CCL Industries Inc.

Good morning and welcome to CCL Industries' Third 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.

Thank you, Holly. Good morning, everyone. Welcome to our Third Quarter call. We're here in Sioux Falls, South Dakota at our food and beverage facility. I'll draw everyone's attention to slide number two, our disclaimer regarding forklift-looking information. I will 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 2023 Annual Report under the section, Risks and Uncertainties. Our annual and quarterly reports can be found online at the company's website, cclind.com, or at cedarplus.ca. Moving to our summary of financial information, for the third quarter of 2024, sales increased 9.4%, with .9% organic growth, .8% acquisition-related growth, and .7% positive impact from foreign currency translation, resulting in sales of $1.85 billion, compared to $1.69 billion in the third quarter of 2023. Operating income was $288.9 million for the 2024 third quarter, compared to $256.1 million for the third quarter of 2023, a 13% increase excluding the impact of foreign currency translation. Jeff will expand on our segmented operating results in a moment for both CCL, Avery, Checkpoint, and Inovia segments. Corporate expenses were up slightly for the quarter due to short-term variable compensation versus the prior year quarter. Consolidated EBITDA for the 2024 third quarter, excluding the impact of foreign currency translation, increased 11% compared to the same period in 2023. Net finance expense was $19.3 million for the third quarter of 2024, compared to $20.3 million for the 2023 third quarter, down primarily due to a decrease in variable interest rates and a reduction of drawn debt. The overall effective tax rate was .5% for the 2024 third quarter, equal to the effective tax rate recorded in the third quarter of 2023. The 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 2024 third quarter were $191.7 million, compared to $169.1 million for the 2023 third quarter. For the nine-month period, sales, operating income, and net income increased 8%, 16%, and 36% respectively, compared to the nine-month period in 2023. 2024 included results from nine acquisitions completed since January 1, 2023, delivering acquisition-related sales growth through the period of 2.6%, organic growth of 5.8%, and foreign currency translation tailwind of .5% to sales. Furthermore, net income included a $78 million non-tax, non-cash revaluation gain recorded in the second quarter of this year when we acquired the final 50% interest in the Pac-Man CCL joint venture, now fully consolidated. Moving to the earnings per share slide. Basic earnings per Class B share were $1.08 for the 2024 third quarter, compared to $0.95 for the 2023 third quarter. Adjusted for $0.01 of restructuring and other expenses resulting in adjusted earnings per Class B share of $1.09, an improvement of 14.7%, compared to $0.95 for the third quarter of 2023. The change in adjusted basic earnings per share of $0.14 is principally attributable to an improvement in operating income, accounting for $0.15, and the combination of interest expense pickup, net against joint venture equity earnings, and the negative impact of currency translation, summing to a one-cent reduction. Moving to slide five. For the third quarter of 2024, free cash flow from operations was an inflow of $233 million ahead of the $182 million posted in the 2023 third quarter. For the trailing 12 months ended September 30, 2024, free cash flow from operations was $618.6 million, compared to $557.4 for the comparable 2023 period. This change is primarily attributable to an increase in cash provided by operating activities, which was generated by improved adjusted earnings. Moving to our cash and debt summary. Net debt as at September 30, 2024, was $1.68 billion, an increase of $167.6 million, compared to December 31, 2023. The increase is a result of funds used for capital expense expenditures, business acquisitions, and share buybacks. Total share buyback for the quarter was approximately 1.29 million shares for $100 million, summing to ,852,488 shares and $140.6 million, -to-date September 30, 2024. Although the company's net debt increased, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was 1.14 times, up slightly, from 1.13 times reported at the end of December 2023. Liquidity was robust, with $760 million of cash on hand, US $0.9 billion of available undrawn credit capacity in our revolving credit facility. The company's overall average finance rate was .8% at September 30, the same as December 31, 2023. The balance sheet continues to be well positioned as we move through fiscal 2024 and into 2025. Jeff, over to you.

