CCL Industries Inc. ($CCLB)

Good morning, and welcome to CCL Industries 2026 First Quarter Investor Update. Please note that there will be a 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. Thank you, Holly. Here we are on our first quarter investor update. I'll draw everyone's attention to Slide 2. If I can advance the slide here. That's our disclaimer regarding forward-looking information. I'll let everyone note that our risks and uncertainties and opportunities are under our annual MD&A and our first quarter 2026 report, particularly under the section Risks and Uncertainties. Our annual and quarterly reports can be found online at the company's website, cclind.com or on sedarplus.ca. Moving to our summary of financial results, Slide #3. For the first quarter of 2026, sales increased 2.8% with 1.9% organic growth, 0.3% acquisition-related growth and 0.6% positive impact from foreign currency translation, resulting in sales of $1.94 billion compared to approximately $1.89 billion in the first quarter of '25. Operating income was $317.5 million for the 2026 first quarter compared to $316.9 million for the first quarter of 2025, an improvement of 0.2%. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint and Innovia segments momentarily. Corporate expenses were down for the 2026 first quarter compared to the prior year first quarter due to lower variable compensation expenses. Consolidated EBITDA for the 2026 first quarter, excluding the impact of foreign currency translation increased 1% compared to the same period in 2025. Net finance expense was $16.7 million for the first quarter of 2026, lower than the $18.5 million for the first quarter of 2025. The decrease is due to higher finance income earned on the company's cash and cash equivalents and a reduction of finance costs on the company's drawn bank debt. The overall effective tax rate for the first quarter of '26 was 25.4% compared to an effective tax rate of 24.7% recorded in the first quarter of '25 due to an increase in taxable income in higher tax jurisdictions. 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 2026 first quarter was $204.9 million compared to $207.4 million for the 2025 first quarter. Moving to Slide 4, earnings per share. Basic and adjusted basic earnings per Class B share were $1.18 and $1.20, respectively, for the 2026 first quarter compared to $1.18 basic and adjusted basic earnings per Class B share for the 2025 first quarter. Adjusted earnings per Class B share increased 1.7% compared to the first quarter of 2025. The $0.02 increase in adjusted basic earnings per share was primarily driven by $0.02 from reduced share count, $0.01 from reduced interest expenses, offset by a $0.01 increase from our tax rate. Moving to the next slide, free cash flow from operations. For the first quarter of 2026, free cash flow from operations was an inflow of $37.3 million, almost equal to the inflow of $39.1 million posted for the first quarter of 2025. This slight decrease is principally due to an increase in net working capital, part offset by lower net CapEx and taxes paid for the first quarter of '26 compared to the prior year first quarter. For the trailing 12 months, our free cash flow from operations remains near record levels. Moving to the next slide, returns to shareholders. During the first quarter of 2026, the company moved from a discretionary share buyback to an automatic share repurchase plan. Therefore, commencing March 2 to the end of the quarter, March 31, 2026, the company repurchased approximately 779,000 shares for $67.5 million. In addition, during the blackout period, April 1 until yesterday, the company also repurchased an additional 1.4 million shares for $119.5 million. Including the 12.5% increase in the 2026 annual dividend that we announced in February, dividends paid for the quarter amounted to $62.3 million for a total of $129.8 million returned to shareholders during the quarter. It's the company's expectation that more will be returned to shareholders in 2026 as the automatic share repurchase plan is active in the market daily, including blackout periods where we were previously restricted in 2025 due to our normal course issuer bid being discretionary. Our Board of Directors has authorized management commencing March 2, 2026, to purchase up to $1.2 billion of shares over the next 12-month period. Moving to our next slide, cash and debt summary. Net debt as at March 31, 2026, was $1.38 billion, an increase of $115.3 million compared to December 31, 2025. This increase is principally a result of higher total debt outstanding due to capital expenditures and share buyback activities. Despite the increase in the company's net debt, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 0.8x at March 31, 2026, up from 0.78x reported at December 31, '25. Liquidity was robust with nearly $1 billion of cash on hand and USD 949 million of available undrawn credit capacity in our revolving credit facility. The company's overall average finance rate was approximately 2.5% at March 31, same as December 31, '25. The company's balance sheet continues to be well positioned as we move through 2026. Geoff, over to you.

