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Good morning, ladies and gentlemen. Welcome to the CCL Industries' First Quarter Investor Update. Please note that there will be a question-and-answer session after the call. The moderator for today is Mr. [ David ] (sic) 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.
Good morning, everybody. This is Geoff Martin standing in for Don Lang. You'll find our investor presentation today at www.cclind.com on the Investors page and there you'll see a set of slides there that we're going to talk you through this morning. I'll now hand over -- straight over to Sean, who'll take you through the numbers.
Thanks, Geoff. I'll turn everyone's attention to Slide 2 and remind you that our business faced known and unknown risks and opportunities. For further details of these key risks, please have a look at our 2018 Annual Report and management discussion and analysis, particularly the section titled Risks and Uncertainties. Our annual and quarterly reports can be found on our website cclind.com or on sedar.com.Moving to Slide 3. Interesting quarter. Before we get to the financial results, we had the adoption of a new accounting standard, IFRS 16, accounting for leases. So leases that were -- and rental agreements that were previously accounted for as off-balance sheet operating leases are now accounted for on-balance sheet as lease liabilities and a right-of-use asset. In so doing, we've added at the quarter end approximately $167 million of lease liabilities and $162 million of right-of-use assets. In the absence of recording a lease expense, our EBITDA has increased by $10.9 million for the quarter and we've had a corresponding increase in our operating income of $1.7 million and offset by a $1.7 million interest expense for those leases. In so doing, there's absolutely no impact on our cash flow for the quarter.Turning to Slide 4, our statement of earnings. First quarter of 2019 was a solid quarter for CCL Industries. Sales growth, excluding the impact of currency translation, was 8% to $1.33 billion compared to $1.23 billion in the first quarter of 2018. The growth in sales can be attributed to organic growth of 2.9% and 5.2% acquisition-related growth. Operating income was $204.8 million for the first quarter of 2019 compared to $200.6 million for the first quarter of 2018.Geoff will expand on the segmented operating results for our CCL, Avery, Checkpoint and Innovia segments momentarily. In the first quarter of 2019, restructuring and other items was an expense of $1.4 million, primarily for severance costs associated with Innovia's U.K. operations.Restructuring and other items was an expense of $3.3 million in the 2018 first quarter due to Checkpoint restructuring and acquisition-related costs. Net finance expense was $22 million for the first quarter of 2019 compared to $19 million for the 2018 first quarter. The increase in net finance costs is primarily related to the adoption of IFRS 16 leases, resulting in additional lease expense or interest expense of $1.7 million. We also had a slight increase in finance expenses associated with the primarily debt-financed acquisition of Treofan. The overall effective tax rate was 26.7% for the 2019 first quarter compared to 26% for the 2018 first quarter. The increase in tax rate is associated with the higher portion of taxable income being earned in higher tax jurisdictions. This tax rate may decline in future periods if a higher portion of our taxable income is earned in lower tax jurisdictions. Net earnings for the 2019 first quarter were $123.6 million compared to $118.7 million for the 2018 first quarter. Moving to Slide 5. Basic earnings per Class B share were $0.70 for the first quarter of 2019 compared to $0.67 for the first quarter of 2018. Adjusted basic earnings per Class B share were $0.71 for the 2019 first quarter compared to adjusted basic earnings per Class B share of $0.69 for the first quarter of 2018. The adjustment to the 2019 first quarter basic earnings per Class B share included a $0.01 increase for restructuring and other items. The increase in adjusted basic earnings per share to $0.71 is primarily attributable to an increase in operating income of $0.02, a $0.02 improvement in corporate costs offset by $0.02 for a change in effective quarterly tax rate and interest costs.Moving to Slide 6. For the 12 months ended March 31, 2019, free cash flow from operations was $383.3 million -- was $440.5 million compared to $461.9 million for the 2018 12 months.This reflects a decrease in net noncash working capital and an increase in net capital expenditures impacting free cash flow. Net capital expenditures for the trailing 12 months ending Q1 2019 was $320.1 million compared to almost $270 million for the prior trailing period.Turning to Slide 7, the cash and debt summary. Net debt as at March 31, 2019 was $2.2 billion, an increase of $275 million compared to December 31, 2018. The increase was primarily driven by $167.5 million of additional lease liabilities, a new bilateral loan facility of $27 million and a reduction of cash on hand. Our bank leverage ratio increased to 2.1x, reflecting the increase in net debt without a proportionate increase in EBITDA. This goes back to the IFRS 16 new accounting where we added $167 million of debt in the quarter, but only $10.9 million of EBITDA.The company's overall finance rate was 2.65% at March 31, 2019 compared to 3% at December 31, 2018. This decrease in interest rates is a result of a reduction in margins on our variable drawn syndicated debt.For the balance of 2019, management expects to continue to delever the balance sheet. Geoff, over to you.
