CCL Industries Inc. (CCLB) Earnings Call Transcript & Summary

Okay. Well, thank you, and good morning, everyone. Thank you for joining us for today's call. My name is Stephen MacLeod, and I cover the Canadian packaging sector here at BMO Capital Markets. And with me for today's virtual fireside chat is Geoff Martin, the CEO of CCL Industries. So thank you to Geoff for taking his time to provide an update for the business. I appreciate and look forward to our chat. We did our first fireside chat like this last June. So really, only 3 months into the pandemic. So landscape has certainly shifted quite materially since then. So we look forward to hearing kind of what your views are effectively a year into the pandemic, where we sit now. So before we get started, we have a good handful of people online. And I just wanted to let you know that anyone who's listening via webcast, there is an option to submit questions. If there's anything that we don't cover in the Q&A. And then I can relay these questions anonymously. So let's get started. So Geoff, I'll hand it over to you. I know you wanted to give some introductory remarks before we head into the Q&A.

Yes. Thank you, Stephen, and good morning, everybody. So we've been doing these intra-quarter updates for investors, really, the first 1 was last February in the middle of when the crisis first started right in the middle of it, and we've been doing them each quarter ever since, and we're now lapping the one we did this time last year. So this will be our last intra-quarter update. And then we'll be reverting to our normal quarter-end investor calls and some public conferences, which we attend. So I just wanted to let everyone know that before we begin. And I hand it back to you, Steve, for whatever questions you want to ask.

Great. Okay. Thanks, Geoff. So I just want to start with some high-level questions and then drill down into some of the segment-specific trends then talk about maybe the resin pricing backdrop and capital allocation. So just in terms of the higher level, the business is really very, very definitely proved out of resilience through the pandemic. Despite the steep drop in global activity, during the depths of last spring's lockdown, organic growth was only down 12%, and then it's steadily recovered. So just as you think back over the last year, what were the biggest surprises for you as to how the business performed and how your people responded?

Well, the biggest surprise, I think, to everybody in our sector was the movement of GDP dollars from travel and entertainment into buying goods for the home. So that generated outsized packaging demand in certain parts of the food and beverage space. And of course, sanitizers and disinfectants. So that was the -- that was the big surprise in the pandemic. I think our Avery and Checkpoint business were the 2 that were deeply impacted, and that wasn't a surprise. So they're both related to what's going on at retail globally and also home working versus office working. So not a big surprise to us that those 2 are the most impacted. But biggest upside really was that sort of surge in demand for packaged goods for the home.

Yes. Okay. And you've talked in the past about -- and even coming into this recession and the pandemic that the business is really GDP minus coming in and GDP plus coming out. As you look forward into 2021, do you expect to see that GDP-plus type growth continuing in the recovery this time around?

Yes. Well, I think '22 will be the asset test year, to be honest with you, because '21 has got such weird comparatives. So we're going to have a very easy first half comparison. And then we had a big recovery in the second half, as you know. So it's going to be a year of 2 halves, the first half and the second half. And -- but the first half comps being very easy and the second half, being a good bit more difficult. So I think really until we get into 2022, and we hope this thing will finally come to an end, and we'll see what kind of world we're in. I think the year of '21 will be lots of ups and downs like 2020 was.

Yes. Okay. Okay. And when you think back over the last year in terms of the company's COVID-19 response, all of your plants remained open through the pandemic. You're were in a very decentralized business. As you think about and talk to your plant level managers around the globe, are they sensing a return to normalcy in most pockets of the world right now?

Well, all of our plants are operating now and everyone's attending work, and that's in every country in the world, really. And it's been that way for quite some time. We only had a few interruptions in the second quarter of last year. So -- but if you go to the various countries and ask how normal is life, the places in the world that are normal, China is obviously #1 on the list. Australia probably will be #2. In Europe, it's still quite some -- this quiet about rising case numbers in Germany, rising case numbers in other countries in Europe, EEC vaccine problems, which you've read all about in the newspapers. So Europe is still, I think, somewhat behind the rest of the world in that regard. I think Latin America where also case numbers rising, although the economies there are pretty much wide open. So it's a bit of a patchwork out there. But in our operations, everything is operating pretty much normally.

Okay. Great. Competitive landscape question for you. You began making adjustments to the business proactively. If you go back even 14, 15 months from now, 18 months. In anticipation of economic weakness, of course, not knowing that there was a pandemic on the doorstep. And the business really has proven out its resilience. In light of this over the last year, how have your competitors fared through the pandemic? Are there any notable areas of market share gains or new customer wins?

Well, we always have new customer wins on the margin. I don't think the landscape has really changed a whole lot in the pandemic. So I think the trends that we see are industry trends. So people we compete within the Avery and Checkpoint space have suffered like we did, people we compete with in the packaged goods space and prospered like we did. So I haven't seen real change in the competitive landscape. I do think there will be more -- probably the big mega trend we see is the global trading situation. The movement of goods around the world has got more difficult. So probably some movement towards more regional sourcing versus global sourcing in some industries. It wouldn't hurt us maybe, not a competitive trend, but I don't think is a trend. But competitive-wise, I haven't seen a whole lot of change in our landscape.

