CCL Industries Inc.

Thank you. Good morning, everyone.

Welcome to our second quarter conference call. We'll jump right in here.

Starting on Page 2, we have our disclaimer regarding forward-looking information. 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 2020 annual 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.

Moving to Slide 3. For the second quarter of 2021, sales increased 15.1% with organic growth of 20.5%, acquisition related growth of 1.5%, partially offset by 6.9% negative impact from foreign currency translation.

This resulted in sales of $1.41 billion compared to $1.22 billion in the second quarter of 2020. Operating income was $235.5 million for the 2021 second quarter, compared to $163.6 million for the second quarter of 2020, a 51.4% increase excluding the impact of foreign currency translation.

Jeff will expand on our segmented results of the CCL, Avery, Checkpoint and Innovia segments momentarily. Included in the second quarter results was an $8.8 million increase in corporate expense due to an increase in short-term and long-term variable compensation expenses for the comparative periods.

Consolidated EBITDA for the 2021 second quarter excluding the impact of foreign currency translation increased approximately 31% compared to the same period in 2020. Net finance expense was $14.1 million for the second quarter of 2021, compared to $15.9 million for the 2020 second quarter.

The decrease in net finance costs is due to a lower average debt outstanding for the comparative periods. The overall effective tax rate was 25.5% for the 2021 second quarter, up slightly for 25.1% effective tax rate recorded in the second quarter of 2020.

The effective tax rate was impacted by recent amendments to UK tax legislation enacted into law during the quarter, partially offset by a reduction in valuation allowances due to improved profitability at certain subsidiaries of our company. This effective tax rate may change in future periods, depending on the proportion of taxable income earned in different tax jurisdictions with different rates.

Net earnings for the 2021 second quarter was $153 million, up 55% excluding foreign currency translation compared to $103.9 million for the 2020 second quarter. For the six months period sales increased 14%, operating income increased 31% and net earnings increased 36%, compared to the same six-month period in 2020.

2021 included results from 11 acquisitions completed since January 1, 2020, delivering acquisition related sales growth for the period of 2%; organic sales growth of 12.1% and a foreign currency translation headwind of 4.5 – 4.7% to sales. Moving to Slide 4, basic earnings of Class B share were $0.86 for the second quarter of 2021 compared to $0.58 for the second quarter of 2020.

Adjusted basic earnings per Class B share were $0.89 for the 2021 second quarter, compared to adjusted basic earnings per Class B share at $0.59 for the second quarter of 2020. The increase in adjusted basic EPS $0.89 is primarily attributable to an increase in operating income resulting in $0.36, a $0.03 reduction in tax expense, attributable to the net impact of the new UK tax legislation, increasing deferred taxes for future timing differences, offset by a reduction in tax valuation allowances.

And these improvements offset by $0.05 negative impact from foreign currency translation and a course an increase in corporate expenses. For the 2021 six-month period, the $0.40 increase in adjusted basic earnings per Class B share was largely due to the $0.47 increase attributable to operating income offset by 7% negative foreign currency translation impact with an increase in corporate expenses of $0.06 offset by a reduction of tax expense of $0.05 and lower interest expense of $0.01.

This resulted in adjusted basic earnings per Class B share of a $1.71 for the six-month period of 2021, compared to a $1.31 for the 2020 six-month period. Moving to Slide 5, for the second quarter of 2021 free cash flow from operations was $94.7 million, compared to $145.7 million in the 2020 second quarter, an increase in cash taxes paid, net capital expenditures, coupled with the retrenchment of net working capital.

Cash reduced free cash flow operations and cash provided by operating activities for the second quarter of 2021 compared to the second quarter of 2020. For the last 12 months ended June 30, 2021, free cash flow from operations improved $109.7 million compared the last 12 months ended June 30, 2020.

The comparative improvement is attributable to the improved cash flow from operations and reduced capital spending for the comparative periods. Moving to Slide 6.

Net debt as at June 30, 2021 was $1.26 billion, a decrease of $128.6 million compared to December 31, 2020. The decrease is principally a result of debt repayments during the first six months of the year, partially offset by a decrease of cash on hand for June 30, 2021 compared to December 30, 2020.

The company's balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was 1.05x, declining from 1.24x at the end of December 2020.

Liquidity was robust with $693.3 million of cash on hand and U.S. $1.2 billion of available undrawn credit capacity on the company's revolving bank credit facility.

The company expects to repay the portion of its long-term debt from free cash flow or using its revolving credit facility before it comes due. The company's overall average finance rate was largely unchanged at approximately 2.3% at June 30, 2021, and December 30, 2020.