Thank you, Sean. Good morning, everybody. I'm on Slide 8, highlights the capital spending for the year, a little under $100 million spent in the first quarter, and we're planning to spend $470 million for the year of 2026. Slide 9 highlights for the CCL segment. Solid 3.1% organic growth driven by low single-digit decline in North America and the Middle East, mid-single-digit growth in Europe and Latin America and Asia Pacific, where we were very strong due to CCL Design, up in the mid-teens. We had good results at CCL Design, CCL Secure and Healthcare & Specialty and had a strong recovery in Food and Beverage from recent periods with soft comps. But HPC profits were down under the capacity interruption we mentioned in the press release at our U.S. aluminum container plant and slow tube sales. Labels for mass markets were solid globally with strong results in Europe and Asia. Slide 10, highlights for Avery. Strong quarter in the direct-to-consumer space globally, especially RFID-enabled cards and wristbands and recent acquisitions are also performing. Back-to-school orders, we expect to be up a little this year, and to say they're now tariff-free unlike last year, and we saw solid progress in horticulture. Checkpoint segment. The MAS business had another good quarter in Europe that was weak in the Americas and also a little slower in the Asia Pacific region. Apparel label results were impacted by an abundance of inventory caution across the industry supply chain. RFID inlay sales are still, however, up in a down market, but Mexican start-up losses and our new plant there continue. Slide 12, highlights for Innovia. Strong results in our Polish operation, where we make a lot of label films, good growth there, including good success with Ecofloat. Volume, however, declined from our U.K. and Australian plants and deliveries to the Middle East also impeded. The new German plant start-up costs sequentially declined. Very solid quarter in North America, modestly below a very robust prior year period. Outlook for the coming quarter. The overall CCL segment orders are solid, but we have significant inflation to manage, which we'll talk about on the Q&A session. And the Sleever acquisition is due to close late this quarter, probably in June. Avery direct-to-consumer growth is due to continue. Apparel orders are expected to improve in coming quarters at Checkpoint and our confidence in RFID remains very solid. Innovia demand was strong in April and buy forward activity in the label materials supply chain. That could aid Q2, but potentially hurt Q3 as buy forward activities normalize as things progress. FX looks decidedly neutral for the coming quarter. So with that, operator, we'd like to open up for questions.

[Operator Instructions] Your first question for today is from Sean Steuart with TD Cowen.

A couple of questions. Geoff, hoping you can give context on the inflationary environment you mentioned, I guess, from 2 perspectives. It's our impression that you guys have a lot of pass-through mechanisms, but we're a few months into this now. Can you give some context on inflation across the system and how those pass-through mechanisms are working? And then on the demand side, are you seeing any evidence of broader macro concerns starting to feed into demand pressure at all?

I'll deal with the first part of that question. Aluminum hit $6,000 a ton a few weeks ago. So we have good pass-through mechanisms in that business. And it will affect demand for our products. We haven't seen any change to that as we stand, but it's at a very elevated rate compared to historical levels. But the pass-through mechanisms are pretty robust and are in process. There's a bit of a lag. So some of the customers have 90-day averages. Some of them are immediate. Some of them have no gain, no pain clauses. So it's a bit of a mix, but it's generally speaking, a bit of a lag when you get a big increase, but that will probably pass as we accelerate through Q2 as long as aluminum doesn't go to $7,000 a ton. The other area of weakness is in Europe, where the resin markets have really escalated pretty significantly. The stress is mainly in Europe. We've seen some increases in the U.S., but not to the same extent as we see in Europe. There the pass-through mechanisms are much more mixed. So it's much more by negotiation, but everyone has been declaring price increases. So we're pretty sure we know what the customers are expecting, and we're expecting to see that margin still stays stable as the quarter progresses. The CPG space has been quite reasonable in the first quarter. Orders have been okay. And you've seen the results from all of our customers. They've been pretty solid with volume increases. Whether that will continue in the light of gasoline prices, only time will tell. We're looking to see what happens with that same as everybody else.

Okay. On the M&A front, between Sleever and the other acquisition, you have about $180 million earmarked for acquisitions in Q2, but that's small relative to your liquidity position. Can you give some context on your appetite for more M&A and the depth of the evolving opportunity set?

We have -- we're always interested in M&A. That's our priority for excess free cash flow. But I don't have anything more to add than that. We still have a pipeline, and we'll see what happens as the year progresses.

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

Geoff, I appreciate that Innovia focuses more on EBITDA dollars than margins. But how should we think about the scale of price comps that you're likely to realize here in Q2, just given the resin headwinds you mentioned? And also, I know the prepared remarks referenced a potential volume pull forward from Q3. Just wondering if you could quantify that.

I can't really quantify it, but I can tell you, our orders have been up pretty significantly for the late March and through most of April so far and also in the early part of May. So how much of that is dollar price increases, how much of that is buying forward ahead of worries about further price increases? The label materials industry has announced price increases ahead of implementing them. And that always triggers demand for people label converters to buy forward and that feeds back into Innovia. So we'll just have to wait and see. It's -- the order situation has been very strong, but we know it's not demand based. It's definitely all activity around the current price activity in the channel.

All right. Fair enough. And I just want to ask on RFID. You sound confident on the growth there. Maybe if you could speak to your expectations on market growth this year and whether you think you're gaining share in this market?

