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?

There's a little bit of lag in a couple of parts of the businesses. So I'd say there's three areas of lag you can think about. Food and beverage in the CCL space, we've got some lagging contracts there that we've now fixed. So we'll have the benefit of that in the second half. Check for MAS. The freight and component cost inflation increases are going through, particularly in Europe in the second half. So we've got some energy and freight transportation and social artists to pick up in Europe. I wouldn't say there's three of them are therapy material. I would say we've passed on 85, 90% of the inflation we've received.

On the regional differences that you're seeing in the CCL seconds, is that more to do with sort of the rate of inflation until geographies or the mix?

Well, the Latin American situation is really about share gain in some parts of the business. So that's one of the times it is. I think in Europe it's definitely, inflation in Europe has been running at a higher clip than it has in the U.S. So that's probably a comment about the contrast in Europe versus the U.S. for sure.

Okay.

And also in Asia where it's running at a much lower clip.

Okay. In terms of sort of volumes and sort of demand picture, I'm just curious how that differs sort of regionally if there's a marked difference between sort of what you see in Europe and sort of North America and the EU, I guess. It deals with the economic data, the bigger risks. It deals with Europe, but they don't help.

Yeah, I would say the strongest region right now for us is North America. Europe is patchy in parts, and Asia is patchy in parts, especially in China. So, pretty much Mira's got most of our customers the same, you know. So, North America's held up pretty well. Some bothersome data coming out of Europe and also from parts of Asia.

You know, that's helpful. It gets a little blurred by the price, but that's super helpful. Maybe just one last one from you, then. Maybe just an NCID. Your stock's gone from sort of mid-50s to mid-60s. I'm just curious if you intend to be as active.

I'll have to wait and see.

All right. Got it. All right. Thanks, John. Thanks, John. Okay. Thank you. The next question is coming from Stephen McClough from Abimo. Stephen, your line is live. Thank you. Good morning, guys. Morning, Steve. Morning. Just on the CPL segment, you had really nice EBIT performance there. And given the fact that most of the growth was from price, I would have thought you'd see a little bit of EBIT margin pressure. So I'm just curious if you can talk about some of the drivers on EBIT in the CPL business in Q2.

Well, two of our bigger businesses in there, HPC and H&M Healthcare especially, did particularly well. And I would say I've done, particularly in North America, I've done probably the best job of the price pass-through. So we had very little lagging inflation in those two parts of the businesses. So CCL design, you know, was more of a mixed story because we had the impact of the chip problems. Demand was dropped in automotive. Demand was dropped in electronics. And in food and beverage, we had some contracts where we had inflation lag. And then at CCL Secure, we had a very strong EBIT quarter last year with very high margins. We had higher sales this quarter, but the mix was very challenging and still above the average for the company, but not as good as it was last year.

Okay, that's great. So mostly Sounds like mostly mix and price related. On the MAS business in Checkpoint, it sounds like you expect some of the software retail impact to continue in H2. I'm just curious, do you expect it to worsen, or is your guidance based on what you're seeing today?

What we're seeing today, I mean, that business is broad retail, so we sell it to all kinds of store operators and in the NAS business, so grocery, pharmacy chains, you know, all those chains you see in the malls. It's really broad-based retail. And we've certainly seen some slowdown in sales globally. And that business, North America's not the largest reason in that business, so Europe is. So some softness in Europe and some softness in Asia, partly due to the lockdowns in China.

Okay, that's great. And then just finally on Anovia, obviously with residents lowering, you're talking about sales being impacted. Would you expect the back half of it to be flat, given what you see right now, or are you sort of guiding to it potentially being lower at this point?

I think it depends on how well we do with the energy and freight situation in Europe. That was the main problem. this past quarter. I mean, it's still got the start-up cost of the line in Poland, that wasn't terribly material, but the freight and energy, catch up on that, making sure we've got enough recovery on that, and that pricing is important in the second half. If we do that, I think we'll be okay. If we don't do it, we'll have a repeat of what happened this past quarter, because we're working on it. Okay. I'd expect to see some sequential improvement, maybe doing as well as we did this time last year, Okay, that's great.