Right. And with a more regional sourcing business model, presumably, that would benefit you on the label side, at least?

Well, we're well positioned for that. We're everywhere our customers are. So it's their behavior that will be driving that. And so when that move occurs, we'll be in a good place to capitalize them.

Yes. Okay. Great. Okay. Well, that's great. I just want to -- and then I wanted to now just talk about each segment.

Sure.

So maybe starting with the CCL segment, you're coming off a very strong Q4 with 7.4% organic growth. The highest level, I think you've reported since 2018. Are you still seeing a strong start to 2021 so far? And is this -- is the year likely to play out as you've expected with a stronger first half and tougher comps in the back half?

Yes. Yes. So the CCL segment space is up about 5% as reported for the first 2 months. We'll see what March brings, and March is a pretty big month. So it may -- things may improve beyond that in Q1. That's an as-reported number not an organic number. And -- but as the year started off pretty solidly. I think probably, the change we've seen is the sanitizer and disinfectant boom is sort of over as the vaccination rollout has occurred and as people have stopped the panic buying we saw this time last year in some of those areas. So I think in the home and personal care space, we've seen some softening of demand in those product categories. We're not yet seeing a recovery in some of the things that have been pandemic-driven. So that's probably the one area of softness we see in the first quarter. But in all the other spaces, we're in -- all rising. In some cases, quite rapidly.

Yes. Okay. And your strength in Q4 was pretty broad-based. But I just wanted to dig into each of the various end markets. So maybe starting with the -- historically, what you might call core label businesses, home personal care, health care, specialty food and beverage. That might be an unfair way to characterize it, but maybe starting with the Home & Personal Care business. Can you give some color on how the label business, labels has trended versus aerosols and tubes. And maybe starting on the aerosol side?

Yes. Well, the label business has certainly performed better than we achieved in aerosol business in Q1 because the comps this time last year were pretty much unaffected. So -- and we still have got some trailing demand issues in aerosols and tubes relative to travel retail demand. So small-sized tubes, small-sized aerosols, sun care products, things like that. Demand is still, but it is improving quite rapidly. So I expect the comps on those 2 product lines will be tougher in Q1 than they will be for the rest of the year. But the label business is still solid. With that one caveat I gave about the sanitizer and disinfectant boom having normalizing, but not come to an end, but it's just normalizing. Those product lines will just return to their normal places in the HPC space.

Right. Okay. And on the aerosol side, if I recall correctly, aerosol and tubes is roughly 40% of HPC and labels are 60% of the -- yes.

That's right. That's right. That's right.

And then within the -- within aerosols and tubes, you talked about specialty retail, which, as I call it, 25% of the overall business. Have you begun to see that sort of pick back up as travel has opened up and economic -- economies have opened?

Only a bit. So the order intake is good, but the shipment, so I think there's a lot of optimism about the summer. But the shipments, we're not in the season yet where we'll be shipping that stuff. So I expect Q2 to be a lot better than Q1 in those categories as retailers get more confidence in demand levels. So it's improved a bit. And the order intake has been better than the shipments. Because they're placing orders for those summer-season-related products now. So we'll have to wait and see what the summer brings. But the optimism in the order intake would indicate it will be better than it certainly was this time last year. A lot better.

Okay. And then maybe sticking with the -- turning to labels within Home & Personal Care. You talked about how things have certainly normalized on the sanitation side. Profitability came down a little bit in Q4 on the -- sort of on the overall business on the CCL container build-out. Can you talk a little bit about where you are on that capacity expansion and whether this has continued to be a drag?

I think it will be a drag in Q1, but we'd expect it to improve markedly in the 3 remaining quarters of the year. So I think it will still be a bit of a drag in Q1, but I'd expect things to improve significantly as we go through the next 3 quarters.

Yes. Okay. Great. Okay. Well maybe turning to the Healthcare & Specialty side. You saw sales and profitability growth in Q4 on pandemic demand. We're actually, speaking of which, we have a question that just came in on the line. Specific to the segment, do you deal with any of the COVID-19 vaccine makers or providers? And is that expected to provide any benefit to the Healthcare & Specialty business?

Yes, we do. We are involved in some of the vaccines, but I wouldn't say the labels we're making in that area are pretty small. Those vials are not very big. There's lots of them, but it isn't a material factor in our situation. But yes, we are involved in both vaccines and supplies for testing equipment.

Okay, okay. And then maybe ex-outside of the vaccines, can you talk about some of the drivers of demand in this business through Q4 and maybe into Q1? And you saw elevated demand around the pandemic. Has that business also began to normalize back to historical levels?

So far, that seems to be holding up well. So last year, we saw in Q2 of real big boom in over-the-counter medicines. So as we get into the second quarter, I think that probably will change a bit. But Q1 is still more or less the same trends we saw this time for most of last year. Whether that will continue in Q2 or not as people's confidence with vaccines remains to be seen. And we've still seen solid growth in modern garden chemicals, which is another area where we had a big boom from the pandemic last year. And so far, demand in that space continues to remain strong, whether it will be as strong as last year once we get into the summer, people have more choices to spend their money, remains to be seen.