The company's balance sheet continues to be well positioned as we move through 2021. Geoff, over to you.

Thank you, Sean, and good morning, everybody. I'm on Slide Number 7.

Highlights for capital spending for the year, $132 million spent so far, $127 million net of disposals. I just want to point out that we're planning to spend $340 million for the year in total.

So capital spending in the second half of the year will be much heavier than it was last year, around $200 million and change. Moving on to Slide 8, highlights the CCL business, very strong quarter, mid-teens organic sales growth, very strong in North America, up in the high teens, low double digits in Europe and Asia Pacific and up high single-digit in Latin America.

We saw strong sales gains in Home & Personal Care, Food & Beverage and CCL Design, slightly down in Healthcare & Specialty due to the pandemic tailwinds in the prior year and the same at CCL Secure, although their profits were up. So moving on to Slide 9.

The two joint ventures we have, one in the Russia, one in the Middle East, very strong results, particularly given the problems of foreign exchange in both jurisdictions. Slide 10, results from Avery.

Strong recovery in all regions and all products. So we've seen a really big, strong bounce back this quarter at Avery.

One laggard that remains is Badges, although it has improved considerably, sequentially, it's still far below normal, but much better than it has been. Our back to school selling has been strong.

We have faced a number of logistic issues, especially supply of critical raw materials from China with the many freight problems and challenges importing from that country into the U.S. currently today, and that may affect replenishment sales in Q3.

Inflation has also been a factor. Slide 11.

Checkpoint. Also big recovery here, especially in the Apparel Label business.

You have to remember in the second quarter of last year, large parts of that industry were completely shutdown. So we've seen a particularly strong bounce back there, but also strong in merchandise availability with nonessential retailing coming back.

In the crisis last year, we had still some good business with essential retailing, that's not essential as the part has really bounced back there. Record profitability in the second quarter, well above Q2 2019 and above the previous Q2 2018 high watermark.

Slide 12. Results for Innovia.

This one really surprised us a little bit. We had very good pass through of the higher resin costs.

But the profit change really was aided by improved mix. So we've done a fair amount of pruning of low-margin product lines, especially in the acquired Polish operation and of the plant in Mexico, and that really helped our mix in the quarter that has just gone through.

Productivity gains, especially in the U.K. and large plants also augmented results.

And the Polish plant, EcoFloat investment, is on schedule and as planned for the second half of 2021. Slide 13.

A few comments on our outlook. I just want to point out that the third quarter last year was a record quarter for the company.

Earnings were up 18% last year in that quarter on a normal comparative period in 2019. So that's quite a high bar on today's foreign exchange rates, especially to the weaker U.S.

dollar. Avery will improve over the second half of 2020.

That's a typo on that slide. So it's the second half of 2020 and the delta which will improve really depends on back-to-school.

We do expect checkpoint progress to continue, but at a more modest pace, although RFID will still be a source of strength. We also see some supply chain issues in apparel due to rising COVID restrictions in Asia.

We had a part in Bangladesh shut for two weeks in the month of July due to government-imposed restrictions after the Eid holiday there. So there's still some challenges in the Asian apparel supply chain appearing as we speak.

CCL Design expects a strong second half. And although automotive is much better than it was last year, I think as we get into the third quarter, the chip shortage is beginning to reveal itself in some glory.

And we expect some challenges for that, particularly in the third quarter and maybe in the fourth quarter, too. But it's certainly a recovered industry compared to how it was in Q2, in the latter part of Q2 last year.

We do have some strong new business wins coming in electronics, which will probably offset that. Food & Beverage and Home & Personal Care are both expected to be solid.

Healthcare & Specialty comps remain difficult for the second half of the year, especially in the Ag Chem space. CCL Secure, the most difficult challenge, an extremely elevated Q3 hurdle based on the high-margin windfall orders we received in 2020 from the cash shortages in many developed countries around the world, but the comps returned to normal in the fourth quarter.

Innovia still has to navigate continuing resin volatility, and we have to manage well the EcoFloat investment in Poland, and there are no more easy comps to come. So with that, operator, we'd like to open up the call for questions, please.

Geoff and Sean, good morning.

Good morning, Adam.

I hope you well. One on translation, Geoff or Sean, based on current Canadian dollar exchange rates, what magnitude of drag would you expect if these rates persist through the end of the quarter?

Sean, do you want to handle that one?

Sure. Adam, I think the way you have to think of it is U.S.

to CAD. For every 1% move in the U.S.

dollar/CAD relationship, we would take a 1% or $0.01 change in EPS on an annualized basis. So look at the year-over-year exchange rates and what you expect for the back half of the year compared to where we're at now and where we were last year.