Thank you, Sean. Good morning, everybody. I'm on Slide 8, the highlights of capital expenditures. For the quarter, we're planning to spend about $350 million for the year, that's our forecast. And so that's about where we come into the year of 2019.Page 9, some views of the CCL segment. We had good organic growth of 4.2% in the quarter. That was actually reduced a little bit by the performance of CCL Secure, which I'll go into in a minute, and it also impacted our operating margins. So for each of the last 5 years, that 18.1% you see there on that slide from the year of 2018; 2014 was 16.4%; 2015, 16.8%; 2016, 16.7% and 2019, 16.7%. So that points to an exceptional first quarter, really driven by the performance of our currency business last year.Recently, the Americas were up mid-single digit organically. Europe and Asia Pacific were up low single digit. Asia Pacific, if you divide that into real Asia and Australia and South Africa, Asia was up double-digit and Australia and South Africa were both down. So we'll talk about that shortly on the next slide. So Page 10, a few more highlights for you. Solid quarter at Home & Personal Care, especially in the label and tube product lines. We did have a lower quarter in the United States of aerosol volume that held profits to a modest underlying increase. Healthcare & Specialty flat. Food and beverage continued to drive very strong organic growth across all product lines and geographies and that drove improved profitability. At CCL Design, our electronic sales were somewhat surprisingly up double-digit organically, really on share gains and the strong U.S. dollar helped profitability in that space. Automotive as expected, was down slightly and profits impacted by start-up costs in Mexico. At CCL Secure, we had good performance in Australia and the U.S. Constant currency profit in those operations combined was up modestly. But we had lower profits in the U.K. and Mexico where we had a stellar performance in first quarter of last year and it's really in those 2 operations that resulted in the lower profitability for the segment -- both the segment and CCL Secure, although CCL Secure's margins remain quite significantly above the average for the segment.Page 11, a snapshot of our joint ventures. Solid quarter in the Middle East in particular, a bit of a slow start in Russia in higher costs for a new line we're putting in there. Page 12 highlights Avery. A very good quarter, but somewhat flattered to deceive. If you remember, we had a price increase in the 1st of January, 2018, and that brought forward some sales into fourth quarter of 2017, which gave us a pretty low hurdle to overcome. But even despite that, we're quite pleased with the results, really driven by the continuing rise of our direct-to-consumer product lines, which grow at double-digit pace.Page 13, Checkpoint. As we expected, difficult hurdle to overcome this quarter, 1.8% organic decline. Last year at this time, we had a 16.8% organic growth rate driven by these 2 large chain-wide technology orders we had last year. Excluding sales to those customers, the underlying base business growth was pretty solid. Apparel labels were up double-digit, including RFID inlays. And we are planning some operational changes in the Checkpoint space, and we do have some operations making apparel labels outside of the regions where customers source and we are planning to make some operational changes that will require some foot -- changes to our footprint and where we make products that will result in a $6 million restructuring charge with a 1-year payback. We should complete the project by the end of the first quarter of 2020.Page 14, Innovia. Good news story here, much better results than we expected. The sales growth you see here recorded was all acquisition-driven in the legacy Innovia business, pricing and mix offset lower volume. But the better mix, pricing and productivity actions we took and stable European resin cost really helped the P&L. And Treofan benefited from lower U.S. resin cost and contributed positively. I'm heading down to Mexico tonight after our Board meeting today to have a look at the new BOPP line, which we're planning to start up probably sometime in June. So any cost impact from that startup is more likely to impact Q3 than Q2.So Page 15 there's a summary on this slide, which I'll leave you to read at your leisure, which shows you the adjustments, gives you a pro forma '19 versus '18 for each of the segments. And as you can see here, the impact at operating income is pretty immaterial and not terribly material at EBITDA, but it's there for you to read as you see fit.The Page 16, outlook for the quarter that's coming up. Our CCL Secure business has all the plants are currently fully loaded. And we're -- in the next quarter, we'll have the reverse of what we had this quarter. Q2 last year, we had a volume hiatus in a couple of operations, that won't be the case this year, so we're expecting that business to outperform in the coming quarter. The base CCL global business demand is stable. Avery trends continued at the first quarter rate in April. The June back-to-school demand, however, will dictate the quarter in how well we do versus the previous year comparatively, very difficult to predict when that starts up. Checkpoint comps will ease significantly as the quarter progresses. So those technology orders we had last year moved -- ran into the first 5 or 6 weeks of the current quarter and so we'll have a tough comp in the first part of the quarter, easier comp in the second part. We do expect Innovia progress to continue. And as I mentioned earlier, the BOPP line starts up in June. And foreign exchange was pretty minimal in terms of its effect this quarter and we expect the same in the quarter coming up at today's exchange rates.So that's our opening remarks. Operator, if you'd like to open up the call for questions, we'll take them.