Right. And can you give -- can you just remind us of the breakdown in the Healthcare & Specialty business between what's sort of core health care versus specialty, i.e., Lawn and Garden?

Well, specialty for us is really -- I mean it's really Ag Chem and Lawn and Garden. So more Ag Chem Europe, more Lawn and Garden in the U.S. So our European businesses are more chemicals for fertilizers for farmers in the U.S., it's more heavily Lawn and Garden consumer-driven. But it's a chemical industry, basically.

Right. And what's the split between health care versus Ag Chem, Lawn and Garden?

What do you mean? What's the split?

The revenue split?

We don't give that information out.

Okay. Okay. Okay. So maybe moving to the Food & Beverage business. You saw Q4 sales growth on sleeves and label demand. Can you talk about how that business has trended into Q1 and where you've seen maybe pockets of strength and weakness?

Yes. We've seen the recovery that started in Q4, continue in Q1. So the comps, of course, easier than they were this time last year. So it's not expected that we're doing better there than we were in Q1 last year. And the return of some level of on-premise demand, particularly in North America is encouraging. And we'd expect the trends in this business to be very good comparatively compared to last year, where we had, particularly the mineral water category, but also beer and wine and spirits were impacted by the pandemic, especially outside the U.S.

Okay. And you saw full year profits down year-over-year in this business, largely due to on-premise and travel-related demand. Have you seen this pick up with on-premise opening?

Yes. We're down a little last year. We're only down slightly, and they'll be up meaningfully this year. Yes. We'll still have a big bounce back year in food and beverage, for sure, demand driven and also just the new business wins and other things going on in the market. I think we're going to have a good year in that space this year.

Okay. Okay. Sleeves is a segment of this market that's had outsized growth over the last few years. What's driving that secular demand for sleeves? And is there any end in sight?

Well, it's been heavily driven by North America. And well, the Americas, really, I mean, North America, Mexico, and Brazil. That's been the growth driver. Europe has been more steady Eddie, but -- and I think it's more share gains than -- and end-use drivers. But the reasons to use sleeves haven't changed. People like the 360-degree graphic look. They like the presentation of the package. It allows them to premiumize products fairly easily at low cost. So I don't think those megatrends have gone away, and we'll return with gusto once this industry normalizes.

Okay. And the trend, as I recall, has been stronger for sleep demand in places like Asia and Europe, but you're seeing that trend becoming more popular in places like North America?

Well, I wouldn't say we've seen it more popular. I think we just gained a lot of share in the U.S. So I think we -- we're the market leader in Europe. We weren't the market leader in the U.S. We're heading towards being that as we speak. But so I think in the U.S., in particular, we've seen quite a bit of share gain.

Okay. Great. So maybe moving on to the Design and Secure business. On Design, automotive is 50% of the business, drove the big rebound in Q4. Are you seeing this recovery continue into Q1?

Yes, we are. Automotive is up, and the demand for IT peripherals hasn't gone away. So first 2 months of the year, were up over 20% at CCL Design. So that's the strongest about our businesses right now, both top line and bottom line, driven by a recovering automotive industry and continuing demand for IT peripherals. I think you have to remember, on the IT side, this time last year, we were in the middle of the China shutdown in Q1. So the Q1 comps for us are very easy in this space because China was really close for -- from almost a whole quarter last year. So the comps in this thing are really quite easy. And automotive also began to close up in March last year. So this year, we got a complete reverse. We are seeing some issues in automotive where the newspapers are full of all the stuff about chip demand and availability of supplies and impeding automotive OEMs ability to make enough cars. And we are seeing some impact to that. But even given that, we're still seeing solid growth in the automotive space and significant increases in profits.

Okay. Great. And when you think about the automotive business, are you seeing any secular tailwinds or opportunities from all the investment going into EV and different components that are going into cars?

Now I think that's a good trend for us because the products we have in the IT space are also relevant for those electronic vehicles. So we're Switzerland on electronic or conventional drive. So we'll look for both. I think as electronic cars gain more and more traction, the need to customize them for -- to differentiate, it's going to become more and more of a factor. So I think making cars look sexier. It's going to become a bigger and bigger issue because the performance of 1 e-car to another car isn't going to really be that noticeable in terms of its difference. But how the car looks and feels when you're in it and outside, it's going to be a big factor.

And does that -- just speaking of components because the Design business has often, I think, benefited in the past from less metal components being used in electronics. Is that a trend that you're still seeing? So less rivets and things like that, more towards label or...

Yes. Nobody wants -- public enemy #1 if you're an automotive supplier of screws, nuts and bolts. So I suppose the automotive industry lags adhesive [ passing ] systems. It can be applied by robots. And -- but we see many opportunities to grow in both of those spaces. Automotive will always be a cyclical business, always has been, always will be, whereas the electronics space is more product cyclical. So depending on where we are with the product life cycle, business is either better or worse to -- down to that. But so the business -- both arms in are a bit more cyclical, but it's still -- what we're seeing in that space is very encouraging to us.

