise do for the holiday season, then that would have an impact on us in the month of the December. So a combination of those 2 things.

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Operator [97]

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And I'm showing no further questions. I would now like to turn the call back over to Mr. Geoff Martin, President and Chief Executive Officer, for closing remarks.

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Geoffrey T. Martin, CCL Industries Inc. - President, CEO & Director [98]

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Well, thank you very much, everyone, for joining us. We look forward to seeing you at the end of next quarter and telling you about our performance for the year as a whole. Thank you for joining us.

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Operator [99]

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Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.