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

Good morning, and welcome to CCL Industries 2026 Second 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 Martin, President and Chief Executive Officer; and joining him is Mr. Sean Washchuk, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen.

Thank you, Holly. Good morning, everyone. I'll draw everyone's attention to our second page of this presentation. 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 2026 2nd quarter report and our 2025 annual report under the section Risks and Uncertainties. Our annual and quarterly reports can be found online at the company's website, cclind.com or on sedarplus.ca. Moving to Slide 3, our summary of financial results. For the second quarter of 2026, sales increased 9.1%, with 5% organic growth, 1.8% acquisition-related growth and 2.3% positive impact from foreign currency translation, resulting in sales of $2.11 billion compared to approximately $1.93 billion in the second quarter of 2025. Operating income was $350.6 million for the 2026 2nd quarter compared to $322.1 million for the second quarter of 2025, an improvement of approximately 7%, excluding currency translation. This, however, did not include $1.7 million of noncash acquisition accounting-related adjustments to fair value in the inventory from the Sleever transaction. Excluding these noncash adjustments, operating income, excluding foreign exchange, increased more than 7%. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint and Innovia segments momentarily. Corporate expenses were up for the 2026 second quarter compared to the prior year second quarter due to higher variable compensation expenses and other general costs. Consolidated EBITDA for the 2026 2nd quarter, excluding the impact of foreign currency translation, increased 6% compared to the same period in 2025. Net finance expense was $18.7 million for the second quarter of 2026, higher than the $17.3 million for the second quarter of 2025. The increase is due to higher finance costs on the company's drawn debt and a reduction of finance income on the company's cash and cash equivalents. The overall effective tax rate for the second quarter of 2026 was 26% compared to an effective tax rate of 25.3% recorded for the second quarter of 2025. This is due to an increase in taxable income earned 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 2nd quarter was $223.8 million compared to $213.1 million for the 2025 2nd quarter. For the 6-month period, sales, operating income, net income increased 5%, 3% and 1%, excluding currency translation, respectively, compared to the same 6-month period in 2025. 2026 included results from 4 acquisitions completed since January 1, 2025, delivering acquisition-related sales growth for the period of 1.1%, organic growth of 3.5% and foreign currency translation was a tailwind of 1.4% to sales. Moving to our next slide, earnings per share. Basic and adjusted basic earnings per Class B share were $1.31 and $1.35, respectively, for the 2026 2nd quarter compared to $1.21 and $1.22 basic and adjusted basic earnings per Class B share for the 2025 2nd quarter. Adjusted earnings per Class B share increased 10.7% compared to the second quarter of 2025. This $0.13 increase in adjusted basic earnings per share was primarily driven by improved operating income, accounting for $0.11, our share count reduction accounting for $0.03 and another $0.03 of positive foreign currency translation, partially offset by higher income tax rate, reduced joint venture earnings, increased net finance costs and higher corporate expenses summing to $0.04. Moving to our next slide, free cash flow from operations. For the second quarter of 2026, free cash flow from operations was an inflow of $189.2 million compared to an inflow of $226 million posted for the second quarter of 2025. This decrease is principally due to an increase in net working capital, slightly higher net CapEx, partly offset by lower taxes paid for the second quarter of 2026 compared to the prior year second 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 6 months of 2026, the company moved from a discretionary share buyback plan to an automatic share repurchase plan that commenced on March 2nd of this year. Year-to-date June 30, 2026, the company repurchased 3.8 million shares for $331.6 million. In addition, during the blackout period, July 1st to August 12, the company also repurchased an additional 700,000 shares for $66.3 million. Including the 12.5% increase in the 2026 annual dividend announced in February of this year, dividends paid year-to-date amounted to $123.5 million for a total of $455.1 million returned to shareholders, including the buyback. It is the company's expectation the more will be returned to our shareholders in 2026 as the automatic share repurchase plan is active in the market daily, including blackout periods when the company was not permitted to make share repurchases in 2025. Our Board of Directors has authorized management commencing March 2nd of this year to spend up to $1.2 billion over the next 12 months on share repurchase. Next slide, the cash and debt summary. Net debt as of June 30, 2026, was $1.74 billion, an increase of $479.6 million compared to December 31, 2025. This increase is principally a result of higher total debt outstanding due to capital expenditures, business acquisitions, and our share buyback. Despite the increase, the company's net debt, the balance debt -- on the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.0x at June 30, 2026, up from 0.78x reported at December 31, 2025. Early in July, subsequent to the quarter end, the company signed a delayed draw syndicated term loan agreement for USD 500 million. Therefore, the company's current liquidity position is robust. Including this new term loan and the legacy syndicated revolving facility, there's approximately USD 1.25 billion undrawn debt capacity and cash on hand of $975.6 million. The company's overall finance rate was approximately 2.6% at June 30 2026, up from 2.5% at December 31, 2025, reflecting an increase in the company's variably drawn debt. 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. And on Slide #8, highlights of capital spending for the year. We spent $200 million in the first half, so slightly behind the [indiscernible] still planning to spend around $470 million for the full year of 2026. Slide 9, highlights for CCL, another solid quarter of organic growth, 3.7%, up mid-single digits in North America and Asia; low single digit in Europe and Latin America. Good profitability gains at HPC in Food and Beverage, solid results in Healthcare & Specialty and CCL Secure, that CCL Design fell slightly, excluding foreign exchange on slowing automotive markets and the impact of tight memory chip supply for customers, [indiscernible] device production rates, which I'm sure you've all read about in the media. Moving to Slide 9, highlights for Avery, a much better quarter than this time last year, didn't have any of the chaos relating to the back-to-school load-in which is very good to see, and we benefit from don some promotions we did to the World Cup in our RFID risk band and card business, stable quarter in the horticultural business. Checkpoint, we had a pretty difficult quarter in the MAS business in the United States, and I'll give some more color on that in the Q&A. It was steady in the rest of the world, but it was below a very strong prior year period where we had a number of very large technology rollouts. Apparel labeling results improved as retail supply [indiscernible], which we've had for several quarters now eased, and RFID growth continues with new business wins. Innovia, very strong growth, 25%, about 15% of that coming from volume, 5% to 6% -- 10% coming from price. And we had very good results in Poland on EcoFloat shrink films growth, continuing robust performance in the Americas, really driven by volume and internal productivity initiatives. Downside, our other plants in Europe and the one in Australia were held by very significant times ramp and run effects risen and energy inflation, [indiscernible] somewhat by price increases, label industry spot building and reduced -- much reduced losses, I should say, at the new German plant. Outlook comments on Slide 13 for the coming quarter. CCL segment orders remain solid. We are watching the situation of memory chips effect on CCL Design closely. We do expect Avery's direct-to-consumer growth and the stronger back-to-school season to continue to play out in this quarter. We do think Checkpoint will have sequentially better second half than it does in the first half, but our comps remain difficult because that technology rollout, I referred to earlier, continued for much in the second half of last year and will not repeat this shift. Innovia could see some inflation reversal, unwinding of the recent label industry inventory build, especially in Europe, and we expect foreign exchange to be a modest plus. So with that, operator, we'd like to open up the call for questions.