Thank you, Sean. Good morning, everybody. I'm on slide seven, highlights of capital spending, $409 million for the year so far. We expect to spend around $465 million for 2024. Moving to slide eight, some investment highlights of what we've been putting that money into. In Lumberton, New Jersey, we're just completing now an addition to the site there, a very large addition that will allow us to consolidate tube labeling and extrusion under one roof for some large customers. In Spain, we've opened a new shrink sleeve plant to supply consumer packaged goods to the Iberian Peninsula. And in Bangladesh, we've completed a significant expansion at Checkpoint. The country is the world's second largest sourcing country for apparel, about $7 million so far in 2024. Slide nine, highlights for CCL for the quarter, .9% organic growth, up mid single digits in Europe, high single digits in Latin America, double digits in Asia Pacific, and up slightly in North America. Profitability gains are strong in home and personal care and CCL design, modestly lower in food and beverage and health care and specialty, but markedly reduced at CCL secure we faced tough comes to a strong prior year. Slide 10, highlights for the joint ventures, which now exclude Pacman CCL for the quarter, but still have four months results in the nine month period. Moving to slide 11, highlights for Avery, end of the back to school season came quite early, but growth in the direct to consumer badges and card segment drove performance in North America. We had solid progress in Europe and Latin America, but Australia was soft. And the horticultural markets in both sides of the Atlantic were in their low off season. Slide 12, best performing business for sure, in the quarter was Checkpoint, very good quarter in the MAS business with solid gains in sales and profitability, but the standout numbers came from the ALS part of the business with over 30% organic sales growth aided by RFID wins and retailer inventory normalization, that drove significant profit gains in that part of the company. Also strong were the results from Inovia on slide 13, sales growth was aided by label materials industry recovery in North America and Europe and some share gain in North America. Strong operating performance in the Americas in general and transition benefits still to come from the Belgian closure in Europe and Australia, which completed as the quarter concluded. Ecoflour sales in Poland continued to build very nicely. Slide 14, some outlook comments, label and packaging businesses face higher hurdles in this quarter and we have a few new plant startup costs to incur, but the quarter has started off pretty well, we had a good October, better than we had actually thought at the beginning of the quarter. CCL design lapse, a lengthy period of easy comps and the automotive industry as we all know is slowing somewhat. CCL secure will sequentially improve in Q4, we expect Avery to be stable, checkpoint RFID growth is expected to continue and as is the Inovia recovery, especially in the label material segment. And FX we think at current rates would be a modest tailwind although it was a slight drag in the current quarter. So with that operated we'd like to open up the call for questions.

Certainly, at this time we will be conducting a question and answer session. If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from Hamir Patel with CIBC Capital Markets.

Hi, sorry, Kimi. Yes, good morning. Good morning. Hi Jeff. Could you comment on, you pointed to startup costs weighing on the Q4 in the CCL segment would make it challenging to match prior year profitability. Could you quantify what that headwind would be from startup costs and should we expect that to persist into Q1 as well?

Well, we've got a couple of larger new operations starting up, particularly the one in Spain. I can't get into what that's going to be because we don't really know. We know when we have startup costs that they'll run for a quarter or two when we're starting a new operation. So, we'll wait and see how things unfold in Q1. It's not a huge material number. So, the bigger impact is really the comps. So, much tougher comps in Q4 and in the first half of next year than we've had in the last 12 months or so. Having said that, I'd also add we had a better start to the quarter than we had originally anticipated in the CCL segment. But it's only one month, it's two months more to go. Fair

enough, Jeff. Are you able to comment on how pricing is faring across the different segments?

Okay, so far. So, we've got some deflation happening in parts of the business. So, we're doing some pass through of that to some of the customers. And certainly, I would say in the consumer packaged goods space, there is a lot of pressure from retailers to reverse some of the inflation that we had in the last three or four years on our customers and they tend to pass that back to us. But it's probably more prevalent in the food and beverage space than it is in home and personal care so far. But I would say in the CPG space, that comment we made about the stressed consumer with inflation of the last few years, it's certainly coloring the environment at the moment.