[Operator Instructions] And our first question comes from Adam Josephson with KeyBanc.
Geoff, a couple on CCL to start. Americas grew at a faster rate than, obviously, Europe and Asia Pac. Obviously, U.S. GDP growth was good in 1Q, but there have been a number of signs of a recent slowdown here. So can you just talk about what specifically in the Americas was stronger than in other regions? And just related to your comment about CCL global business demand being stable in 2Q, can you just talk just about just demand trends in CCL broadly?
Sure. Well, I think the thing to point out -- actually the fastest growing region we had was Asia. So -- well, I mean Real Asia. So in Asia, we grew low double digits. But Asia Pacific, which includes Australia where we have the last CCL Secure operation, that kind of dragged down the average to low single digits. It was really driven by -- the performance of Asia was driven by CCL Secure. But on the Americas, it was just solid. It was -- the growth rate across the businesses was pretty solid. And we haven't seen much change in April. So we had a pretty good month in April. And the outlook for May is no different. So I think in the consumer goods category, we're seeing reasonably stable demand. We haven't seen any signs of a real slow down. We've seen it in automotive as you would might not be surprised to hear, but not in other places so far.
So even with all the volatility in 1Q results from the likes of 3M and others, you have not seen many signs of a slowdown other than in automotive?
Yes. That's correct. In automotive, we, for sure, have seen it. In electronics, I think we have gained share. So we grew double digits in our electronics business at CCL Design. But I think a lot of that is share gain. We know that industry is not really growing at the moment and the number of devices being sold is kind of flat or even slightly down, but we have picked up some share and some new applications, so that's really what's driving our performance there.
Got it. And then switching to Innovia, you mentioned results in this segment were better than you expected there or certainly better than we were expecting. How much of that was legacy Innovia versus Treofan? And can you just help us with what exactly was better than you were expecting, was it U.S. resin cost falling? Or other factors?
Well, I think mix was a big factor. So we had very good mix in Innovia. So frankly, that -- a lot of that has to do with the internal sales of security film, which is the highest margin product we have. So that really helped the mix. Resins was stable in Europe. They didn't go down in Europe, but they went down in the United States, so resin helped. And a lot of the productivity initiatives that we started in the large operation of the U.K. bought some provision. So it was really a combination of all 3 things. All levers all work together and the results you can see. I mean it was against a pretty poor first half. So it wasn't going to be too difficult to look good compared to the previous year.
Sure. And just last couple, how much did Treofan contribute in the quarter to EBITDA that is?
EBITDA, I wouldn't like to say, but I think operating income a few million.
A few million? Okay. And then just for the balance of the year, just given the lack of visibility we have into the combined Innovia business and just all the moving parts of the price increases, falling resin, the new line coming up, how do you have us think about just the total Innovia segment in 2Q and beyond? Just very generally.
Well, I would be surprised if Q2 wasn't similar to Q1 and the comps get easier than they were in Q1. So Q2 last year was not very good. It's not going to be difficult to show a good distance between last year's performance and the current year. The second half is more difficult to predict because we don't know what the impact of the startup of this line in Mexico is going to be. We've said to people in the external world, well, if that costs us $1 million dollars to start up, we'd be very pleased. And if it cost $10 million to start up, we'd be very disappointed. And probably the truth is somewhere in between. I mean where in between, it's hard to say.
And then just last -- when you say 2Q maybe similar to 1Q in terms of the year-over-year EBITDA growth you're talking?
Well, if you look at the EBIT -- if you look at -- no, I think probably absolute ...
Is it absolute? Okay.
Because last -- Q2 last year was really not very good. As you look at the numbers for last year, you'll see it wasn't good at all.
And our next question comes from Stephen MacLeod with BMO Markets.
Just a quick housekeeping note on IFRS 16. Sean, would you expect that the impacts you saw in Q1 would be indicative of the impacts you would expect this year, all through the year?