Great. And CCL Design has been and continues to be a key focus for M&A, I believe. So where do you see the biggest opportunities there?

Well, more and more of what we're doing, just more of the same. And building out our footprint a little bit around the world and we're somewhat Asia-centric in the electronics industry. So building our footprint out in other parts of the world will be important. I do think there will be some migration, some migration, not as much as people surmise out of China, but it's probably not going to go very far in Asia, maybe all the way to Vietnam from China. But Mexico will become an important country. Brazil will become an important country. Parts of Europe will become important -- more important than they are today in the electronic assembly. So I think we'll want to build our footprint out and our nuts and bolts product line capability to broaden the offering we have to the customers. But we're very encouraged by what's happened so far and we think there's lots of room to grow in this space, both organically and by M&A.

Okay. And what -- when you talk about complementary products, and when all, we've been at label expo in the past, there have been different interesting decorative technologies. Are those things that would fit into the CCL Design bucket?

Not really. I don't think you'll find much in CCL Design and Label experts. It's -- the products are much more technical, more performance-driven. We use all kinds of different converting equipment that's broadly sourced from the mechanical engineering industry. So it's a very different business from our core Label business. We're primary in adhesive technology in that space, and that's a big factor in our performance. And the kind of converting we do is rather different from what we do at CCL Label. There's a little bit of overlap where the products are packaging related, but a lot of the things we do in that industry are more or inside the phone or inside the car and are much more performance-driven.

Okay. Yes. Great. Okay. Maybe finishing off the CCL segment with the CCL Secure business, again, coming off a good Q4. And you've talked in the past about new note issuances versus replenishments. Have you seen any change in the tempo of those demand for those 2 drivers?

No, we haven't. So that still continues to be a big factor. So new note issuance is a demand driver for us as our polymer conversions. So -- there will be 2 big new polymer conversions this year in 2 large countries. I'm not going to say which ones they are or if they become public. But there are 2 kind of to happen this year, and we're going to be involved in both of them. So we expect this year eventually to be a good one. I think the second half of the year, last year, we had some very rich mix in our business profile. That won't repeat this year. So repeating second half profitability this year versus last year might be difficult, but I'm quite confident the business will grow again later this year.

And have you seen any changes to long-term demand for this business coming out of the pandemic?

Not really. I mean, in the pandemic, I mean, it's well-known publicly that there's been a run on cash, just about everywhere in the world during the pandemic, as people sought cash for whatever reasons they wanted to. They just wanted it. And so every region of the world has seen growth of notes in circulation. And that hasn't stopped as of the current time of writing. And so we'll continue to be optimistic about the prospects for this business in the near term.

Great. And then maybe -- actually, this will be my final CCL second question. Are there any end markets, just as we think about the business more broadly, are there any end markets where you've seen any structural changes in demand that have come out of the pandemic?

No.

Or is it -- no?

No. No, not really.

Okay.

I think the big change, Stephen, in the CCL space is the impact of sustainability initiatives. So the public interest in seeing more responsible use of packaging. I mean that's the mega trend in the CCL space, really. It's across all 5 legs of it and we have a number of solutions that we offer our customers in that regard. And that's probably the most important megatrend that we all face.

Yes. And you...

I think the other thing that's worth commenting on is when we -- just the -- just on the -- on just how bumpy the year will be in the in the current cycle just due to the comps. So in the first 2 months of the year, our Label business in the U.S. was up mid-single digits. Our Label business in Europe was down low single digits. We were up double digits in Latin America. And up well over 20% in Asia. And up over 50% in China. So I think when you imagine how when we report our numbers for the first half of the year, we're going to have these wild swings in comps due to what happened last year and where you're at on the stage of recovery this year and depending on where you were in the mix. So I think that's just something everyone needs to be aware about as we eventually report our numbers for Q1 and Q2.

Okay. That's great. And even notwithstanding the tough comps in the back half of the year, you'd expect this business to be up year-over-year in 2021? Or is it too early to tell?

Yes, we do. We expect to have solid growth in CCL overall this year.

Yes. Yes. Great. Okay. Maybe moving on to the Avery business, and I'll just pause here and I'd remind people that if you have questions, feel free to submit them through the interface. We have a couple of waiting here that we'll get to. So maybe just turning to the Avery business, which, as people know, it was one of the areas of the business that experienced the most acute pandemic-related weakness. Can you just provide an update on where you are on the DTC business?

