CCL Industries Inc.

Thank you for holding and please remain on the line. The CCL Industries event will begin momentarily. Thank you for your patience. Good morning and welcome to the CCL Industries Fourth 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.

Thanks, Holly. Welcome, everyone, to our fourth quarter call. I'll move everyone to slide number 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 2022 and 2023 annual reports, particularly the section Risks and Uncertainties. Our annual and quarterly reports can be found online on the company's website, CCLIND.com. or on the new CDARplus.ca website. Moving to slide three, our summary of financial results. For the fourth quarter of 2023, sales increased 4.7%, with 3% acquisition-related growth, 2.2% positive impact from currency translation, partially offset by 0.5% organic decline. resulting in sales of $1.66 billion compared to $1.59 billion in the fourth quarter of 2022. Operating income was $254.8 million, up 18%, excluding foreign currency translation, compared to $211.2 million for the 2022 fourth quarter. Jeff will expand on our segmented operating results of our CCL, Avery, Check Point, and Inovia segments momentarily. Corporate expenses were up for the fourth quarter due to an increase in associated expenses for long-term variable compensation. Consolidated EBITDA for the 2023 fourth quarter, excluding the impact of foreign currency translation, increased 14% compared to the same period in 2022. net finance expense was $19.1 million for the fourth quarter of 2023 compared to $17.6 million in the 2022 fourth quarter due to an increase in interest rates on our variable rate debt. In line with our December 23 press release, CCL recorded an impairment of goodwill associated with our NOVIA segment of $95 million. This impairment was a result of our closure of our Belgian production facility and continued demand challenges in the labelled material industry post-pandemic. We also recorded a restructuring charge of $37.2 million, largely for the closure of our Belgian operation. The overall effective tax rate was 57% for the 2023 fourth quarter, compared to an effective tax rate of 21.2% recorded in the fourth quarter of 2022. This was due to the fact that the goodwill impairment charge and the associated restructuring costs for our Belgian operation were not tax deductible. The effective tax rate may change in future periods depending on the proportion of taxable income earned in different tax jurisdictions at different rates. Therefore, net earnings for the 2023 fourth quarter were $38.8 million compared to $145.2 million for the 2022 fourth quarter. With the year ended 2023, sales and operating income excluding foreign currency translation were flat and increased 3% respectively. Net earnings decreased 20% compared to 2022, principally driven by the goodwill impairment charges and restructuring events that were recorded in the fourth quarter for the Inovia segment. Moving to the next slide, earnings per share. Basic earnings per Class B share were $0.22 for the fourth quarter of 2023 compared to $0.82 for the fourth quarter of 2022. However, adjusted basic earnings per Class B share were $0.97 for the 2023 fourth quarter, an improvement of 16.9% compared to $0.83 for the fourth quarter of 2022. The change in adjusted basic earnings per share of $0.14 is principally attributable to an improvement in operating income accounting for 18 cents, foreign currency translation adding 1 cent, partly offset by an increase in corporate costs for 2 cents, increased tax expense costing 1 cent, increased net interest expense costing another penny, and reduced earnings from our joint ventures costing us another cent. Moving to the next slide, slide 5, free cash flow from operations. For the fourth quarter of 2023, free cash flow from operations was an inflow of $273.8 million, almost equal to the $271.6 million posted in the 2022 fourth quarter. With the 12 months ended December 31, 2023, free cash flow from operations was $559.6 million compared to $573.4 million at the end of December 2022. This change is primarily attributable to an increase in net capital expenditures offset by an increase in cash provided by operating activities generated by improved adjusted earnings. Moving to the next slide, the cash and debt summary. Net debt as at December 31st, 2023 was $1.51 billion, a slight decrease compared to $1.52 billion of net debt at December 31st, 2022. The decrease is principally a result of higher debt repayments in the fourth quarter of 2023. Although the company's net debt decreased only slightly, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.13 times down from 1.24 times at December 31st, 2022. Liquidity was robust with $774 million of cash on hand and $0.97, almost a billion dollars U.S. of available undrawn credit capacity on the company's revolving bank credit facility. The company's overall finance rate at December 31st was 2.8% compared to 2.9% at December 31st, 2022, reflecting a strong reduction in syndicated revolving variable interest rate during the fourth quarter of 2023. The company's balance sheet continues to be well-positioned as we move through fiscal 2024. Jeff, over to you.