Yes. Roughly about $10 million, $11 million of EBITDA per quarter. And the debt number will decline slightly as we roll off the principal payments or add new leases. So that's probably $10 million to $11 million of EBITDA per quarter.
Okay. That's great. And then just turning to the Avery segment. The DTC segment has been very strong over the last couple of quarters. Can you just talk a little bit about what's driving that strength, I mean, particularly the double-digit growth you saw this quarter?
Yes. Well, we've seen double-digit growth in direct-to-consumer first, multiple quarters in a row now. And it's just driven by the phenomena of web-to-print digital printing, it's -- we have a number of our label in car products, on various URLs on the Internet and where consumers can access them, make designs and then order them in small quantities from us digitally printed and it's on a roll, that's just the only way I can put it. So it's up to about -- we'd like it to be bigger than it is, it's over $100 million now of the annualized revenue at Avery. So its impact is not yet as big as it might be over time. And we're, obviously, looking to grow it as fast as we possibly can both organically and by acquisition.
Okay. And profitability-wise, is security above average margins?
It's around the average. Depends a little bit -- if you look at it on the year, so this quarter, it was above the average. If you look at it over the year when we get that big bump in the summer in the core business with the back-to-school business. So you look at it annually, it's average or slightly above. But in the current quarter, it's quite a bit above.
Okay. Okay, that's great. And then just turning to Checkpoint. One of the things that you're doing is, I believe, you're sort of in-housing RFID inlay. Can you just talk a little bit about what your expectations are in terms of the RFID market opportunity versus maybe where you were a couple of years ago and where you are today?
Well, it's a -- apparel label is -- the apparel industry is, I think, over in maybe a decade or 2, I think will adopt this technology universally and niche as it were -- and we're not a huge player in it, but we're a niche player and our strength is really in Europe. So we have a number of retailer contracts in Europe for apparel labels and tags with RFID inlays. Some of which we use to make in Europe, some of which we now make in Asia. And the changes we're planning to make to that business really are around about expanding our Asian footprint, particularly in Bangladesh and making all of our products there in country rather than importing them, and moving them across borders and incurring shipping cost and time delays and all the rest of it.
Okay. Okay. That's helpful. And then maybe just finally on the CCL segment. You mentioned the electronics business was surprisingly strong. What do you think is leading to your share gains?
I think it's just blocking and tackling, Steve. Since we bought Worldmark in 2015, we've done -- we've made a lot of changes that, I think, are coming to good fruition. So really improved our plants, really improved our service capacity to deliver, R&D teams are working on pretty interesting new applications, which are more functional inside devices rather than decorative on the outside of devices. And the changes we've made, I think, are just working. And so I think competitively, we're doing -- we're getting better shares than the market would suggest given what you hear about when you listen to the calls of people making those devices, which is all kind of flat to down.
And our next question comes from Walter Spracklin with RBC Capital Markets.
So going back to Innovia when you indicated that you're from $1 million to $10 million in startup costs there and if we split the difference and, call it, $5 million, are you suggesting that kind of you run at $25 million for the couple of quarters? And then would you drop to $20 million? Or is there offsetting ...
Yes. I think it's a startup period. So I don't really know whether it's going to be $5 million or $2 million or $1 million or $9 million, Walter, we just don't know. And so -- but I think it won't take more than the back half of the year to get the line fully up and running. But it's -- those pieces of equipment are a good-sized football pitch, and it's 10 meters wide, it's the largest line of its kind in the world. We just know it won't be free of charge to start up, but exactly how much? But I'd surprised if any issue in starting it up would extend beyond the end of the year and hopefully, sooner than that. But that's to quantify for you, that's the best we can give you. If it goes well, about $1 million. If it doesn't go well, about $10 million. And chances are it's somewhere in between whether that's $2 million or $8 million, I wouldn't care to say.
That make sense. And certainly, when it's done and when we look into 2020, is your margins for the first half a good basis for this new run rate once these are done or should we see even higher margins if you're -- if the revenue comes in based on that.
Yes. It's going to be dependent on that, and sort of the tropical cycle, depending on what happen to resin. So we would hope to get this business up in sort of mid- to high-teens EBITDA margin that's kind of what we're targeting. So it's a combination of Treofan and Innovia, so that's what we're working on.
Okay. That's fantastic. Turning over to CCL, food and beverage has been a great contributor for that division. I think you were discussing a lot premiumization your shrinkwrap on some of your big consumer goods. When do we start to lap at it? Or is there another line that's going to come down the pipe that's going to keep this curve going? Or are you -- is there a period where there has been this puts for that and you've had some great products to fill that need by a lot of your customers and is there a point when we start lapping these growth rates?