The market declined last year. So the numbers of RFID inlays produced by the industry last year declined for the first time in many years. And that was all driven by the changes in the apparel channel. It's stabilized now. We think it will return to growth maybe even in the coming quarter. We did actually grow a bit in terms of the number of inlays produced across the board, both in apparel and outside of apparel. So that's why we still have great confidence that the business will still grow. It's definitely a knock in the apparel space for sure.

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

Can you quantify the financial impact from the thermal oxidizer outage at the Pennsylvania facility? And how much insurance recovery you expect to recognize over the balance of the year?

USD 5 million.

USD 5 million. Okay. And just on Innovia, can you give us an update on the utilization ramp and profitability trajectory of the new [indiscernible] line in Germany? And when do you expect that asset to start contributing positively to segment margins?

Well, I think it will be a while before that happens, but the pipeline -- the order pipeline is progressing quite nicely. It takes a long time to get approvals to switch, that has to go through testing and all the rest of it. So -- but we're quite pleased with the pipeline progress, how soon we'll move into positive. We're more focused on positive cash flow at the moment. So as soon as the EBITDA is positive, we'll let you know that. But I think that will be a quarter or 2 before that happens, but -- before we get EBIT contribution. I think that will be small, so it's limited this year. It should be a very different picture in 2027.

Okay. That's great. And just if I can squeeze in just a follow-up on the demand question. At CCL, you referenced softness in higher-end beauty markets, while mass market demand remained resilient. Are you seeing a broader consumer trade down dynamic across the categories you're in?

I wouldn't call it trade-down. It's just that certain categories of products in the high-end beauty space, we've definitely seen some impact in those areas in some specialty brand owners. But the first quarter for that was slow. It has picked up in Q2. I can tell you that. So it may have been a situation around excess inventories at holiday last year, I don't know, but it was certainly slow in Q1. It's picked up a bit in Q2. But things like shampoos, skin care, deodorants, things of that order or everyday items, that's been pretty solid.

Your next question is coming from Michael Glen with Raymond James.

Geoff, can you just maybe remind us for the label business specifically, how some of the inflation and pass-through mechanisms work in that -- those product lines?

Well, we have tens of thousands of SKUs in the label space, probably hundreds of thousands actually. So a lot of it is done with spot changes. So things are changing all the time, the designs and the shapes and sizes. So a lot of it is financed pass-through. Some of it is more -- where the labels exist in a more continuous form that we have pass-through arrangements for. And I just want to stress the heavy area of inflation is in Europe. We aren't seeing that in the same -- anywhere near the same extent in either Asia, Latin America or Europe or the U.S. So that's -- so the focus for us is really around -- particularly around Western Europe in the label space. It's a net pass-through really.

And as we see resin prices increase specifically, does that naturally lead to flow-through on the label -- on your label input costs?

Yes, absolutely. So it goes from the resin to the film producers, including Innovia and other producers into laminators and then out to us and it happens pretty quick.

Okay. And then just on Checkpoint, can you just frame -- you did have very modest organic growth in the segment, but margins were down. What is the big item that is overhanging margins in Checkpoint in Q1?

It's really the weakness in the MAS business in the United States.

Your next question is from Arthur Nagorny with RBC Capital Markets.

I just wanted to circle back to the disruption in the Middle East. It doesn't seem like you have material direct exposure. I think you called out CCL segment organic growth in the region down only low single digits. But is there any chance you can detail for us what your footprint looks like in the region?

Well, we have plants in Egypt, which are obviously not really affected by the turmoil there. That's where our biggest operation is. We have a plant in Dubai, a plant in Saudi Arabia, a very small plant in Oman and a plant in Pakistan. That's what we refer to as the Middle East. And it was very low single-digit decline. It was almost flat actually. So we've seen very limited disruption in the CPG space in those businesses since the trouble started.

Okay. That's helpful. And then I don't think you'd have any meaningful exposure here, but figured I'd ask anyways. On the Section 232 tariff update that was announced a few weeks ago, would you have any exposure maybe in the aluminum cans business or anything else for us to kind of keep in mind there?

Yes. So the Section 232 tariff changes really eliminated the potential to be charged for empty cans crossing the border. So filled cans were tariff-free and empty cans, they tried to get those to be subject to a tariff and that now seems to have fallen by the wayside. That's good news for us and our customers.

Got it. And then maybe switching over to Avery. You noted that the back-to-school season is expected to be tariff-free this time around. Can you maybe just detail what your supply chain exposure looks like at this point in time?

Well, we've localized more of the production into our operations in Mexico, raw material supplies. We managed to localize that to a sufficient and another extent where we can claim the USMCA status, and that's now been documented and agreed. And 1 or 2 leading retailers in the U.S. decided not to take supply chain risk from Asia this summer and opted to have brands that are currently onshore. So that's why we have greater confidence in back-to-school.

