CCL Industries Inc. (1C9A.F) Earnings Call Transcript & Summary

Good morning, and welcome to CCL Industries Third Quarter Investor Update. Please note that there will be question-and-answer session after the call. The moderator for today is Mr. Geoff Martin, President and Chief Executive Officer; and joining him is Mr. Sean Washchuk, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen.

Good morning, everyone. Sean Washchuk here with Geoff Martin. We're in New Jersey at our Home & Personal Care office in Lumberton, New Jersey, and we'll begin our Q3 presentation. Turning to Slide 2, our disclaimer regarding forward-looking statements. 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 2024 annual report, particularly the section Risks and Uncertainties. Our annual and quarterly reports can be found online on the company's website, cclind.com or sedarplus.ca. Moving to Slide 3, a summary of our financial results. For the third quarter of 2025, sales increased 6.3% with 3.7% organic growth, 0.1% acquisition-related growth and 2.5% positive impact from foreign currency translation, resulting in sales of almost $2 billion compared to approximately $1.8 billion in the third quarter of 2024. Operating income was $321.8 million for the 2025 third quarter compared to $288.9 million for the third quarter of 2024, a 9% increase, excluding the impact of foreign currency translation. Geoff will expand on our segmented operating results for our CCL, Avery, Checkpoint and Innovia segments momentarily. Corporate expenses were up for the 2025 third quarter compared to the prior year third quarter due to higher variable long-term compensation expenses. Consolidated EBITDA for the 2025 third quarter, excluding the impact of foreign currency translation, increased 7% compared to the same period in 2024. Net finance expense was $18.2 million for the third quarter of 2025, lower than the $19.3 million for the third quarter of 2024. The decrease is due to higher finance income earned on our higher cash and cash equivalent balances. The overall effective tax rate for Q3 2025 was 25.5% compared to an effective tax rate of 24.5% recorded in the third quarter of 2024. This was due to a higher portion of our taxable income being earned in higher tax jurisdictions. Our 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 2025 third quarter was $210.8 million compared to $191.7 million for the 2024 third quarter. For the 9-month period, sales, operating income and net income increased 6.5%, 9.9% and 7.9%, respectively. This all excluded the impact of a $78.1 million revaluation gain recorded in the second quarter of 2024, also compared to the 9-month period of 2024. 2025 included the results from 2 acquisitions completed since January 1, 2024, delivering acquisition-related sales growth for the period of 0.8%, organic growth of 3.1% with foreign currency translation tailwind of 2.6% to sales. Our next slide, earnings per share. Basic and adjusted basic earnings per Class B share were $1.21 for the 2025 third quarter compared to $1.08 basic and $1.09 adjusted basic earnings per Class B share for the 2024 third quarter. Adjusted earnings per Class B share increased 11% compared to the third quarter of 2024. This 12% -- $0.12 increase in adjusted basic EPS was primarily driven by improved operating income, which was attributable to $0.14, foreign currency translation adding $0.02, reduced net finance costs added $0.01. These gains were partly offset by lower joint venture earnings of $0.01, higher corporate costs of $0.02 and a higher income tax rate of $0.02. Moving to Slide 5, our free cash flow from operations. For the third quarter of 2025, free cash flow from operations was an inflow of $333.4 million compared to an inflow of $233 million posted in the third quarter of 2024. This increase is principally due to improved earnings and improved net working capital for the third quarter of 2025 compared to the prior year third quarter. For the trailing 12 months September '25, free cash flow from operations was $860.2 million compared to $618.6 million for the trailing 12 months ended September '24. This change is primarily attributable to improved adjusted earnings and reduced net capital expenditures over the comparative periods. Moving to the next slide, returned to shareholder slide. For the 2025 third quarter, we repurchased 1.3 million shares for $100 million, including the 10.3% increase in the 2025 annual dividend announced in February of this year. Dividends paid year-to-date have amounted to $167.9 million for a total of $467.9 million returned to shareholders. Moving to Slide 7, our cash and debt summary. Net debt as at September 30, 2025, was $1.49 billion, a decrease of $131 million compared to December 31, 2024. This decrease is principally a result of higher total debt outstanding, more than offset by an increase in our cash and cash equivalents. With the decrease in the company's net debt, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 0.93x at September 30, 2025, down from 1.08x reported at the end of December 2024. Liquidity was robust with $1.1 billion of cash on hand and USD 0.8 billion of available undrawn credit capacity in our revolving credit facility. The company's overall finance rate was 2.6% at September 30, 2025, equal to December 31, 2024. The company's balance sheet continues to be well positioned for the balance of 2025 and well positioned as we move into 2026. Geoff, over to you.