Well, I don't see any signs of it right now. And if you listen to the commentary from most of these companies, premiumization is how they're growing their revenue, it's not by unit volume of liquid. So it feels to us as though that trend is there for a good while to come. And more and more of them are targeting the ABC consumer, the consumer that has money and volume and to pay more for the product in the channel where they're selling it. And it's hard to see how that can change in the near term.
And are you seeing your existing customers just buying more of that? Or are you getting more and more customers who are shifting to that premium?
It's a bit of both. Yes. So it'd be more premiumizing with the customers we already have, and then some new customers coming onboard that we didn't have before, a combination of the 2.
Okay. Last question here. You mentioned a footprint change in Checkpoint, can you give us a little bit of detail what happen -- what's going on there?
Yes. It's really just, as I mentioned to Stephen on the call there, it's about manufacturing apparel label products in the countries where our customers source materials, source finished apparel. And we make some of those products in developed world markets today and we're planning to move that production in country where these products are sourced. So we're putting a pretty big expansion on that facility in Bangladesh, and we've got a large operation there already which we plan to expand. And that's really what it's about.
And our next question comes from Scott Fromson with CIBC.
Just -- most of my questions have been answered, but just a couple of questions on the CCL division in core labels, are you gaining market share with the big brand customers?
Well, I would say in the Personal Care space, we have done over the last year or 2. I would say in the food and beverage space we've just written that trend I was talking to Walter about was a premiumizing phenomena. And I think in the rest of the CCL business, I would say the answer is no. We're just growing with the customer. So the places where we've been gaining a bit of share have really been in food and beverage and HPC.
Okay. And are you seeing any pricing pressure or is premiumization really into revenue?
Well, we always have pricing pressure. I mean all these consumer companies have got their own challenges with the changes in the retail world, so pricing pressure never goes away. But it's all the combination of pricing pressure and the need to innovate and so it's the combination of those 2 things. We're always in discussion with our customers and honestly, we prefer the conversations about innovating to the ones about lower prices, but it's definitely a mix of the 2.
Okay. And last question. Are you seeing any changes in customer supply chain demand? In other words, are customers trying to better managing -- manage their working capital and finding ways that CCL can help?
Well, they always are, they always want longer terms. So every customer on the planet wants longer trade terms. That's a constant battle and a constant challenge, but we're doing our best to keep an even keel.
And our next question comes from Mark Neville with Scotiabank.
Maybe if we can just talk about the Secure for business -- a minute, just so I understand sort of the language you're using. Okay. I guess my understanding was, I guess, Q2 through Q4 of last year, no major bank runs or bank notes -- sorry, runs. And it sounds like, I think, you said fully loaded in the MD&A for talking about that segment. So I'm just sort of trying to understand the quantum of improvement through some of the big note that you're running this year or if it's sort of more steady growth over last year as opposed to sort of some big step-up, if that makes sense.
Yes. Well, Q2 and Q3 last year were pretty dry and they won't be -- well, certainly Q2 will not be dry at all this year. And Q3 is always a down quarter in that business, but it won't be as down far this year as it was last year. And Q4, hard to say. It's a bit too far out, but we expect to be up pretty significantly for the year. We've got one large volume note running in Europe, which is a big part of that. Its margin profile isn't the same as some other notes we've run there in the past, but that's having an impact on the revenue picture certainly for the second quarter. And we've got some new issues going on in a couple of countries. No, no, no big conversions anywhere in the numbers, but just banks issuing new notes, a couple of denomination increases in a couple of territories. But we do expect to be up reasonably significantly for the year as a whole. We were down in Q1 because we have such an exceptional Q1 last year, but it'll be only good quarter that we had in that business for the whole year, Mark.
Yes. No. That's very helpful. Maybe just on Innovia, a few questions, I guess. You mentioned mix. I'm just sort of curious since you talked about pruning stuff before. I'm just curious if that was sort of a purposeful thing or it just sort of came in the quarter?
Yes. We definitely pruned off some low margin stuff, particularly in Europe. The better mix commentary that we referred to on the slide really is a function of the security film. So as we -- production volume in security film was high. So that's really what's really drove the commentary about mix.
Okay. And the startup cost in the second half, the 1 to 10, that's an aggregate, not per quarter, correct?
Yes. In total. Yes.