Well, I think it's probably worthwhile, just giving you a view about how it's currently doing quarter-over-quarter because it's kind of interesting, really. I think I just want to remind everybody, Avery was the least impacted business in Q1 last year. So the impact on them of the pandemic really only began the last week in March. Where we saw order intake drop quite dramatically, but we didn't see shipments drop because we had the orders in already. So Q1 sales last year were actually up year-over-year, and will be down -- we're down currently in the mid-teens due to that. So sequentially, we still see things improving month-on-month and quarter-to-quarter, but comparatively, in Q1, we had pretty much another affected quarter this time last year. And we'll have a still affected quarter this year. Once we get into Q2, that situation will completely reverse as we expect to see continuing sequential recovery against a very difficult Q2 last year. So the DTC businesses, no change in trend really. So event badges are still down very significantly. That was last year, pro forma category, well over $100 million. In certain parts of it, large parts of it was down over 90%, particularly event badges, and we have seen limited change to that. So there are some people now beginning to order badges for prospective events in Q2, but placing orders, not getting shipments. So events in Q1 were still highly restricted worldwide. And we still -- we have -- still have some, the business in the naming category. That still held up better, but it's still down. Direct-to-consumer labels continues to boom. So that's still growing currently for the quarter. It's up almost double this time last year. So it's still a mixed story in direct-to-consumer. In the legacy core business, in the binders and indexes and organization categories, as you might expect, workplace and schools driven, still down significantly. Labels has held up quite well, particularly internationally.

Okay. And I suppose, too early to tell on back-to-school at this point. We're only in March.

Yes. I think it's quite likely the back-to-school for most for the mass market retailers last year wasn't good. So we'd expect some of the big mass market retailers to restrict or to reduce the amount of space they give to back-to-school items this year because of that. Maybe some of the office superstore groups will do the reverse of that to try and capitalize on the share gains and take a bit more risk than the mass market people will do. But what actually happens is really going to depend more on what -- whether school openings in this fall are going to be normal or not and we all hope they will be, but reality is none of us now.

Yes. Yes. Okay. Okay. And on the printable media business, how is that business trending?

Well as I said, that's held up quite well. So it might be up a little bit in -- outside the U.S., down a little bit inside the U.S. So inside printable media in the United States, we have another -- we have a large badge category that makes up a significant chunk of it. That's also down significantly with the label side of it, which is the big beast in printable media. It's also like its international brothers. It's held up quite well.

Yes. Okay. And it sounds like you're seeing, as you mentioned at the beginning of the Avery section, you are seeing the gap continue to close. You still expect...

Well it's sequentially closing. I think...

Sequentially?

This quarter, we had such a good start to last year. So I just wanted to remind everyone, Avery last year was not only unaffected, it was also good. So we've got a very tough comp at Avery in Q1. So it will be down -- well, currently, it's down in the mid-teens after 3 months. We'll see how it pans out when we close the books, but that's where it stands to date.

Yes. Okay. And as you begin to comp the Q2, Q3, Q4, -- as you begin to comp in the back half of this year, do you still expect the full year to be up year-over-year?

We expect every quarter after Q2 to be up. Q2 ought to be up. And hopefully, we'll make up the shortfall in Q1. So I expect the year to be up for sure. Whether we get back to 2019 levels is probably the question mark, but I certainly expect us to exceed 2020's numbers by a good margin.

Yes. Okay. Okay. And then once things normalize, do you sort of expect this business to revert back to its longer-term growth rate, which we expect to kind of sort of -- yes.

Yes, we expect -- we'll still be the same place we were, Steve. We've got these growth categories, and we've got these categories that are in decline. We would have said going into 2020 that we would have got through that in 2020. So come 2022 over '21, we'd expect this business to be probably heading towards being a growth category rather than a mix category.

Yes. Okay. And the margin expectation over the long term, do you still see margins potentially getting into the low 20s over the long-term as we continue to Q2?

Correct. Correct. Correct. We would expect the EBIT margin to return into the low 20s once things normalize.

Yes. Okay. Okay. And as we were talking about Avery, we got a question that came in from the line here. When you think about the badges business with respect to events, are your people seeing any potential impact to in-person events from a rise in virtual conferences? Or do they think that this will -- things will revert back once we're through the pandemic?

Well, we got an order last week for electronic dance event in Las Vegas for 400,000 wristbands. So 400,000 people are descending on Vegas for an event in April. So I guess, events -- my guess is when events come back, they'll come back with a bang. And I don't -- anyone who thinks there are going to be conventions and meetings and these events and dances don't -- I think doesn't understand human nature.

Yes. Certainly, there's probably a lot of pent-up demand out there. Okay. Well, that's great. Maybe moving to the Checkpoint business, which was another one of the businesses that was acutely impacted during the early days of the pandemic, but really came back strongly in the back half of the year, certainly seeing some recovery. Can you talk about how that business is trending so far in Q1?

I can. And, yes, it's up slightly at the top line. It's up significantly on the bottom line. So the mix trend we saw in Q4 is continuing into Q1. So up slightly in revenue and up significantly in profits. And I'd expect that to be how the quarter pans out, too. And you do have to remember, this time last year, the apparel industry, the manufacturing side of apparel, the supply chain last year was -- the restrictions had already started. So suppliers of clothing items in apparel and shoes and the like were all affected in January and February and March last year. Even though demand may not have been, the supply side of apparel was. So we've seen that grow quite significantly in the first quarter so far. And I'd expect it to continue in March. But the MAS business, so which is the part where retailers buy that equipment from us directly, we're still seeing that affected by some retail closures in specialty retail, CapEx constraints on equipment. People are still more worried about store safety than they are worried about store security.