Thank you, Sean. Good morning, everybody. On Slide 8 highlights the capital spending for the year. We're expecting gross costs for the year to end up about $450 million, most of it spent in the CCL segment. Page 9, highlights for the quarter for the CCL segment, which was the strongest part of the company for the quarter, 6.6% Q3 organic growth that was on top of 4.9% for the same quarter last year, mid-single-digit growth in North America and Europe high single digit in Latin America and Asia Pacific, including the Middle East. Very good quarters in Healthcare and Specialty, Home & Personal Care and especially CCL Design. CCL Secure was up significantly, but compared to a weak prior year and the Food & Beverage business was flat. Moving on to Slide 10. Just one comment really on our joint ventures here. Pacman-CCL was acquired in the middle part of last year. So we're just seeing the results of the one joint venture we have left remaining here for the quarter. Page 11, highlights for Avery. As we expected, we had some impact in the back-to-school season in the U.S. from tariffs, particularly affecting our ring binder business. We'll talk more about that in the Q&A. But that was part offset by continuing growth in our direct-to-consumer segment in North America and Europe. Latin America was affected by currency, particularly for imported materials and especially in Brazil. Page 12, highlights for Checkpoint. Another strong quarter in Europe in the MAS business, a few large technology rollouts, chain-wide rollout of technology in European retailers and solid elsewhere, except the Americas, where we had also tariff impacts from our intercompany supply of products from China. The apparel label industry continues to be disrupted by the supply chain disruption from tariff policies. So that's continuing to affect us. We had very strong growth in this quarter last year. It was modestly better this year, but we're expecting to see that gradually improve as things settle down in the apparel supply chain. Page 13, highlights for Innovia. Profits down for the quarter entirely due to the Germany scale up. We had a pretty good quarter in Europe, softer in North America on the volume side and sales declined also on lower resin cost pass-through, particularly in North America. Slide 14, some outlook comments for the coming quarter. For the CCL segment, orders are stable. Most of you would have seen the CPG customer volumes are still soft. But our CCL Design business continues to be quite an offset to that. October results were modestly ahead of this time from prior year. Avery had its slow quarter, horticultural aside, but also had a pretty good October. The Checkpoint tariff-related risks remain in MAS internally and in the apparel supply chain externally. And then in Germany, we've got continuing start-up costs, and we'll have a shutdown this December to fix some problems on the line, and we'll start up with gusto into the new year. We have challenging comps for the fourth quarter, but we also have FX as an increasing tailwind. So we'll wait and see how that pans out as the year finalizes at the end of December. So with that, operator, we'd like to open the call for questions.

[Operator Instructions] Your first question for today is from Ahmed Abdullah with National Bank Capital Markets.

Solid results at CCL. And I just wanted to clarify the commentary about the softer volumes on the CPG customers. Are you seeing any dramatic step change there? Or is it like a step change down? Or is this referencing the ongoing sluggishness that we've been seeing throughout the year?

Ongoing sluggness we've seen throughout the year.

Okay. Perfect. And just in the CCL segment, are you still seeing a benefit from customers kind of rethinking their supply chains and helping you gain some share there? Any color you can give on that?

We have some share gain on the margin, but it's not material.

Okay. And for RFID at Checkpoint, you called out a strong September. Any color you can give us on how Q4 has been trending for RFID growth?

We don't have the data for Q4 yet, but September was pretty strong. So the Q3 data July was actually below prior year. August was modestly above and September was up well into double digits.

Okay. And just a final question for me. On the German plant start-up costs, this quarter was a bit higher than last quarter. Should we expect this number to be trending down as we head into early 2026 or kind of staying around that level?

I think it will be $3 million to $4 million a quarter for another quarter or 2 until we get through the qualification with all the customers. So it's a new line with new technology. So we have to get the films approved by all the customers, which we're now doing. So we expect that situation to improve in the second half of next year.

Your next question is from Hamir Patel with CIBC Capital Markets.

Geoff, for the CPG softness that you've been seeing this year, are there any maybe notable differences that you'd point to across geographies? And is that also affecting price comps with those customers?

Well, I would say on the geography side, the most notable change is things are improving in China. So we've seen that pretty much across the board with all the customers. So we're seeing definitely improving strength in China. Europe and the U.S., I think can best be described as flat. Latin America, volumes are okay, but inflation is foreign exchange-driven inflation can present some challenges in Latin America. Middle East is very strong.

Great. That's helpful. And for Innovia, just given the, I think, a planned outage you referenced for Q4, how much of a headwind would that be in addition to the start-up costs you mentioned?

I don't think it will be very much because it's a short month. So we're just taking a little bit of extra time. So there's not much point in running the line between Christmas and New Year. So it's really taking that sort of Christmas, New Year period to make some adjustments to the line on the trials we've been running. That's really what we're doing. I think the impact will be very modest compared to what we saw in Q3.

Fair enough. And Sean, for CapEx, what would you expect for 2026, just given the strength of the balance sheet?