Great, thanks Jeff.

That's all I had. I'll turn it over. Okay.

Your next question for today is from Ahmed Abdullah with National Bank of Canada.

Yes, good morning. Thanks for taking my question. Given the one month visibility you have at the CCL label segment, are you sitting at a very different order level or backlog versus last year or is this causing more to do with the last weeks of December?

I think it's just no difference in the backlog. So, I think it's just that the comps really for this coming quarter are much more difficult than they've been for some period of time.

Okay, that's fair. And taking the outlook commentary for the whole CCL segment, do you still expect to see even that growth year over year for the segment?

Not sure yet. It's November and December are difficult months to forecast because we have a very short November in the US with Thanksgiving. We've got the year end lottery in December. So I can only tell you what we know. So October was better than we thought, but we had a strong end to the quarter last year. So we'll have to wait and see how things unfold.

Okay, that's fair. And just on the Inovia operational savings, I see the margin definitely improved year over year. Is there any of these savings that have trickled in into the 3Q or is this more a story of 4Q and into 25?

No, no. The overperformance in Q3 was driven by North America. So that's where the performance came from. Things did improve in Europe with label industry volume going up, but we haven't yet seen the cost benefit savings with the transition from Belgium to the UK yet, but we expect to see them start to come. And we saw the early signs of that in October with the transition now complete.

Okay. All right. Thank you. I'll queue back up. No problem.

Your next question for today is from Sean Stewart with TD Cowan.

Thanks. Good morning, everyone. Jeff, I'm wondering if you can provide some context on perceived exposure in the event that Trump imposes a blanket US import tax. How that could affect your business, whether it's with respect to finished product or procuring feedstock.

Yeah. Well, by and large, our company is what I would call a local, local business. So the customers that we're billing in the 43 countries that we operate around the world are located in the countries where we're manufacturing. And that also applies to the raw materials. So we're not really terribly exposed as CCL to tariff changes. The real nub is what happens to our customers. So some of our customers are impacted. They may ask us to start making things in countries that they would like us to switch to rather than the countries we're making them in today. But the impact on us directly, I think, is negligible.

Okay. Thanks for that detail. And then within the CCL segment, you noted Latin American organic growth in the high single digit range, which I think is a little bit of a deceleration from what you've seen in recent quarters and hoping you can provide perspective on, is that just lapping difficult comps? Where do you see Latin American organic growth normalizing for the business?

I think what we're seeing in Latin America is more control over inflation. So that's a good thing, I think, for us in the long run. So certainly, you always have to look at Latin America as the organic growth rate net of inflation. So we've seen, particularly in Brazil, things get under pretty good control there. And currency's improved in Mexico. But we're still very encouraged by the opportunities throughout that region in the world. But it is volatile, driven by exchange rates and the impact on inflation.

Okay. That's all I have for right now. Thanks very much. No problem.

Your next question is from Stephen McLeod with BMO.

Thank you. Good morning, guys. Hey,

Steve.

Good morning. Just wanted to follow up on a couple of things. Just on the checkpoint business, can you talk a little bit about, you talk about the ALS business up 30%. Can you talk about the breakdown between the drivers of that number on RFID versus retail or inventory normalization?

It's almost all RFID driven. Okay. The vast majority of it, Steve.

Yeah. And are you seeing any moderation in those, in the RFID growth rates as you sort of turn the page into Q4 in 2025?

No, I think we're very encouraged by the outlook. The whole industry is growing. There are more and more use case applications appearing. We're in a very good position. We have knowledge in hardware, knowledge in software. We've got two world class inlay production facilities. We've got coding equipment installed in a number of operations around the world. So we're, we have an extremely good position to capitalize in our, what is without doubt in our industry, the biggest growth opportunity for us and for all the players in the space. Yeah. Okay.

