Thoughts exiting Q3 – Overall, Q3 results were in line with consensus forecasts (details inside), while Q4 outlook commentary largely echoed the commentary at Q2 reporting (our estimate revisions were modest, noting comps get tougher looking ahead). The consumer backdrop continues to be relatively weak, with management noting some deflationary pressures across the business (particularly in Food & Beverage). As such, we continue to expect that CPGs will prioritize growing volume (e.g., via promotions), which we would view as a positive for CCL.
RFID the standout again this quarter – The standout this quarter was once again RFID, which almost entirely drove the >30% organic growth in ALS (in comparison, the industry is growing in the 15%-20% range). For perspective on the runway ahead, management noted that the apparel industry (which is the primary industry for RFID today) is still only ~33% penetrated today (directionally in line with commentary from Avery Dennison; see our note here for more), with the transition from hard tags to soft tags offering an additional avenue for growth. Looking ahead, construction of the Mexico RFID facility (focused on non-apparel applications) was completed in Q2, and the plant is currently ramping up production (expected to turn profitable in 2025). Given the higher growth and accretive margin profile, we see RFID growth as a catalyst for the shares.
Innovia recovery continues – Within Innovia, the industry recovery continues (+18.0% YoY organic growth; recall that 2023 results were impacted by customer inventory destocking + pricing headwinds), and we believe Q4 will be another strong quarter.
U.S. election outcome impact expected to be negligible – Given the Republican sweep in the U.S., there was some concern regarding what potential impact import taxes could have on CCL (recall that the company generated ~39% of its 2023 revenue from the U.S. & Puerto Rico). Given CCL has a global manufacturing footprint (including a large presence in the U.S.), management does not expect the company to be meaningfully impacted. Regarding CCL's presence in China (largely related to CCL Design and RFID), management expects to be able to leverage its global manufacturing footprint (e.g., Mexico RFID facility) to offset any potential headwinds.