Okay, great. Thanks, John. Thank you. And the next question is coming from Walter Strachan from RBC. Walter, your line applies. Hi, gentlemen. Thanks for taking the question. This is Louis on for Walter. I know we ask you this every quarter, but any change to the M&A landscape? Is market volatility prompting any new sellers? Are valuations still elevated?

No change.

Okay. Okay. This one's on CCL. So organic growth in CCL core segment has been solid, and your outlook sounds optimistic. How far would you say you have visibility on demand, and any views as to sustainability beyond that direct line of sight?

Well, it's a short lead time business in large file. So, you know, and you know it's going to be on visibility for about six weeks. But we don't see any anecdotal change in circumstance. So, customers are still very much focused on supply availability than anything else. So, supply chain issues still remain in many areas of packaging. and customers are more focused on making sure they've got what they want when they need it.

That's the big issue right now.

Okay, thanks, Jeff.

Thank you. The next question is coming from Adam Josephson from KeyBank. Out of your landslide. Jeff and John, good morning. Morning. Morning, Adam. Jeff. Morning, Jeff. You just... In response to the last question, you just talked about how supply chain problems are leading packaging buyers to keep their stocks up, yet in the earnings release, you talked about supply chain problems easing globally. So can you help me square those two things?

Well, the supply chain is sort of relative. It's not as bad as it was, but it's still terrible compared to how it was a year ago. So is it looking like it's improving? Yes, it is. How is it compared to a year ago? Terrible. So, you know, our key raw materials, pressure-sensitive raw materials, typically we used to wait three days to get an SKU of raw material from a supplier. Today we wait six to eight weeks.

Yeah. Yeah, and you see that.

But it has improved. Some of the pain points we were experiencing, you know, the UPM strike particularly, you know, was obviously over. So some of the pain points were easing, but compared to how it was in what the last time people called it normal, it still was pretty difficult.

Do you see that easing? I'm sorry, go ahead, Ted.

No, go ahead.

Do you see that easing further in the weeks and months ahead? I mean, there's no other event like the UPM strike, so. Is there anything that sticks out to you that would suggest to you that these problems will significantly further ease in short order?

Well, yeah, I would say we're certainly seeing some signs of easing. And also you're seeing that in deflation rather than insulation, you know, resins and aluminum. And so things are a little bit easier than they were. So I I think paper is a big question. So the paper supply industry in the U.S. with all these conversions to box boards, paper supply in the U.S. has become challenging just in general.

Yeah, no, understood, Jeff. When we look at your CCL segment organic growth and try to compare it to historical when we've been in recessionary periods, it's fluctuated anywhere from call it flat to up. 5% to 6%, but this time it's distorted with all the price increases related to all the inflation. How do you characterize your volume trends now compared to what you've seen in past recessions? I think you said your volume was slightly up in the second quarter, and I assume you're expecting something similar in the third quarter. Can you just frame what the volume trends you're experiencing are compared to years past and recessions past?

Well, it's a very different economic outlook compared to how it was in the last one where we had, the last big one was the global financial crisis of 08 and 09, which was a real recession, you know, unemployment and all the rest of it. So this time we have a technical recession and GDP has declined two quarters in a row, but we still can't find people and unemployment is at record levels. So it's an unusual situation. And on top of that you've got supply chain constraints which we didn't have in the last recession. So it's very hard to read what's actually going on underneath it all. But if you look at the results of our customers, most of the sales increases that we saw, there were exceptions, but a lot of them were price-led rather than volume-led. So we look at that quite closely and follow it quite closely. And the outlook is probably like it's been this quarter, there's going to be a little bit of volume growth, yes, but not much.

Yeah, I appreciate that. And on the price pass-through initiatives that you talked about earlier, how much inflation did you actually recover in your CCL business in the first half? I'm just trying to understand how much more growth one should reasonably expect year over year in profitability given inflation. whatever additional price recovery you will have had along with all the other benefits, the easier constant CCL secure, the acquisitions and CCL design, et cetera.