Yes. I guess the new plant, should we think about that more as a revenue or a margin opportunity, because I think you're talking sort of about high teen or...
Yes. It's the combination of the 2, Mark. I mean that 5x2 really old lines, I mean sort of prehistoric. And so we'll be closing those down and moving the production over to the new line which will run much, much more efficiently, much lower scrap, and et cetera, et cetera. But it will also create capacity to service the market better in the United States where there's probably more need for a supplier to be able to supply these films than there is in some other regions around the world.
Okay. And just on the resin pricing sort of spread dynamic. Firstly, you've raised prices you're benefiting from, I guess, resin sort of moderated. I'm just curious, I guess, just qualitatively is it has -- because I guess part of the problem last year was just the way the mechanism work and how often prices would adjust. How the pricing sort of -- how the mechanism -- how it's changed or how it's, if at all, give?
Well, it changed a bit. But I wouldn't say we fully solved that. But the problem we had in really 2018 was drinking out of a fire hose of resin going up double-digit every month almost. So it was really almost impossible to pass it on quick enough. And we certainly didn't have the mechanisms in place to do that. And -- so one thing stabled and the resin moves and we were able to sort of get the right conversations with the customers. So it's been a combination of those 2 things, those improved things. If resin was to gallop up again, I wouldn't have said we've got everything squared away on that front, particularly on the Treofan side. And I think we've done a better job on the legacy Innovia businesses, but we still got quite some work to do on the Treofan side where we've only been inside the business for 2 or 3 quarters now.
Okay. And I guess sort of doing all that or sort of, again, it's less a concern if resins are stable, but sort of fixing all those pricing mechanisms. Is that like a year or 2? Or is it quarters? And just how long that sort of could it take?
Yes. Realistically, I mean, given what we've got to do yet at Treofan, I don't think it's something we're going to solve in 1 or 2 quarters, it will take some period of time. But it's -- we've made a lot of progress. I mean -- so we're pleased with the way it's gone. And we've got a lot more to do now on the -- in the Americas with how Treofan going to the market and how they handle these things inside their own business.
Yes. No. Clearly, the results are much better. Maybe just a last one on Avery. It's hard to predict back-to-school but when I think about Q2, Q3 sort of combined year-over-year, is that flattish? Or is it still down just given some of the...
No. No, I think that we don't expect to have a down back-to-school season this year like we had last year. So I can say that. So it's Q2 and Q3, we added the 2 together and we'd be surprised if they were worse than flat. And I wouldn't be surprised to see it up slightly.
And our next question comes from Maggie McDougall with Cormark.
Just following up on Avery's comments that you've made so far. I'm wondering if we are starting to see direct-to-consumer outpace your declining categories.
Well, I think we just need to keep the scale of it in proportion. So Avery is a $700-plus million annualized revenue business and direct-to-consumer is about $120 million at its current run rate. So I think it probably has to get up to probably $200 million, $200-plus million before we'll start to see that happen. But once we get up to that pace, I think we will start to see the beginnings of annual organic growth again at Avery once we've got there.
Okay. On Checkpoint, you talked about how last year you had a really strong quarter because of the 2 big orders that you rolled out. And just curious if you were to adjust the growth in Q1 this year for that dynamic, what the base business has been performing at?
Mid-single digits.
Okay. Okay. Great. And then one final question and this is a larger picture question. I'm curious if you could just provide us with a bit of your view on how the current trade status between the U.S. and China and so on may or may not impact your business.
I don't see anything in our business that's likely to be impacted by the current trade issues. It may affect some of our customers. So we know some players in the electronics space have considered moving -- send the operations from China to places like Mexico. So we know some people have been considering that. So we'll be affected to the extent our customers are affected. But I think long term -- for the long-term health, the trade dispute needs to be resolved. But as of right now, I wouldn't say it's particularly hurting our business in China. And the domestic consumption business in China has been quite strong. So the government is being cutting the rate of VAT to stimulate spending in the country and the consumer goods industry, they're still doing quite well despite all the noise about tariff.
And our next question comes from Ben Jekic with GMP Securities.
I have 3 questions. And I apologize if some of them have been answered. But the question number one is on Checkpoint. So Geoff, you mentioned some changes to the footprint. I think you mentioned some incremental spending, but can you just sort of for modeling kind of indicate what some of those expenses will be through 2019?
Yes. So we're planning to spend about $6 million on making a bunch of changes in our operational footprint in the developed world to move it to the emerging world with a 1-year payback. So spend $6 million to get $6 million.