That's great. And would you, would you sort of characterize it? You already have relationships with all the, a lot of the large label buyers around the world. So is it, is it fairly, fairly easy or simple to kind of embed RFID into those relationships and as a conduit for incremental sales?

Yeah. I mean, I'd say we've got a highly developed infrastructure for delivering RFID in the apparel space. So in these, in these new categories, the customers and ourselves and all the people in the supply chain still have some things to organize to be able to implement the technology without, without difficulties. But the retailer, the retailer interest in, in, in deployment is, is going up and up and also in some spaces outside of retail. So I think we're just in a really good place, but some of these new applications may take a, may take a bit of time to unfold when we get things organized. Right.

Okay. That's great, Keller. Thanks, Jeff. Appreciate it. Just turning to, turning to the buyback, obviously very active this quarter with a hundred million dollars of deployment. Can you talk about sort of how you're thinking about the buyback now and heading into, into Q4?

Well, we're definitely buyers of the stock at the moment. We still think the stock, it's a good option for use of our surplus free cash flow. We do want to make sure we, the very least, we buy enough back to offset any dilution from compensation programs. And, you know, I think the outlook is for things to continue along the lines you've seen so far.

Okay, great. Thanks, Jeff. And then maybe just finally, you know, in terms of other capital deployment, can you talk a little bit about what you're seeing on the, on the consolidation or M&A front?

Yeah. Yeah. So we still, we're still working on a number of, a number of opportunities in the M&A arena. Valuations still sometimes challenging in some of the spaces we'd like to be in. But we've, we've still got an active list of targets we're working on. And, and it's still our number one priority for, for free cash flow. But as you've seen from Sean's slides, the free cash flow number is mounting. So, so optionality for either Greenfield Investments or M&A or buybacks for in a very happy state of affairs. That's great. Thanks so much, Jeff. Appreciate it.

Your next question for today is from Arthur Nagourney with RBC Capital.

Hey, good morning. Morning, Arthur. Just want to go back to RFID. I believe your Mexico facility came online in Q2. And just wondering how that's ramping up, I guess, relative to your initial expectations.

Yeah, it's ramping up. It's still, it's still in startup mode. So it's not making money yet. But it's more focused and targeted on non apparel related applications. So they come more less frequently and a bit more lumpily. But we're very encouraged by the opportunities that we that we're facing. And we certainly expect that operation to turn a profit as we go as we go into 2025 at some point in the year.

And then just one more on RFID. I think you called out some customer in the quarter. Is there anything in particular that you would call out there?

Don't want to disclose anything about customers. But everything everything we're involved in is really in the retail space so far. That's a substance.

All right. And then last one for me. Sounds like the Pacman acquisition is progressing ahead of expectations in the first fully consolidated quarter here. What trends are you seeing in the Middle East?

Yeah. So the Middle East, obviously, everyone's asking us about what's going on with the conflict. But the territories we're in, Egypt, the UAE, Pakistan, Oman, Saudi Arabia. These are not countries affected by the situation down there. And we still see pretty strong demand levels, especially in Egypt and especially in Saudi Arabia. Perfect. Thanks,

Jeff.

No

problem.

Your next question is from Michael Glenn with Raymond James.

Hey, good morning, Jeff. I just want to circle back to RFID. So if apparel label is comping 30 percent, but just to make sure I understand that correctly, like RFID would be a much smaller portion of that business overall. So it's comping meaningfully higher. Is that the right way to think about that?

Well, I wouldn't say so. I wouldn't put it quite as succinctly as that. But so the incremental growth is all coming from RFID. So yeah, if you look at the growth rate in pure RFID, it's sort of at a premium to the average that we see for the ALS business in total. That's for sure the case. I don't have a number in my head what that would be, but it's certainly north of the number for the growth in the business overall.

And ALS, ALS traditional business would be a mid single digit or high single digit type comp? Is that

correct? Don't have the data, but it's the vast majority of the growth came from RFID. OK.