Yeah, it's very hard to measure that in the label business because it's millions of transactions with all shapes and sizes. You can only really intuitively guess at it really, Adam. So it's very hard to answer that numerically. I think all I can say is the volume is up slightly in the past quarter. My gut tells me the volume of the situation is unlikely to change for the second half of the year.

But presumably the price-cost relationship will be more favorable in the second half than it was in the first half.

Yes, yes. But don't forget we've got a lot of pass-through arrangements and the things that are really dropping, like aluminum, we pass on pretty much real-time. So it's kind of a wash on the bottom line, really.

I got it. Okay. Yep. And just one last one, Jeff, on RFID. Can you talk about from your seat what the penetration is in apparel and other markets compared to what it was a year ago? And has your thinking or outlook changed with respect to the long-term opportunity you have in RFID? Okay.

Well most of our sales like everybody in the industry today are in apparel and apparel is the hundred pound gorilla in the room of RFID and it's still continuing to grow and the technology is still continuing to develop so the form factor of RFID is also beginning to change so not just the rollout of RFID it's the form factor that's using. So more use of soft tags, less use of hard tags specifically. And so we still think we're in the early to mid phases of RFID growth, and I haven't seen a lot of change in that comment since last quarter. We are getting quite excited about opportunities outside of apparel, but they're all in niches, and there's lots of them. So the challenge there is to find out, making sure you've got the last mile of the business development and marketing activities and approach property price to make a real profit in that part of the business. But we're excited about it.

Wonderful. Thanks, Jeff.

No problem.

Thank you. And the next question is coming from Ahmed Abdullah from National Bank of Canada. Ahmed, your line is live. Thank you. Good morning, all. You managed to deliver strong results of about 11% organic growth in the first and second quarters of this year. Given where you stand and all the moving pieces and how pastures have gone and inflationary pressures, should you be thinking about a similar level of organic growth in the back half of the year?

We'll have to wait and see. I mean, we've got some, you know, resin in the lumen and the boat's dropping quite significantly. So we definitely won't see the same rate of growth in Ovia in the second half of the year because resins are dropping. Where we've got past three erasions like in our aluminum can business, which has also been dropping, we're going to see impacts there. So the bottom line is no, I don't think we'll see the same rate of organic growth because I don't think we'll have as much inflation in the second half. What the number will be, I wouldn't like to say.

Okay, that's fair. And at Avery, you highlighted that you saw a bit of pull forward as the back-to-school season spawned earlier than usual start this year. Can you perhaps quantify how much of a pull forward that may have been? I mean, will we still see a bigger third quarter in the year for the segment?

Well, typically the big month for the back-to-school shipment is July, but this year it was in June because the the pull forward was really from June into May so first time I can ever remember back to school shipments beginning in May so they started in May accelerated in June so July was below what it was for July last year so we're expecting to see some pick up in August because the reorders are much more organised this year the retail industry had a calamitous back to school industry last year with all the chaos of retail they're much better organised this year so over the seasons We look at it over the season, we're expecting sales to be up, but I think there'll be more in Q2 this year than there was this time last year, and less in Q3 than this time last year.

Okay, that's fair. And I'll need to know, do you have a sales decline given the lower revenue prices? Are you thinking more sequentially or versus last year as well?

Sequentially.

Sequentially, okay.

Yeah, I think it'll be up versus last year, but... Okay.

That's it for me. Thank you. Thank you. The next question is coming from Michael from Raymond James. Michael, your line is live. Thanks. Just to start, if we're looking at CCL design and we're thinking of the automotive business there, can you give some sense as to how much below trend or how much opportunity for upside there might exist there?

Well, it's about 300, a little over 300 million in sales. This is the former Gavigan. Some of the Gavigans we've added a fair chunk to it. And it's still difficult in automotive. So we've still got lots of problems with OEMs, rescheduling production, parts availability. So that's the big challenge in automotive. And it's disrupting our operations everywhere, particularly in the US and We're not very big in China, but particularly in the U.S. Europe seems to be better. So Europe is performing better than North America. That's probably the best color I can give you.