Great. Okay. Just talking about RFID. I had a couple questions here. And we just had one come in on the line. Has increased e-commerce activity due to the pandemic or maybe more likely something trends like buying online, pick up in store, has that led to heightened interest in RFID? And any -- and then from there, any new orders? Or are people getting more -- like more warm on conversions or adoption, I guess?

I think the interest in RFID is heavily in apparel. So the interest -- retailer interest outside of apparel is limited, nitchy. So the megatrend is really apparel driven because the apparel doesn't have line of sight and has a lot of SKU complexity, but -- so that's the megatrend, and we're still in the relatively early days of the rollout of that technology into that industry. And with all honestly, some of the early adopters didn't really get the benefits out of it, they thought they were going to get out of it because it's not a panacea to more basic business problems. But the current rollouts that are being done by some of the better managed retailers are more thoughtful, more likely to produce the right kind of returns and responses. And I think it's a trend that will continue. We'll continue to be a player in the space.

Yes. How big of an opportunity is it for Checkpoint in terms of...

Well, our Apparel Label -- our Apparel and Label business is a little under $200 million. So the market leader is $1.5 billion, and probably the market is $5 billion. So there, lots of room for us to grow, to gain share by M&A and by just execution. And we have all the technologies that every -- that the market leader has. So we're not disadvantaged by technology. We are disadvantaged by footprint. So we have footprint in certain parts of the world. We're more of a player in Europe than we are in the U.S., and we have strong footprint in Asia. We don't have such strong footprint in North Africa and Latin America, which are also important sourcing countries for apparel retailers.

And in the past, within that $200 million ALS revenue bucket, how much of it is RFID?

Well, we don't really measure that because we make an RFID inlay. We -- and I think this year, we'll sell, I don't know, $1.5 billion, something like that. If RFID inlays the market, it's probably $20 billion in apparel, just to give you a frame of reference. So we're a player. We're in the probably in the top 10 players in the world and by no means, the leader. And we have strong positions in certain parts of the world where we've got assets in the right place. So we're anxious to grow in this industry and get our share position that we deserve.

Yes. Okay. We had 1 question coming on the line here with respect to Checkpoint, applicable to the Apparel Labeling business. Have you seen -- are you seeing QR codes being embedded into tags? Is that something that...

QR codes will get used in lots of other applications in the retail supply chain, particularly in -- particularly for drugs in the pharmaceutical industry. And for the packaged goods there a much better solution where line of sight isn't important. So I think 2-dimensional codes will have their place in the track and tracing of goods through the supply chain. But in apparel, you've got a unique set of problems with SKU complexity, inventory going or walk about in the store. Lot size components, which you don't have in a lot of other consumer goods that made their set of problems, quite distinct and quite unique.

Okay. Okay. That's great. Yes, that -- there's certainly lots of questions coming in on the Checkpoint, which is great. Maybe turning to Innovia, again, coming off a strong Q4. Kind of 2 components in this business that are topical, certainly the demand as well as the cost, the resin price environment. So maybe just starting with demand, can you talk about how -- talk a little bit about how demand evolved through the pandemic and sort of where you are now?

Well, where we are now, first 2 months of the year, we're up in the mid-teens. A lot of that's price, some of it's the trailing acquisition of the business we bought in Poland last year. So when we get to the quarter end, we'll give you more color on that, and that's all I'm going to say on it for now. We've been able to pass-through resin costs so far, reasonably successfully. When resin was falling, a lot of our customers moved to shorter pass-through arrangements that we had done in the past. So we've benefited on the upside of that. So now we have rising prices. The terms that were agreed for pass-throughs that were applied in the down cycle, still apply in the up cycle. So, so far, profits for the quarter are up nicely and it looks so far like we're doing a fairly good job of managing our way through the resin crisis. Availability has been challenging at times of getting the amount of resin we need at the time we need it. You have had some supply interruptions in Mexico with natural gas supply as a result of the tax storm, but they haven't been terribly material and so far, so good.

That's great. So you've -- you're actually up in profits in the Innovia business? Yes.

Correct. Correct. Significantly.

Yes. And that's year-over-year? That's...

Year-over-year. Yes.

Yes. Yes. Yes.

I expect March might be more difficult because the resins have been escalating extremely rapidly through the quarter. I mean we have more resins. They pretty much doubled since the fall of last year. So each week and each month we've seen resin escalation. So we may have a bit more pain in March than we've seen in January and February. But we'll have to wait and see how the quarter pans out. But so far, it's been good.

Yes, yes. Okay. That's great. And you would attribute, certainly through the last period of resin -- material resin price inflation was much more painful and then you were able to renegotiate your contracts. Would you attribute how you're performing now to those pricing pass-through mechanisms?