And about a 1% move is a $0.01 change on an annualized basis.

So I think in the second half, Adam, it will be mid-single-digit cent EPS, something like that impact if the rates stay where they are.

For the second half as a whole, not per quarter?

Correct.

Right. Got it.

Okay.

It's a bit difficult to model because you've got some offsetting currencies around the world, too. So the Australian dollar is strong and a few other places.

So we did have some offsets.

Yes. Thanks, Geoff.

You don't normally provide much in the way of explicit quarterly guidance, Geoff. So I'm just wondering what you see more forthcoming than normal about – you're thinking about 3Q and even for the second half of that matter?

And when I look at consensus, consensus already expects an earnings decline of about 4% in the second half. So I'm just wondering what prompted you to be as forthcoming as you were in both the release and presentation about your second half thoughts.

Well, just to remind everybody, Adam, in the second half, just to remind everybody, the first half the comps are very easy and the second half is difficult. And the currency is, I think, something that not everyone has picked up on before the latter part of the last quarter.

So I think it was also just to remind everybody about the translation impact. The two big impacts in the second half of foreign exchange translation and that Q3 quarter, we had CCL Secure in Q3 last year, where I think we made something over $20 million, and we will be lucky to do 25% of that this quarter.

Got it. And I appreciate that, Geoff.

You mentioned the supply chain issues in apparel resulting from rising COVID restriction in Asia. Are there any other aspects of the delta variant that are causing you particularly concern regarding the second half?

Not particularly. I do think we'll get through it because governments are very much keen in, I think, in all parts of the world to get through this.

So – but the part of the world that's difficult at the moment is the Asia Pacific, the Indian subcontinent, Thailand, Indonesia, Malaysia, Australia, these countries have all got sort of pretty severe restrictions in place at the moment. We're currently able to operate, but there are certain times when Government act and they acted in Bangladesh in July.

So we were closed down for two weeks – an additional two weeks on top of the Muslim holiday there in July. There was the shutdown.

There may have been some restrictions also in Thailand. But it's not material at the company level, but it's bothersome.

I understood Geoff. On Innovia, you mentioned the results were surprisingly good to you and mix was a big help there.

Can you just talk about exactly where that came from? And then given how all the segment handled resin inflation in 2Q, how much reason do you have to be concerned about 3Q along those lines?

Well, we've got hurricane season to get through in the U.S. So when you – these days we're all mindful of what the weather can do to resin supply.

So we're slightly somewhat cautious about that. But we did a good job of managing the pass through, not 100%, but a good chunk of it.

Because a lot of our customers, when resin was going down last year, changed our arrangements to be more real-time and the move to resin, so that benefited us when the curve went the other way. But the big impact this quarter was really mix and getting out of some of the low-margin volume we had, particularly in Poland and particularly in the plant in Mexico.

And presumably those benefits are sustainable, Geoff?

Correct.

Yes. Two other ones.

The large transaction that was announced about a month ago in the label converting industry. What did you make of it, particularly the multiple?

And what do you think it says about the going multiples in the label industry these days?

Well, I think our stock price multiple seems to now be the going rate to buy anything in the industry. We've seen multiple space, quite small businesses that are really highly elevated.

So it's challenging at the moment. So there's a lot of money chasing a few deals.

And some of the prices that are being paid, in our opinion, are pretty ridiculous. But that's just our opinion.

You have to ask others what they think.

Yes. I appreciate that.

And one last one. I mean, you don't give guidance, I think, for good reason.

Depletion at the world is always uncertain. How would you characterize your level of uncertainty about what's to come in the months ahead compared to whatever it might have been historically?

I just – not just a variant, but Brazil is hiking interest rates because of very significant inflation there. Obviously, there's very significant inflation elsewhere.

Just talk about what your level of visibility into the next few months compared to whatever you would consider normal?

Well, we've been facing difficult external circumstances. So it seems like forever.

So I wouldn't say today it's more elevated than they were last year in the middle of the pandemic. So we're more confident than we were in March and April and May last year, for sure.

And we've got – and some of our businesses has still got some runway left on the bounce back, particularly the Avery. So I think it's just we had a – like many companies, we had a very strong recovery in the second half of the year last year.

So the period of easy comps is gone. And on top of that we've got the U.S.

dollar weakening pretty significantly. So those two impacts, just making it – the business is doing pretty well right now.

But externally those two things are making the situation a little bit difficult.

Thanks a lot Geoff.

No problem.

Thanks very much operator. Good morning everyone.

Good morning, Walter.