Well, I think it will be plus or minus our current run rate, $450 million. we'll have an update for the Q1 quarter because we'll have our entire budget process completed by then.

Your next question for today is from Stephen MacLeod with BMO.

Just a couple of things I wanted to circle around on. Just with respect to the CCL segment and the performance in the quarter and the outlook commentary. It was a very strong quarter, but it sounded like a bit more of a moderated outlook. So I was just curious if I'm interpreting that correctly. And then secondly, along those lines, did you see sort of growth kind of decelerate into the end of the quarter?

No. No, no, we didn't see that. So it's always difficult in Q4 because you've got 2 short months. So forecasting the end of the year is always tough. I wouldn't say the environment is terribly different. So we had a good fourth quarter last year. So it's just -- we haven't seen an improvement really the message. So we haven't seen a robust consumer environment. That shouldn't come as a surprise to anyone. So we're just taking into account the fact that it's a difficult quarter to predict because of the 2 months of holiday seasons. And we haven't really seen any improvement compared to how it's been all year.

Okay. No, that's helpful. And then I just wanted to ask about the CCL segment margin, which was quite strong and the highest quarterly margin, I think you've had in 4 years. So I was just curious if there's anything kind of onetime or unique to the quarter that was driving that 17.2% margin.

Comparatively, we had a very weak quarter last year in CCL Secure. So that was certainly an impact. And we didn't have an exceptional quarter in Q3 compared to other quarters we've had in that business over the years. But the comparisons were very strong because it was good this year and not good last year.

Okay. That's helpful. And then I guess maybe as we think about that margin into Q4 and into next year, is it still -- is there a reason to think that we could continue to sit above 16%.

Well, we'll have to wait and see. We hope so, but we'll have to wait and see.

Yes. Okay. Thanks, Geoff. And then maybe just finally, I noticed in the outlook commentary, you highlighted particularly on Avery, focus on tuck-in acquisitions. And I'm just curious if you're seeing anything popping up in the pipeline on the CCL side as well.

No change on the CCL side. There's always things we're looking at. Those direct-to-consumer acquisitions at Avery have been largely home runs in the name. So we want to do more of them. And we've announced a couple this year. There's a few more in the hopper, and we'd like to do more of those because that's the part of the business that's really growing.

The next question for today is from Michael Glen with Raymond James.

Just going back to the CCL gains, the 6.6%, Geoff, you're talking about low CPG volumes and then modest share gains. So what's the explaining factor for the outperformance on an organic basis?

Well, we don't -- we can't measure physical volume organic gains. We can only really measure revenue gains. So it's more mix driven than anything. I can say that for sure. We know it's more mix driven and probably a little bit of share gain on the margins, but it doesn't really move the needle that much. So mix would have been the biggest factor for sure.

Okay. And then just back on the CCL Secure. The contribution you saw from CCL Secure this quarter, is this something specific in Q3? Or is it a new recurring piece of business?

It's really about the comps. So it's just the fact that last year, CCL Secure Q3 was not good. There's nothing unusual. It's just back to normal. That's all it is.

Okay. And then just on Avery with the back-to-school, how do we parse between the tariff impact and what might be an underlying structural decline in those legacy products?

Well, the tariff impacts a couple of million. So in terms of cost on us. And then you've got the effect the whole tariff regime has had on retailers sourcing products for a very short selling season. So you have to remember that the tariff shock came as quite a surprise right in the middle of the time of the year where retailers are preparing for the back-to-school season. They do it well in advance. So their ability to deal with that this year was materially impacted. So that affected how many products they could put on the shelf by when. And then on top of that, we had tariff impact ourselves directly on some products we had, which were not USMCA compliant that we had to pay tariffs on.

Your next question for today is from Sean Steuart with TD Cowen.

Geoff, I wanted to follow up on the M&A opportunity set. You touched on the direct-to-consumer opportunities for Avery and maybe more in the hopper there. What you've announced this year, a pretty small scale. Are there -- I guess I'm hoping you can frame the scale of some of these opportunities. Are there opportunities out there that are larger scale than what you've announced this year that could maybe move the needle to a greater extent?

Well, we can't discuss things like that. I'm sorry. I know we always get asked these questions, but we have a hopper of opportunities we look at constantly all the time, developed over many years, and we just have to wait and see how many of them come up. And I think we're highlighting the direct-to-consumer space because it's doing so well, and we want to do more of it. But beyond that, I don't have any other comment to make.

Okay. Understood. In Innovia, you touched on sales being affected by the lower resin cost pass-through. Would you qualify that as strictly a timing issue? Is there anything structural there? Could we expect that to normalize...

It's just the pass-through of resin. So if resin drops 20%, well, in resins half year cost will sales go down 10%. That's the way the math works. And so in this quarter, we had mid-single-digit volume decline. So you can look at the revenue decline and see deduce from that how much the resin pass-through impacted us.