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

A couple of questions. So just on the RFID growth, I guess we should assume it was probably in the single-digit range, right, for the quarter for you?

The inlay growth was actually double digits, but most of it occurred in the non-apparel space.

Okay. Well, that's great. And the market itself -- that RFID market itself, that was down, right, in the quarter, you would think?

The year of 2025 was down for sure. You're talking about the whole market, yes, for sure, it was down. But Q1 2026, it was down, it certainly wasn't down by much. I characterize it as flattish.

Okay. And so what would you attribute to your, say, outperformance of the market?

Well, we're not -- we're still a small player. So it's probably more around the law of small numbers more than anything.

Okay. And then just moving to the CCL segment. So the Design was -- the auto was weak within CCL Design. So how soft was that in the quarter?

It was too bad. It was down about 3% in organic sales, down a little bit in profit, but it was more than compensated by growth in electronics. We did have one customer in Germany go bankrupt on us. So that cost us, so that was most of the profit problem. It was more triggered by customer bankruptcy with an indication of softness in the industry in general.

Okay. So given that, then you're probably going to face that for the next few quarters to lap that event, right?

That's correct.

Yes.

But I think it's still going to be offset by growth in electronics.

Okay. Okay. So outside of that one customer, would you say your CCL -- like the automotive part of CCL Design was maybe flat in the quarter?

Not flat in sales, slowed down in sales. But flat in profit, excluding that one problem.

Okay. And any idea when you think that might improve?

In automotive?

Yes.

No, your guess is as good as mine. I mean there's a lot of speculation about automotive right now. So I think it wouldn't be wise for me to comment about what's going on with our customers. I mean we just have to wait and see. But in the label business in that space, we're still growing. So we're still encouraged by that. And it's not a huge business for us. It's on the order of $300 million, $400 million annually. So it's not material to the whole company.

Your next question is from Stephen MacLeod with BMO Capital Markets.

Just on the CCL segment, the outlook was certainly quite constructive. And I'm just wondering -- certainly on the top line. I'm just wondering, do you still expect sort of full year organic sales growth in that kind of low to mid-single-digit range?

Well, the comps get easier in the second half. We know that. But it's a pretty uncertain situation we face, Steve, with what's going on in the Middle East. So we don't really know what the impact of all that is going to be on consumer behavior that we have to wait and see. But we haven't seen any signs of weakness yet in terms of business levels with our customers. But whenever we read the newspapers, it is the same as everybody else. When you see gasoline at $5 and $6 a gallon in the U.S., that perturbs you to the extent of worrying what effect will that have on consumer spending long term. But so far, we haven't seen much.

Yes. Okay. No, that's helpful. And then just when you think about all the inflation and that you referenced earlier and that obviously, we can all see. But when you think about the CCL segment, is it fair to assume that you'd see sort of a more minimal or more moderate impact to margins from inflation just because of your pass-through mechanisms and the flow-through of...

Yes. We've got fairly good pass-throughs, but there's always a bit of a lag. So we'll see in this quarter as to how much impact of that there really is. We've been out putting in surcharges and price increases where that's necessary and putting our supply chain levers, renegotiating with suppliers and doing all the things you do in situations like this. And we just have to wait and see. I'm not going to speculate on what may or may not happen this quarter or the rest of the year. All I can tell you is right now, in a business where we have 4 to 6 weeks backlog, we haven't seen much change in circumstance so far.

Okay. That's helpful. And maybe just one for Sean. Sean, you mentioned you now have the automatic buyback in place. So do you just expect to execute on that as the year progresses naturally?

Yes. I think if you look at our monthly reports, they get filed, you see us in the market each day buying a quantity of shares depending where the share price is. So as the share price moves up, we'll buy a little less. As it moves down, we'll buy a little bit more, but we'll be active in supporting the stock daily.

[Operator Instructions] Your next question for today is from Daryl Young with Stifel.

I just wanted to ask one higher-level question around AI, given it's the soup du jour. I would think your business is very well insulated from any disintermediation or disruption risk, but I was just curious if you're seeing any opportunities to implement efficiencies or cost-saving exercises you might be starting to pursue around that.

Well, technology tends to affect the design process first in any technology revolution. That's where we see it happening first. So I think we're more likely to see that in the design-intense businesses we have, which are really Avery and Checkpoint, the apparel label business of Checkpoint, which are, I don't know, $1.4 billion, $1.5 billion of our revenue. So that's to give you a flavor for that. And we're as intrigued by the productivity impact of AI as everybody is, but it's still early days.

We have reached the end of the question-and-answer session, and I will now turn the call over to Geoff for closing remarks.

Thank you, Holly, and thank you, everybody, for attending the call. We'll see you again in the summer. We hopefully have warmer weather than we've had this spring. Thank you very much.

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