So starting with Avery. And you mentioned and looking at your different divisions, it is the one that hasn't – that is still kind of below pre-pandemic on a fairly meaningful basis.

And I believe last quarter, you had indicated, Geoff, that you did expect it to be up year-over-year, albeit on a tough comp. Are you getting more encouraged?

I mean it looked like a great quarter. Things seem to be coming back.

You mentioned a few of the driving factors. But is it – are you getting – if you were to take that, expect it to be up year-over-year, I think it was actually in the fourth quarter call you said that.

Do you feel better about this division? Are you – do you expect it to be performing better than you – than when you gave that guide or that comment in the fourth quarter with respect to Avery?

Well, we made in the second quarter of 2018 and 2019, we made about $45 million in both of those two quarters, 2Q 2018, 2Q 2019. This year, we made $38 million, but at a very different foreign exchange rate.

So if you normalize foreign exchange to make it constant, we would have been in the sort of low 40s. So they're not far off the pre-pandemic level.

The business is still a drag in badges. So sales of some categories of badges declined 90% to 95% in the crisis.

They have bounced back. So the business has got profitable again.

And as events continue to absolve, and particularly in the U.S. and Europe, which is where that business is based, that's really the thing that has to occur.

The other business that's still difficult at the moment is the ring binder business and the comments I made about China and the difficulties we have there. It's all around the importation of ring for the back to school business.

So the world's supply of rings pretty much for the whole planet. It all comes out of China.

And just getting them out of there and getting them shipped to where we need them shipped has been quite challenging in the current environment. So just to give you a frame of reference, an emergency 45-foot shipping container out of China today costs $45,000 versus $4,000 two years ago.

I mean that's how much the world has changed. So those are our two underlying comments, sort of on the downside of Avery.

But on the upside, the label business has really returned to normal. And internationally, it's in very good shape.

So we're very confident about Avery, both for the coming quarter, the second half and the year-over-year growth.

Fantastic. Moving to a Novia, Geoff, you had, I believe when you first looked ahead to post the reorg in Mexico or the new plant startup, I believe you were guiding us back then to kind of a low double digit margin, which subsequently went and I'm referring to EBITDA margin.

It subsequently went up to the mid-teen range. And now we're nicely trending above 20% is north of 20%, the new normal, or is that mix that you mentioned more temporary and should we look more at 20% or less than that as a normalized margin for a Novia?

Well, these are the margins that the business was making when we bought it. So we've done a very good job of cleaning it up and sorting it out.

I think we'd have to wait to see what happens in a declining resin market. What happens when resin rise, then you do have some inventory of lower price resin and situ as prices rise, so you have the benefit of that.

That's typically offset by price increases you don't get quite through. So it usually ends up being a wash.

So what we're curious to see what happens is what happens when resin prices fall, if they were to fall dramatically, we would then have high price inventory in a silo. The more the impact of that would be as prices fall on the pass through.

So that's probably the thing we've not experienced yet that could happen if the resins supply situation normalizes in 2022. But it as an ongoing run rises, high teens, – low 20s is probably as high as it's ever going to get.

I hop that answers your question.

It does. Thank you.

That's great. And lastly, on the CapEx I noticed a small increase, I think, in your CapEx spend.

Are you getting – can you give us a little bit of color around any interesting projects that you're looking at new projects or these growth initiatives, what areas you're focusing your attention just from a capital expenditure standpoint?

Well, there's probably the most interesting ones or all around the electronics business is the CCL design we’re building a couple of new plants in China, one of them is very big. It’s a $25 million project.

There is some new business wins behind that that will be coming in 2022 and latter part of 2021. So that's probably the main thing.

I think also we have to be very mind, we curtail the CapEx in the crisis for liquidity reasons. So some of this is delayed projects now coming back to the full.

And it takes a bit of time, the machine building industry has also got its challenges with availability of raw materials, and chips, and steel and aluminum and all the rest of it. So getting the machines on time today is also not easy.

So we've had some delays in getting the equipment we need in parts of the business we would otherwise would have like to have earlier.

That's great. I appreciate the time is always, yes.

No problem Walter.

Thank you. Good morning guys.

Good morning Steve.

Just had a couple of questions on the CCL segment, you had another nice quarter of good margin growth. I'm just wondering if you can point to any specific margin drivers that may be were driving the the Q2, strengths?

Well our Q2 strenght CCL, Steve, was really driven by the recovery in the automotive business another big factor. So, CCL design automotive was in the [indiscernible] obviously in 2Q last year and it bounced back pretty strongly.

So CCL design margins were up quite significantly in the quarter as a result of that year-over-year. And food and beverage also bounced back.