And I just want to circle back on the Trump question. Can you just remind us about what your China export business looks like and maybe give some indication of some of the steps you've taken over the past, call it eight years to mitigate any risk from China tariffs or China supply chain issues?

Well, one of the reasons we built the RFID inlay plant in Mexico, that was a factor. So the main exports that we have around the world in that regard really revolve around the checkpoint hardware business. So that would be the area that we would be most exposed, but that's a pretty small part of what we do. We would have lots of options if we needed to relocate it for any reason. And I think you also have to recall, remember that in the event there are any tariffs, it's only on the transfer price, not the full retail price of what we make. So I think the impact is relatively small. The much bigger question really revolves around our customers. So obviously in the electronics industry, we've got a very large number of customers making and assembling devices in China. And the question will be, well, what will happen in the future to their supply chains and where they might be relocated to? Or will these tariffs really get put in place in the way that some people say they might be?

Okay. And finally for me, so North America Organic does appear to have slowed sequentially. I think it was high single digit in 2Q and now it's low single digit in 3Q. Was there anything specific that you could call out on North America?

Just comps.

Just the comps.

Yeah.

Thank

you

for the questions.

No problem. Your next question is from Daryl Young with Stiefel.

Hey, good morning, everyone. Just one higher level question from me around your approach to M&A. So historically you've shied away from competitive processes and been more long-term relationship focused. But given the elevated monetization environment for the private equity landscape, is there an argument for maybe adapting to participate in some of these processes as some of these assets come to light, just given how active private equity has been in your space in the last decade?

Well, the private equity industry has been very active and very irresponsible in our space for a long time now and received many bloody noses as a result of that. And there is not very much of great interest to us that's held by private equity players in our industry in the core CCO label business. So our focus remains on the better quality assets in our industry, which tend to be privately owned companies with more reasonable expectations, with better investment profiles because they've been put in capital play into their business over the long term versus somebody who's been highly leveraged and not been deploying capital during their period of ownership. That's good color. Thank

you very much, Jess. No problem.

Your next question for today is from David McFadgen with Cormark.

Oh, great. A couple of questions. Just circling back on the checkpoint business. So in your presentation, you talk about the fact that you've had ALS going up over 30% driven by RFID wins. So when you say RFID wins, does that mean new clients or does that mean converting existing clients to RFID?

It's a combination of new clients, share gains, customers that we already have where we have gained shares. It's a combination of those two things. So new clients and share gains that customers we already have.

Okay. I don't know if you can help us out on this one, but what percentage of your existing clients have adopted RFID? And then I'm just wondering what the opportunity is just with your existing clients today.

Well, the best way to answer that, the apparel industry is around one third adopted in our opinion. And I would qualify that by saying that in the apparel space, a number of players initially adopted RFID with hard tags. So these would be multiple trip RFID tags that are taken off in the store and then reused. So there'll be a number of conversions of those to soft tags, which is a better business for us, which would be one way tags that are not recycled and reused. So I think there's a long runway left when you think about it in that regard in apparel. And I do think it will eventually become a ubiquitous technology broadly adopted in the apparel industry. So quite a long runway still left.

Okay. And that business within Checkpoints, it's about a $250 million business today, right?

Correct.

Okay. And then just a question on CCL Secure. So you said that, you know, with down marketing in the quarter, just I think you call it just strong comps. But are there any other factors that cause it to be down in the quarter?

No, it's a volatile part of the business. So if we have orders, we make very good money. If we don't have orders, we don't. And obviously, given the nature of the customer, it's very difficult to influence them to do anything short term. So when they need supply, we do well. When they don't need supply, we have what happened in Q3. Okay.

Okay, great. Thanks. No problem.

Once again, if you would like to ask a question, please press star one. We have reached the end of the question and answer session, and I will now turn the call over to Jeff Martin for closing remarks.

Okay. Well, thank you very much, everybody, for joining the call, and we'll look forward to talking to you at our year-end call in the middle of February. Thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.