Okay. Perfect. And then just on Avery, and it was probably asked, but you had organic growth this quarter but that is still not the beginning sort of a sustainable pace at which the segment is going to grow.
Well, we'll have to wait and see. It's a -- we've still got some legacy product lines in there, ring binders, sheet protectors, indexes and dividers. Not much as we all love those products, it's hard to pretend that they are products that are likely to grow over the longer term. And they are multiple hundreds of millions of dollars between them, 200 -- between $200 million and $300 million depending on how you look at the category. So I think we've got to wait and see how these other product lines stabilize and how fast our direct-to-consumer business grows. But there are signs of it reaching the bottom and how quickly we'll start to see that business improve gradually over time and turning to sort of a dividend segment for the company where it just grows 2%, 3%, 4% quarter-on-quarter, we'll have to wait and see. But hopefully, in next year or 2 or 3, we'll see that happen.
Okay. And the last question is on the CCL Secure. So I understand there is one launch in Europe and then sort of the rest of the utilization goes to kind of replenishing of the exist -- of the volumes. Is that right?
Well, I think there's one large project in Europe and then a number of denominations. We've got some countries that have decided to issue a second denomination in polymer. So that's a factor, all the patterns this year versus last year. But we know for sure the business will be, in total, up this year over last year with a reasonably significantly.
And is there both revenue and profits?
Correct.
And our next question comes from Elizabeth Johnston with Laurentian Bank Securities.
Just going back to Checkpoint briefly in terms of the restructuring. When you say getting -- spend $6 million to get $6 million back. I assume that's coming through to margin as opposed to an increased opportunity for revenue growth.
Correct. I think we'll see better revenue growth too because it's pretty difficult. As you imagine, what we're doing making labels and tags in Western Europe and the United States shipping them over to Bangladesh or Vietnam and then we'll only need to bring them back again, it's not very operationally effective. So we'll probably get some pick up just in being able to service the customer better and quicker than we have and we are being able to do that today. So we do expect to get some revenue growth from these changes, but the driver is to be just operationally -- just a lot more effective than we are today the way it's currently set up.
Okay. Great. And then going back to Innovia. In terms of the path to mechanisms that we've gone through, but can you give us some examples of some changes that you've made. Just trying to get a sense of if you're shortening the past 2 period or some other structural change to help us understand that process better.
I think we've commented about what we want to say, really, publicly on that. It's pretty obvious, we put prices up and we lost a little bit of volume at the bottom end which we weren't too disappointed to see happen. And it's still work in progress. How much longer time it will take us to fix it, particularly with the Treofan thing. We'll just have to wait and see. But I wouldn't like to comment any more than we've already done.
Okay. And just finally from me. In terms of your outlook for M&A, you've more recently discussed being on the sidelines, so to speak, given where evaluations have been. Have you seen any change to that?
So big transactions, no. We've got a pretty very healthy pipeline of bolt-on transactions that we're working on, primarily in the CCL Design and Avery space, direct-to-consumer at Avery. So those are the sort of 2 legs of the company where we're most active in right now. And -- but they're all bolt-ons, we don't have anything large or material there driven by the size of multiple expectations today and given where equity markets are likely to go in the next 3 years, which is probably more down than up. I think it makes sense to wait on the sidelines to be ready to move when things are a bit more rational.
Okay. Great. Maybe just one quick one for me on Innovia. In terms of the changing sales mix, should we expect some pressure on that organic growth number in Q2 as well for the rest of the year? Or do you think that you're largely through that process?
Again, I wouldn't like to say. It's a big surprise if you've seen much in the way of organic growth this year. We're not really focused on that. What we're focused on is getting our cost structure right, getting that line started up, making sure we've got good mechanical pass-throughs and we're operationally effective. So whether we're up 2 or down 2 is not a big driver for us.
And we have a follow-up question from Adam Josephson with KeyBanc.
Just 2 follow-ups. One, Geoff, on Innovia. So I -- you mentioned high-teens EBITDA margins are your target for that business. And you are roughly there in the quarter and then your sales were about 150. Just -- is that a fair run rate the ones -- I know you're adding a big line, but do you -- I ask if you consider the 150 a good sales run rate because I know when you bought in house ...
If you -- that's -- our budget for the year is around $600 million. So that's about what we expect this business size to be. We -- the fourth quarter is always the most difficult one in terms of margin. So we'll have to wait and see what's going on with resin when we get there. But yes, if we can have a $600 million business with 16%, 17%, 18% EBITDA margin, we'd be very happy.