So the on premise issue that has really hurt that business was the other big change. So those are the three main changes margin wise.

CCL Secure also had a good quarter, but it had a good quarter last year. And the Delta variant was big for the two.

The two margin impacts on the operating margin were really, Food & Beverage and CCL Design.

Okay. Okay, that's great.

That's helpful. Thank you.

And then I just wanted to confirm I thought in one of the previous questions, you mentioned something about CCL Secure. Did you say that you would be lucky to do 25% of what CCL Secure did last year in Q3

Correct. Yes, so I'd say headwind in Q3 at CCL Secure at EBIT of the order of $15 million to $20 million.

So we had a really when I say windfall, I meant windfall. So we had the big orders that came in last year in a number of jurisdictions, top off orders at premium prices.

And this year they are absent.

Okay.

That’s the delta quarter-on-quarter. So we had an exceptional quarter in Q3.

Q4 was normal. And we expect Q4 to be normal for trading, going to be a Q3 phenomenon.

Right. And did you say that last year’s windfall was $15 million to $20 million?

Sorry the delta difference. So the difference is same may be we’re likely to make this year.

And what we made last year is off the order of $15 million to $20 million at EBIT.

Okay. That's helpful.

Thank you. Just turned to Avery, you mentioned about just the supply chain issues.

You had a strong back to school but you talked about supply chain impacting potential replenishment orders. How much does replenishment usually impact Q3?

Like is there any way to quantify turn the magnitude...

We don’t quantify Steve because last year we had the fiasco of all the school restart in the U.S and Canada, which I'm sure you remember, well.

Yes.

Retailers this year are achieving, I think, with some [indiscernible], the back-to-school will be normal. So typically what you get is you have a sudden odd, and it usually goes out in the latter part June and the early part of July of this year, but mostly in the latter part of June.

And then July and August, you get to top orders from retailers. And if you have the inventory, you can sell it.

Obviously the selling season is extremely short for back-to-school. So, if you haven't sold it by September, you're done.

So if we don't get the ring supply we need, it could affect our ability to keep retailers supply with what they need during that sort of replenishment period. So that's the challenge at the moment.

Okay. I see.

Thank you. And then maybe just finally just on the Innovia, I just wanted to clarify you did a very good job managing through resin inflation in Q3 – Q2, sorry.

But I guess what you're saying is Q3, you can manage the resin price inflation in a similar way, but I guess you're just saying that the hurricane season creates a bit of uncertainty on supplies, Is that, right?

Resin is still going up, creeping up now that rather than leaping up. But it's still going up.

And in the U.S. and Europe now resins have double the price of the resins in China.

But there's so many difficulties importing from China at the moment. I mean, I don't think not many things in the world, I know I was thinking about sourcing from there.

And China is a net importer of resin anyway. So if the world did that, there'd be no availability anyway.

So, the real challenge has really been what's going to happen in the future. And in hurricane season, you worry about that every year, because it knocks out a cracking plant, the usual impact short term.

So we'll have to wait and see what happens.

Okay. That makes sense.

Great. Thank you, Geoff.

Thanks, Sean.

Okay. Thank you.

A couple of questions. So you talked about the badges business, how it's improved there, but it's still down, I guess, compared to normal levels, say 2019.

San you give us an idea how much it would still be down compared with Q2 ‘19?

It's still down 60%, 70% over the 2019. The LHD, event batch pass droped concerts and sports events and business conventions and things like that.

That dropped 95% in the crisis. And we're back to sort of 25% at normal levels.

Okay. I mean, it should continue to improve a fair bit...

I talked to you about that, we're expecting it to improve. It improved in July, but it's a long ride back.

So until conventions, and sports events and attended sports events and non-attended sports events, use many badges. So attended sports events till that becomes normal it's still got ways to go.

It's about a $100 million businesses part of Avery.

Right. Okay.

And then just on – can you give us an idea how the direct-to-consumer performed in buying your specifically in Avery in the quarter?

Well direct-to-consumer performed very well with the exception of badges and binders also performed quite well because of the selling for back-to-school. But we had some inflation challenges in range supply, a lot of it involved around freight.

Okay. And then just on the balance sheet, obviously you guys have a very low leverage.

I think on the last conference call, there was a question about just the optimal capital structure. I think you thought that it was below optimal level.

So are you looking at a potential, substantial issuer bid or something?

Well, [indiscernible] other there and we'll see what happens.

Okay. Could there be any large...

Little bit of liquidity more than I just commented.

Okay. All right.

Thanks.

Okay, everybody. Thank you for joining the call.

And we look forward to talking to you in November for the third quarter. Thank you very much for today's time.