And is the bigger exposure for that business overall that it's in North America versus Europe?

Well, now we have McGavigan's. No, no, Europe is the biggest. Okay. Okay. And then for the MAS,

There's these stories we read about increased – you talk about the grocery and the pharma broad exposure, and then we read these stories about increased use of security products on an expanding line of items. Are you seeing any of that come through in your results?

You'll see that in the CTL space, not in Checkpoint NAS. Okay. Okay. If a pharmaceutical company wants to use RFID, those revenues would appear in the CCL segment on a checkpoint.

But putting, like we read these articles about people putting security products around meat and stuff like that.

It's really around RFID. It's not really around security. It's really around RFID. It's around tracking of inventory.

Okay.

We're doing some of that at a checkpoint in Europe. So we're doing in-store. So in-store fresh meat is one of the new applications, new potential applications for RFID. We're seeing a lot of traction without a checkpoint in the pilot stage.

Okay. And then are you able to isolate out, there's a bunch of M&A, how much M&A contributed to the EBITDA in the quarter? Are you able to isolate that out?

No.

Okay. Thanks for taking the question.

No problem.

Thank you. The next question is coming from Daryl Young from TD Securities. Daryl, your line applies. Hey, good morning, gentlemen. The first question is just around potential for trade down to private label products. We're starting to hear what we call an acceleration of companies talking about 13 consumers stretched and trading down. I'm just curious if that started to percolate into your order book yet or if it's still the supply chain driving ordering volumes.

Yeah, we don't see a lot of that in the spaces we're in in the CCL business, Daryl. The home and personal care sector is the area where we see it is in a recessionary environment. There's less use of salons for professional products, which are a premium product. People tend to buy a professional grade shampoo at Walmart rather than go to a hair salon and pay for it there. So you see a little bit in there that's not very material. And in the food and beverage space, we don't see a lot of that. So private label is not very big for us. But the categories that we're in in the CPL space, we're not really vulnerable to private label attack.

Okay. And then you've called out both paper and aluminum as being big costs and potentially some easing there. I guess it's freight.

I think it was a supply problem, not a cost problem. I think it was a supply problem.

Okay, sorry. But when you layer on freight as well and potential for what's called over the median, some softening there as well, does that pose a pretty big headwind for the revenue line and the the organic growth trends as we look at, say, 12 months from now?

No. No, freight is really only a factor in Europe for us because in the United States, you know, most of our customers pay for the freight themselves and organise the freight themselves. So it's not a big factor in North America for us. It is in Europe, so it affects Anovia in Europe particularly and Anovia in North America because we transship from Mexico into the United States and pay for that. So I wouldn't say trace the material and materialize the revenue line. So the revenue line is going to be driven by what's going on in the resin market and what's going on in aluminum. Both of which are dropping quite well. In aluminum's case it's dropped 25% in three months. Got it. Okay.

Perfect. And then just one last one on CCL design and the electronics market. There is some talk of lower PC sales. I guess the mix within CCL design between the consumer electronics, how big of an exposure or concern would that be? Or have you seen any of that with your clients?

Yeah, well, they're all large customers of ours, all the big names in that space. And the PC industry had a big boom in the pandemic. and now has top sales. Global predictions are that the PC market will drop 10% this year. Cloud computing is also on the way. So we're expecting to have to contend with that in the second half. But we've got some new programs in some other parts of CCO that are quite a big offset. So we'll have to wait and see how that all unfolds.

Okay, that's great. That's all for me. Thanks for your time.

No problem.

Thank you. The next question is coming from David McFadden from Cormark Securities. David, your line is live. Yeah, thank you. A couple of questions. First of all, on the MES business, I was wondering, was that a surprise to you, the results that you recorded in the second quarter, and is it kind of indicative of just the general macroeconomic slowdown and just seeing that show up on retail?