Thank you, Sean. Good morning, everybody. I'm on slide seven, highlights of capital spending for the year, $444 million just about, men of disposals, and we're planning about the same amount in the current year of 2024. In slide eight, a few highlights of a few of the projects that are in those numbers. We're completing, as we speak, a startup plant in Raleigh, North Carolina, which will make special folded literature labels for the GLP-1 blockbuster drugs you're reading about in the newspapers. That plant is due to come on in the middle of the current year. We're engaging in a major expansion of Aguano Ato Mexico plant, the CCL container, to handle the growth in aluminum bottles and aerosols. That plant can now house nine high-speed lines in a state-of-the-art campus. And in Italy, we're building near Turin a new pressure-sensitive label production site for some major global spirits brands, switching from WEC3 bottle decoration to pressure-sensitive. That plant will start up also in the first half of 2024. Slide 9 highlights for the CCL segment. Return to organic growth, 1.8%, which is nice to see. all driven by high teens growth in Latin America, very modest declines in North America and Europe, and Asia Pacific. Profit gains in all sectors, led by food and beverage, and particularly CCL container. A notable turn at CCL design as electronics demand improved from the recent trough we've seen over the last 12 months or so. FX tailwinds reduced quite considerably in the quarter and will probably turn negative in the current quarter. Slide 10, highlights for our joint ventures. You see some numbers here that are on the negative side. That's all due to the devaluation in Egypt, which caused me to take a big write down on our balance sheet in the fourth quarter around that. So that's the reason for the change in the numbers for the two joint ventures. Slide 11, results for Avery. Solid quarter to end a record year. Outstanding free cash flow. All of that EBITDA and a little bit converted into free cash, so a very good year and a good improvement in the horticulture business, especially in the United States. Slide 12, another very good call for Check Point. The MAS business improved internationally on productivity gains and easing supply inflation. Business is stable in North America compared to a very strong prior year. But the start was really the apparel label business delivered 20% organic sales growth in the quarter driven by robust RFID wins and a record year overall for Check Point 2. Slide 13, results for Inovia, much better quarter than the poor quarter last year. And we saw late in the quarter the first demands of the demand trough that we'd seen really for five quarters in a row. In the fourth quarter of 2022, all the way through last year, we saw the final turn in the pressure sensitive legal material space with demand accelerating also quite rapidly in the first six weeks, nearly two months now, of 2024. The Belgian plant closure has been agreed with the people over there quite smoothly, and we expect to complete that sometime between the end of Q1 and the end of Q2. All is going quite nicely. And we had a good Q4 and a very good 2023 in the Americas. Slide 14, some comments on the outlook. I'd say we feel better about the outlook than we felt for a number of years. Consumer product industry is certainly showing some signs of a return to volume growth with, of course, easier comps than they've had in recent years. The only business we see a little bit of weakness in is in health care. where the inventory building and supply crisis last year is also beginning to show some effect, but that's somewhat offset by the growth in the GLP-1 space. CCL design recovery is continuing this quarter and continuing so far in the year to date. We have fairly easy comps for all of next year, and especially in the electronic space, so we're quite encouraged by that. CCL secure comps are a little more difficult, but the passport-related business is strong. Avery results are expected to be stable, and we move now into the horticulture busy production season where we make most of our money. Checkpoint growth will continue to be driven by RFID and the recovery in apparel volumes, as we're also beginning to see. But most of all, the Inovio starts 2024 with much improved, very good order intake compared to a week prior year. As I mentioned earlier, the FX tailwinds that we've enjoyed will probably flatten out or even turn into a modest headwind at the current exchange rates at some point in the first quarter.