It's partly that. But I think the other big thing is the operational improvements we've made in our factories, particularly the one in Mexico. It's been quite dramatic down there. So that plant is really performing very significantly better than it was this time last year. Also the same in Europe. So -- and our plant in Australia. So all of our operations, operationally and productivity-wise, are running at much better rates than they were this time last year. So the team has done a great job with that.

That's great. One question that came in on the line. It's sort of higher level with respect to resin pricing and other cost inflation. Just to confirm, I know we've talked about this in the past, but your -- you wouldn't expect inflationary pressure on margins in your other businesses? Historically, you've had a very good success either passing on prices through or absorbing those prices without margin...

Well, we're a long way down the food chain in the label converting businesses. So if you take a polyester release liner, which has got significant inflation-based into it, that's a significant portion of our suppliers' cost. But then again, supplier has its margin, too. And then it gets to us and then we convert it. And we have a conversion margin. So a 20% raw material cost might need a 1% or 2% price increase for converted labels. So I think you have to sort of bear in mind, commodity pricing and converted label pricing, the position in the channel is a big factor. It will have to be the rate of inflationary increases we've seen will require us to raise prices, even in the Label business. It's just too far and too extreme. I think in North America, it is exacerbated by the petrochemical outage. And probably that will recede as the second quarter unfolds, and we may see some easing because the premiums that are being paid in the U.S., those -- the grades of resin, above what you can buy it out in China are so severe, that will have to normalize, either China will have to come up to the same or the U.S. will have to ease off a bit. So I do expect to see that ease a bit as the second quarter and the summer unfolds.

Okay. Okay. A couple of other questions here that have come through on Innovia. So on the margin side, Innovia had a very strong year in 2020 with over 20% EBITDA margins. What margins do you believe are sustainable in the Innovia business?

Well, since we've known this business, we've been -- -- we vary between 12% and 20%. And how good we'll -- how flat we can make it. So we don't have that degree of volatility. I think it will depend on how we perform in our plants and how good we are at the pass-through mechanisms. So I think we're demonstrating, I think we will demonstrate this year. We've got a lot better at that than we have been in the past, and time will tell.

Okay. And then secondly, do you have any -- you've owned the Innovia Treofan -- Innovia and then subsequently Treofan now for several years. Did you have any reflections on how the business has performed versus when you bought them? If anything surprised you to the upside or the downside, I guess?

Yes. Well, we had a tough start with it, as you know, and -- but it's now got back to where it was. So we're pleased to see that. And we're -- we still are fundamental believers, and we need to control film technology. It will be very important for us in the sustainability world to have product offerings for our customers. So we are still believe -- big believers that our company needs to have prime -- prima facie control over the kind of phase materials we use in our business, broadly speaking. And we haven't changed our minds on that.

Yes. Okay. Great. So maybe moving away from the operations and a couple of questions around capital allocation here. You've increased your dividend 17% with the Q4 results. How do you see capital allocation evolving coming out of the pandemic? Or is it just went back to where it was before?

Well, we had a record year last year, and our earnings were up 10%, I think. So I don't think we were doing anything terribly untoward with the dividend. I think it was certainly what we could afford, and our dividend payout ratio is still very much in line with its historical norms. So I think that's just a reflection of the company's performance through the pandemic. So we're big believers that dividends are important to shareholders. We've had only increases and no emittances for 3 decades now, and we believe that will continue. We haven't bought back our own stock for a very long time now. And we're still big believers that M&A is the best use of excess free cash flow in the business, but time will tell.

Yes. Okay. Maybe turning to M&A. A couple of questions. In the past, you've indicated, well, certainly through the pandemic, you've indicated that due diligence was difficult to do. We can't do due diligence over Zoom. So with travel opening up. I know you have spoken to some -- the business, some of your senior managers have begun to travel more frequently. Is it any easier to execute on M&A in this environment given that there's easing of restrictions?

No, not really. Not really. I mean, if we had a U.S.-only business, we were able to buy, that probably would be doable. But I mean, right now, our managers can't go from 1 country in Europe to the next. I mean that's how difficult it is. So managers in our business in Germany can't go to Switzerland and vice versa, but it's still pretty difficult. And aside from that, valuations are still -- cheap money is still out there and a lot of competition from private equity firms for some of these assets that, in my view, pretty ridiculous valuations. So until we see some return to norm in that regard. I think, big M&A. Well, who knows, but time will tell, Steve. But we don't have anything immediately on our horizon for those 2 reasons, valuation is still being tough. And even if we could get over that, how do we actually take on something that's large and global in scale in the middle of a pandemic, which we don't even know if it's even over yet. Yes. So our play this year will be a repeat of last year. You can expect us to do bolt-ons because they're done in country, by and large, and we've got boots on the street in most places in the world. So we're able to do the bolt-ons and -- but a large scale, transformative M&A transaction, you never know, but the current environment, it's not easy to do those for the reasons I've explained. ad nauseam.

Yes. Absolutely. A couple of questions here on -- coming in from the line, and these are more high level. And certainly mentioned sustainability packaging has a megatrend coming from your customers and those consumers. How do you see it evolving from here? And does it have any impact on margins as it becomes a bigger part of mix? Any impact on M&A strategies? Or is it -- you do it in your existing businesses and without looking outside, I guess?