Yeah, I would say so, because it was broad-based. It was an accused You saw where it happened. It was most pronounced in Asia. So the lockdowns in China was a factor in that. The next region that was most impacted was Europe, which is probably not a surprise. And the region that was least impacted was North America, which was down in most English digits. Latin America was up. So regional colour was a big factor in it. And our largest business in MAS is in Europe and Asia. So North America is smaller part of that segment.

So it would appear based on your QC results that the business that seems most impacted by a slowing macroeconomic environment is Check Point and MAF. So is that correct? I mean, the rest of the business is pretty resilient despite maybe a slowing macroeconomic environment? I think that's a fair statement, yes. Okay. And then can you remind us about the size of the MAS business and revenue?

It's about $400 million.

Okay. And then lastly, just on inflation, it seems like you're nearing the end of the past year. So is there a correct way to interpret that, that inflation is indeed slowing down and you're seeing that show up in your numbers?

We're definitely seeing inflation easing in the direct commodity space. So resin's going down, aluminum's going down, metal's going down. So we haven't seen that transfer into, the commodity gets converted into intermediary material. We haven't seen any deflation in that of any significance so far. But it does eventually flow through. So if resins drop, then film prices go down, laminate prices from raw material suppliers go down. That's just how it is.

Okay.

I would characterize it as easing at the moment rather than deflation. The area where we see real deflation is in resins and aluminum. Okay. Resins is only for Anovia, and aluminum is for our container business, which is $250 million in sales. So as a total company, it's not taking an impact.

Okay. All right. Thank you.

Okay.

Thank you. The next question is coming from Ben Jeffich from PI Financial. Ben, your line is live. Thank you. Good morning. Jeff, I just have a quick question on MS just to make sure I understand fully. So you had an operating margin that was the lowest in the last eight quarters, right? Is it demand-driven, or is it the impact of the freight and component inflation, or both, and in what relation?

Both.

Okay. And if I look at your outlook, it seems like that dynamic is still going to persist in the second half. Should we be thinking of a similar – margin as in too few or or if he's directionally a little bit higher we'll have to wait and see okay thank you thank you the next question is a follow-up coming from mark bellow from social bank mark you're on the class thank you thank you morning good morning again um i'm just just curious to talk about sort of energy and freight costs in Europe. So your success or what you're doing, which is if you're pushing surcharges through. I'm also curious about maybe if there's any risk or if your businesses are reliant on natural gas from Russia and if you're taking some kind of measures to just how you're dealing with the whole situation.

Yeah. Well, the energy-intensive business we have in Europe is a no-go. And the main supply plant for that business is in the UK. So we do have a small operation in Germany. It's not very big. So the main supply plant is in the UK. So the freight transportation has been, the fact that it's in the UK has been a significant factor because most of the revenues are on the continent. And the UK energy prices have been rampant. And so that's also been a factor. We are implementing surcharges and there is some lag in that and we've got some improvement over Q1. I think we'll see some sequential improvement in Q3 and Q4 again too. But certainly there's very much top of mind at the moment. Got it.

All right. Thanks, Jack.

No problem.

Thank you, and once again, ladies and gentlemen, if there are any final questions, please press star 1 on your phone at this time. We have another follow-up coming from Adam Josephson from KeyBank. Adam, your line is live. Thanks, Jeff. Just one more question on the label demand issue. On the last call, you talked about how it wasn't clear to you how much of the demand was related to your customers, just keeping excess supply on hand versus real end demand. is it any more clear to you now than it was three months ago?

Not really. I think if you look at the impact of packaging on the gross margin of our customers, it's pretty immaterial, particularly when you talk about labels. So no one's going to run risk of supply availability and label supply in a situation like this. So if your job is to buy labels for the XYZ CCG company, and there's a huge plant somewhere selling whatever brand it is and there's no labels, you're going to be pretty much straight away. So there's a lot of people taking supply risk out of the equation, making sure there's no availability of labels is not a problem. And so we're seeing demand levels that don't really gel with the So there's a volume in results of our customers. It's particularly in North America. In Europe and Asia, it's more matched to the customers. But in North America, where retail is bigger and supply chain is more, businesses are bigger, you know, we're seeing some caution in the behavior of big CPTs to make sure they have what they want.

