CCL Industries Inc.

Good morning, ladies and gentlemen. Welcome to CCL Industries' second quarter investor update. Please note that there will be a question and answer session after the call. The moderator for today is Mr. Jeff Martin, President and Chief Executive Officer, and joining him is Mr. Sean Waschuk, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen. Good morning. This is Sean Waschuk here. I'd like to thank everyone for joining us on our second quarter investor update. We're having some challenges with the website right now, so in order to view the slides, everyone will have to go to our website, CCLIND.com, and go to Investors, drop-down menu, then to Investor Presentations, and download our second quarter investor update presentation. And from there, I'll guide you along through our deck today. So, moving to our Slide two, 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 2021 annual MD&A, particularly this section, Risks and Uncertainties. You can also refer to our second quarter report for updated risks and uncertainties. Our annual and quarterly reports can be found online at the company's website. CCLINV.com, or on CDAR.com. Moving to slide three, our financial summary for the three and six months. For the second quarter of 2022, sales increased 14.9%, with organic growth of 10.9%, acquisition-related growth of 4.8%, partially offset by almost 1% negative impact from foreign currency translation resulting in sales of $1.62 billion compared to $1.41 billion in the second quarter of 2021. Operating income was $247.8 million for the 2022 second quarter compared to $235.5 million for the second quarter of 2021, a 6% increase excluding the impact of foreign currency translation. Included in this figure is a $3.5 million non-cash acquisition accounting adjustment to fair value inventory for the acquisition of a paddle bra in the quarter. Excluding this adjustment, operating income improved 7%, excluding currency translation. Jeff will expand on the segmented operating results of our CCL, Avery, Checkpoint, and Inovia segments momentarily. Corporate expenses are up for the quarter. principally due to higher expense for long-term variable compensation versus the prior year quarter. Consolidated EBITDA for the 2022 second quarter, excluding the impact of foreign currency translation, increased 7.3% compared to the same period in 2021. Net finance expense was $15.4 million for the second quarter of 2022 compared to $14.1 million in the 2021 second quarter, due to an increase in total debt outstanding this year versus last year. The overall effective tax rate was 24.4% for the 2022 second quarter, compared to an effective rate of 25.5% recorded for the second quarter of 2021, primarily reflecting a higher portion of taxable income earned in lower tax year extensions, as well as a UK tax legislation that was enacted in the second quarter of 2021 than increased the prior year tax rate. This effect of 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 2022 second quarter were $163.4 million, up 8%, excluding foreign currency translation, compared to the 2021 second quarter. For the six-month period, sales increased 16%, operating income increased 5%, Net earnings increased 6% compared to the six-month period in 2021. 2020-22 included results from 12 acquisitions completed since January 1, 2021, delivering acquisition-related sales growth for the period of 4.7%, organic sales growth of 10.8%, and foreign currency translation with a headwind of 1.7% to sales. Moving to slide four, our earnings per share. Basic earnings per Class B share were $0.91 for the second quarter of 2022 compared to $0.86 for the second quarter of 2021. Adjusted basic earnings for Class B share were $0.94 for the second quarter of record, quarterly record, compared to adjusted basic earnings for Class B share of $0.89 for the second quarter of 2021. The change in adjusted EPS to $0.94 is primarily attributable to an $0.08 advance in operating income, $0.01 increase from equity contribution from our joint ventures, partially offset by $0.02 negative currency translation, $0.01 from increased finance costs, and additional $0.01 from our adjusted tax expense year over year. Moving to slide five, free cash flow from operations. For the second quarter of 2022, free cash flow from operations was $115.1 million compared to $94.7 million in the 2021 second quarter, reflecting an improvement from cash flow from operations of almost $42 million, partially offset by an increase in net capital expenditures for the comparable periods. For the 12-month end of June 30, 2022, free cash flow from operations decreased $165 million compared to the 12-month end of June 30th, 2021. This comparative decline is attributable to an increase in net working capital coupled with an increase in net capital spending for the periods. Moving to slide six, dollars returned to shareholders. During the second quarter, the company renewed a normal course issuer bid or a share buyback program for the buyback program that expired in May of this year. Under this new bid, the company may purchase up to 9.9% of its public float, of class B floating shares, up until May 24th, 2023. This is all subject to the normal restrictions of the TSX. During the first six months of 2022, the company repurchased almost 3.4 million shares at an average price of $58.95 for total proceeds of $200 million. Including the 14.3% increase in the 2022 annual dividend in February of this year. Dividends year-to-date have amounted to $85.4 million, representing 26.7% dividend payout ratio. Moving to slide seven, our cash and debt summary. Net debt as of June 30th, 2022 was $1.76 billion, an increase of approximately $515 million compared to December 31st, 2021. The increase is principally a result of new borrowings to finance the company's acquisitions during the first six months of this year and dollars needed to repurchase shares under the aforementioned buyback program. Although the company's net debt increased, the balance sheet closed the quarter in a strong position. A balance sheet leverage ratio was approximately 1.47 times, increasing from 1.06 times at December 31, 2021. Liquidity is still robust. with $634.3 million of cash on hand, and U.S. dollars $0.8 billion of available undrawn credit capacity on our revolving credit facilities. The company's overall finance rate was largely unchanged at approximately 2.43% at June 30, 2022, compared to 2.42% at December 31, 2021. The company's balance sheet continues to be well-positioned as we move through fiscal 2022. Jeff, over to you.