And just one on that sales issue. So when you bought Innovia, they had $570 million of sales estimated for '17 and then Treofan was a little over $200 million...
I don't think that 570 includes currency, Adam.
Right. Okay.
[indiscernible] in that number, so you have to pull that out. So the run rate in the films business was then, I think, 300-and-change, 340, 350, something like that.
Right. Okay. Yes. Yes. No. I appreciate you're clarifying that, Geoff.
You've got a bit foreign exchange in there. These are all Canadian dollars numbers I'm giving you, so.
Got it. Okay. That's perfect. And then just on sustainability. Where do we think labels fit into that discussion? And just more broadly, as you know, plastic packaging has come under a great deal of scrutiny and mainly in developed markets even though at least from what I can tell, there's not much of any data supporting the claim that plastic is actually more harmful to the environment than other types of packaging substrates when you consider the entire lifecycle of the product. So where do you come down on this issue? And what do you think is likely to happen from here?
Well, I think, the subject is the container, not the labels. So the label is part of the container. And so whether it's a plastic container or a metal container or some other substrate like paper or corrugated board or, so everyone's focused on how do we make these linear -- little delinear recycling process. And I think a lot of the stuff that's going on right now to me doesn't make a whole lot of sense. In the beverage business, people look at glass, metal and PET and say well -- so aluminum is the most sustainable of those 3, which I don't think is necessarily a logical conclusion. I think that it's the only substrate that's worth money. So if you put aluminum into the waste stream, it's going to be extracted because it's got value whereas the PET bottle today doesn't and neither does a Tetra Pak, for example. So until something's done about in the regulatory environment to force -- to make those things worth money or taxable deposit schemes or whatever it is they're going to do, it's hard for me to see why consumer behavior would change. I think people running in a park in New York City are still likely to carry a PET water bottle. And until somebody does something about the regulatory system to force those things to be as linearly recycled -- sorry, nonlinear recycling, I don't see an awful lot of change really happening. But I think once that does happen, I think you'll start to see more rational behavior take place. And then we'll see where we go from there.
And when you say more rational behavior, what do you mean exactly?
Well, I think -- what I mean, I think, it's irrational to say a PET water bottle is bad because a PET bottle is a very easy substrate to recycle multiple times. It will go round a recycling process a thousand times, but the consumer perception of a PET bottle is trash and not worth anything. So they're more likely to go into waste stream than an aluminum bottle. But both can easily be recycled. And I think in the case of PET, using a lot less energy than you would do to recycle aluminum.
And then have you noticed any significant substrate shifts just in your business?
We've seen some marketing behavior to the consumer sensitivity. So we know a lot of consumer companies are trying to develop products that market to the sentiment, but I think that's just the edge of a change. If you want to really solve this problem, you have to recognize it's an issue and say we can't carry on doing what we're doing and probably will require some regulatory interference to make that happen. But what we see going on right now is marketing to the issue, more than solving it.
But not really changing the packaging that they're using in any kind of meaningful way.
So far, no. There's a lot of good intent. A lot of marketing to the sensitivity and some of which we're participating in. We have a whole host of products that are meaningful in that arena. And -- but I think it's a difficult thing to solve because it's hard for me to see how you can solve this issue without there being some cost to it. And the -- so the idea that we can go from the world we live in today to the world we probably should be in and that be free of charge to everybody is, I think, one of the problems.
Right. Well, there's a reason why plastic is so prevalent to begin with, right? It's so inexpensive compared to other types of packaging.
Yes.
And our next question comes from Stephen MacLeod with BMO Capital Markets.
I just had 2 quick follow-ups. One of them was just on the CCL Secure business. I know in the past, you've identified it as roughly a $200 million revenue run rate business. Is that...
A little bit more than that. A little 10%, 15% more than that.
Okay. Okay. And then just with respect to the last set of questions around Innovia. Could you just walk through the sales breakdown of Innovia? You were saying films was 340 to 350. And is the balance...
No. No. Innovia is all films. So the Innovia segment is all film, it's a combination of the legacy Innovia films business and Treofan. So we put together those 2 businesses.
Right. Okay. So when you're referring to 340 to 350, is that...
That was the legacy Innovia portion of it.
That's legacy Innovia. Okay.
Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I will now like to turn the call back over to Mr. Geoff Martin for any closing remarks.
Well, thank you, everyone, for joining us, and we look forward to seeing you and talking again in August. Thank you for joining the call.
Ladies and gentlemen, this now concludes our call. You may all disconnect. Everyone, have a great day.