So you have no good way of knowing, it seems like, if your customers, in effect, have excess inventory that eventually they're going to have to work off.

Well, they don't always work it off. Sometimes they may just throw it away because labels shop and change all the time, too. So labels are economically immaterial to them. So at the moment, there's so much caution on the supply availability. People are just buying If you need a million, buy two million. You know, you can do that with lasers, but they take up space. And there's a lot of caution being taken to make sure the customers make sure they have what they want and what they needed.

I guess for all you know, they could keep buying more than they need for months, if not quarters, to come.

It's just, there's no... It tends not to happen in things that take up space, so... in our chief business and our aerosol business, that wouldn't happen. Although we also have long lead times there that are beyond what we would expect to see given the current condition of, you know, in our last big CPGs report, you know, 1% volume growth and we see 10 or 15, something tells you that that doesn't gel.

And this has been going on for how long, this seeming disconnect between the volumes they're reporting and their order.

I think since the supply chain issues really started, it's probably a year old now. It's been going on for about a year. So it's starting to be easing a little bit in the summer, but only a little. So we'll have to wait and see.

And why do you suppose that's a North American phenomenon and not also happening elsewhere?

But you've got space there.

Right. Yeah. That's a good point.

You've got much more space. You know, Europe, it's a much more congested part of the world than Asia. So the U.S. has always got warehouse space available to put stuff. Not so easy in Germany.

Yeah. Yeah. No, I understand. Just two other things. On... M&A multiples, I mean, you talked about, I think, private market multiples for label companies having been quite high in recent years. Have you seen any changes along those lines recently? How do you characterize multiples these days and how attractive or unattractive they might be to you?

Well, I think they're still elevated, but we are seeing signs of transactions being entailed by the financing markets, so So that's usually the first indicator that things are going to change. So we've seen some public to private transactions go slightly pear shaped in the financing of those deals. Deals still went through but the financing was very difficult. That's the first early sign you tend to see and we've seen early evidence of that.

And just one last one. Your exposure to ocean freight, Jeff, have you, since the supply chain easing but staying pretty bad from a historical perspective, any observations on the ocean freight to the extent you're reliant on that?

Well, we're reliant on it with Avery for importation of rings for binders in North America in particular. So that's a big factor. And checkpoints is we make everything we make in checkpoints made in in places where we ship by ocean freight and in the container. So that's also a big factor. The rampant inflation has stopped, but the pricing levels are still highly elevated compared to historical norms.

And is that because of the poor congestion that continues from the best you can tell?

Everything, you know, just, you know, China lockdowns, you know, it's one thing after another, poor congestion in the U.S.

Yeah, yep. Thanks so much, Jeff.

No problem.

Thank you. And we have another follow-up come from Mark Meadows from Social Bank. Mark, you're on your side. Yeah, sorry to keep going back. Maybe it's the follow-up on Adam's question. Just in terms of the inventory situation, I don't know if you have a historic comparison to this, but if they are building inventory, do you get to a point where – Is this image going to become obsolete or is it something you work through? You touched on it earlier, but just a little more color if you could.

Labels do tend to obsolete pretty quick. So if you over order, the rate of obsolescence typically goes up because designs change all the time. Regulatory comments have to be added into the label graphics. there's a fair amount of obsolescence that can occur when people over-order. Okay.

So it doesn't sound like the risk is that material risk?

No, I don't think it's material. I just think that, you know, I think what will happen, Mark, is when it demands, once the supply chain issues go, people will be less conservative in the supply chain risk-taking than they are today. Yeah.

All right. Thanks, Cam.

No problem.

Thank you. There were no other questions from the lines at this time. I would now like to hand the call back to Jeff Martin for closing.

Okay, everybody. Well, thank you very much for joining our call today.