Thank you, Sean, and good morning, everybody. Hope you're managing to follow the slides. Sorry about the webcast, Matthew, this morning. I'm on slide eight. So, highlights of capital spending for the year so far, 190 million net in disposals, exactly half what we planned for the year, 380 million dollars. Slide 9, highlights for the CCL segment. Very good quarter in this part of the company. 10.9% organic sales growth, largely price-led. So some little bit of volume growth, but largely price-led. North America up high single-digit, Europe up double-digit, Asia-Pacific up mid-single-digit, and Latin America up more than 30%. Very strong quarter in our home and personal care business and healthcare and specialty. Upset tough concepts, CCL secure. Sales were up, but profits were still impacted by lockdowns in China and soft demand in the electronics sector. Sales were up at the food and beverage business. The profitability gains there were held a little bit by inflation. 5.10, highlights of our joint ventures. Very good quarter. Excellent quarter impact. So we're very pleased to see that. 5.11, highlights of the results of Avery. A strong trajectory in this business continues, especially in North America. We've seen a big recovery in name badges. Not quite yet a full recovery because we're still seeing some stoners in the convention space, but sports events and other forms of events are back to normal. Non-cash acquisition accounting affected the ABR result, as Sean already mentioned, to the tune of $3.5 million out of Brown Reserve. Raw materials in place and an elevated freight component cost in trying to pass through was successfully implemented, but supply availability in this business is still challenging. Slide 12, time for checkpoints. The MAS business had a tough quarter actually. There were sorts of declines in all regions except that in America. The burst was a very strong prior year and our profits were impacted by China's trading component in inflation and lockdowns in the country which affected our large supply farm that's based in China. The apparel labelling business on the other hand had another exceptional quarter, exceeding expectations 25% organic growth, driven by RFID and augmented by the UNICEF and TechnoBlue acquisition. So one soft story at MAS and one strong story at ALS. Slide 13, Inovia. Two stories again here. Volume was up in the Americas but down in Europe and the sales gain was largely passed through the inflation. The down story was really all in Europe where we had higher than expected energy and freight inflation. and the cost of the new line started in Poland, all three of which impacted profitability in the quarter and accounted for all the decline in the quarter. Profitability did increase in the Americas and was held by the revaluation of inventories as resin declined, and we also saw higher freight costs in North America. Slide 14, there are no comments for the coming quarter. Final price pass-through initiative has now been implemented to benefit the core CCL label businesses where we had some lag and that will definitely benefit the second half of the year and the orders picture remains very solid. CCL design outlook still depends on the ship availability recovery especially in all the boaters and consumer demand holding up in the in the electronic space where it's been a little bit soft recently. Recent acquisitions are additive. Constant CCL security significantly for the second half. AV volunteers continue to improve and are vented by recent acquisitions. Checkpoint RFID growth at ALS is also expected to continue, but the slots for MAS, picture in broad retail, may well continue in the second half. I'll have to just wait and see. Inovio's sales likely to decline on lower resin, so resin's been dropping in the last three months for today's purchase prices. And we have to balance the freight and energy in social Europe to match the second half of 2021 profitability. We are working on both of those things. Company-wide, our China operations are back to near normal. the demand in the country overall remains soft. Okay, operator, with that, we'd like to open the call for questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, please press star 1 if you have a question at this time. And the first question today is coming from Mark Neville from Scotiabank. Mark, you're right, it's live. Hey, good morning, guys. Thanks for taking the time. Thanks, good morning, guys. Maybe first, just on prices, just so it's clear, are all the price increases that you intend to do sort of through now?