Well, our job is to support our customers. And so that's what we're doing. So we have a whole suite of sustainable product lines that we offer our customers. It's their decisions whether they take them or not, not ours. And they -- in some cases, they do, in some cases, they don't. I think there's still a degree of marketing to the sentiment going on in the consumer world in general. So for example, in the apparel industry, there's a lot of focus on making paper tags that you buy with a garment, sustainable and recyclable, even though it currently isn't by and large. So you have all -- for a lot of folks, whether that's rational behavior in the long term, I think, remains to be seen. So I think the -- we're in the very, very early days of a sustainability journey. And I think over the next 4 or 5 decades, I think 50 years from now, we'll look back at this time and reflect quite differently on how we're reflecting on it today. But -- and the role of our company is to support our customers, and we are working diligently on everything they're asking us to do. And we have a whole suite of technologies in recyclable films, recyclable labels, labels that help customers recycle bottles more easily. Like I said, a whole suite of products. Well, the extent to which they are adopted is their decision, it's not ours. And probably, they're working through their own challenges in this regard, too, and finding out for themselves what their future world looks like. And maybe they don't have all the answers to those problems just yet either, but everyone's on the same journey.

Yes. Yes. Yes. Okay. And is there -- do you see any potential margin impact? Like are you able to put...

No. No. No.

No?

I think right now, if you want to design, but recycled resin costs more than virgin resin. And there's a limit availability of recycled resin. So -- and everybody wants it. So until there's a lot more ability for the world to reprocess plastics into recycled resin, and it gets -- the price point gets to the point where it's going to have more widespread adoption. So these are all chicken-and-egg situations that have to be thought through. There's a lot of discussions in the packaging industry about sustainability, so the metal packaging guys and the glass guys say, "Well our packages are more less found in waste streams. They're more recycled." Well this is, of course, true. But they also give out 4 or 5x the amount of greenhouse gases that plastics do. So the -- we have a whole series of dichotomies in this sort of whole packaging supply chain, none of which is -- nobody has any answers. There's a lot more questions than there are answers, and we are in there, everybody else trying to be realistic and work on real end solutions that bring benefit to the consumer and benefit to the customer.

Yes. Yes. Okay. And you talked about a whole -- you have a whole suite of technologies.

It's true.

So lots of things that your customers can leverage your expertise on with respect to sustainability. Is there any -- are you able to give like any examples of things that have led to as things have been more popular with your customers' customer base?

Yes. Well, we invented post-consumer -- plastic tubes made out of post-consumer resins 20 years ago, and then 2 customers wanted it. Now every single customer in the world wants their plastic tubes made out of plastic recycled resin content. So that's probably the biggest thing we would see in our 2 businesses, $200 million. So I would have said, if you had asked me this question 5 years ago, and we said, well, our PCR tube sales, out of that $200 million 5 years ago, it was probably 5% or 10% of the revenues. Today, it's going to have to be significantly more than that.

Okay. Okay. A couple of minutes left here. And just -- we got to -- just want to remind everyone who's listening online, you can have an opportunity to submit questions. We covered a lot of ground. I'm just going to ask a couple of these questions that have come in. I haven't heard of this before, but 1 participant is asking on the CCL segment. Is there a new sleeve product for aluminum cans that you're aware of?

Yes. So I mean, we've been putting sleeves on aluminum cans for many years. That's not a new idea. We've got it from our customers, and they do it in their premises rather than we do it in ours. So we sell them a blank can they put a sleeve over it. The idea was developed in Japan, to my knowledge, more than 20 years ago.

Okay. Okay. So very -- I thought most of the cans were decorated, but, okay.

Most of the cans are decorated. There are some that are sleeved out there. People want to have multiple SKUs and have 1 shape of can and have 50 variants. I think you can do that quite easily with sleeving as it's done in Japan. But -- and we do, do that for a few of our customers already today.

Yes. Okay. Okay. And then another question here on RFID, which is obviously very topical now. Is -- are you seeing any price competition from new entrants coming in from China or anywhere else in the world?

Well, the vast majority of RFID inlays are made in China. That's where we make ours, too. So the 20 billion inlays made in the world today. I would guess, 90% of them are made in China, and that's where we make all of ours. So will there be more capacity added to the current players? I think the answer to that is yes. Whether it be new entrants will have some barriers to entry today in terms of the scale you need. So I don't know how many big new entrants there will be. But I expect all the current players to be investing heavily in it as we are to build capacity to customers.

Okay. Okay. Well, if we just turn to 12:00 on the hour. No more questions have come in. So Geoff, I lost you on my video, but you're still there. I appreciate your time today, very insightful, very timely to get an update on the business. And thank you for your time for this last intra-quarter fireside chat.

Yes. Thank you, Stephen, and thank you for everybody who called in. Anyone who wants to ask more questions directly of us, you can call Sean Washchuk at our office and Toronto. He'll be glad to take your calls.

Great. Thanks.