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

On the Checkpoint MAS, acknowledging the large tech rollouts that made comps difficult, but looking more specifically at your consumable business there, would you note any change in volume trends there or replenishment cycles that you used to see in prior quarters?

It was really a phenomenon driven by our hard tags business. So hard tags or the things you see being pulled off when you buy when you buy an item of merchants, for example, in the clothing store. So those hard tags are all manufactured in China and we're all subject to tariffs last year. So we saw quite a bit of change of behavior retailers and we went out with price increases. Some retailers elected to stop using them. Some have since reversed that decision because of the amount of shrinkage loss they had, but at the time, they decided not to swallow the price increases and just stop using the tags. There's been some migration from hard tags to soft tags, and we had our largest soft tags customer for EAS labels, found a whole bunch of inventory and stop ordering from us really for the whole of the first half of this year. So they were the main drivers. So it's somewhat situational around tariffs, some situations of key customers, migration of hard tags to soft tags and one very large customer just excess inventory.

That's helpful. And when you talk about these migrations to a soft tag, is it still with the same hardware installations that you have done? Or does this require another...

No hardware change.

No hardware change. Okay. And just looking down the pipeline, past the second half of 2026, are there any rollouts or mass MAS deployments that you have kind of in the pipeline that could improve 2027 comparisons versus 2026?

Well, when we get to '27, we'll have '26 being the comparator, so that's going to ease things considerably. So it's definitely a situation driven by the tariff scale. So that was the biggest driver. I'd say the second biggest driver is the move from hard tags to soft tags that we will eventually benefit from that and also a producer of soft tags. And so I think it's somewhat situational around a few customers, and it will eventually wash itself out. .

Okay. That's fair. And just one last one for me. The RFID new business wins that you've mentioned, are those in apparel or non-apparel?

In apparel.

Your next question is from Sean Steuart with TD Cowen.

On Innovia, can you give us a perspective on how much of the top line growth there was pull forward of orders I guess, in advance of price hikes. And the margins there held up really well despite inflationary pressure. And I appreciate German start-up costs are falling, but can you reconcile that? And is there room for margin expansion through the back half of the year as price hikes roll through?

I don't think there's much room to margin expansion from today's level. There are a lot of levers being pulled in the second quarter. So in Europe at time at some periods after the Iran war started, inflation in our resin grades hit 80% at its peak. So it was a pretty big swallow. We passed it on immediately to some customers -- some of the customers, we had a lag. So we've got those price increases coming through now in the second half. But of course, our inventory position in resin reflects those price increases. So we're not really gaining the whole lot. That's why there would be much margin expansion. It was about 15% volume. So we know we gained share in the Americas. I don't think we gained share in Europe, in the Americas we most certainly did. So there's some share gain there. And there's also the gains in EcoFloat which isn't share gain, that's really a new application. So EcoFloat grew pretty strongly. So that was also a factor. So I think there will be some rollback once this inventory gets -- started to be consumed by the labor converted channel and will soften demand in the label materials channel, and that will subsequently soften demand to Innovia. But the flip side of that will have the upscale in Germany, ongoing growth of EcoFloat and the benefit of price increases coming through, which we weren't able to get through in Q2. So lots of moving levers all happening at one time. But I think the team did an outstanding job this past quarter managing the way through it.

Yes, it was an impressive result. You've qualified the CCL segment. Q3 order activity is solid. Can you give us a perspective on which subsegments or regions are driving that trend? It sounds like CCL Design isn't necessarily, but across the rest of it, where are you seeing particularly strong order activity?

Well, the two strongest businesses in the first half [indiscernible] the second quarter were Food and Beverage and Home & Personal Care, and that's continuing in the second half. We think we'll see also strong volume gains in the second half in CCL Secure. The healthcare is just steady and the business we've got some concerns about the CCL Design relative to that memory shortage, but that's also moving at fairly rapid speed. . So there's two problems we face there. There's the availability of chips affecting demand and also it's pushed customers we have in that space into very heavy cost saving mode because they're looking to mitigate whatever they can from the rising cost of chips.

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

Geoff, the 3.7% organic growth that you delivered in the core CCL segment, how much of that price versus volume? And how meaningful would you expect sort of pricing gains to drive the comps in the second half? .

Well, that's really impossible for us to measure because we have millions of different transactions over so many designs. It's just not possible to break that out. So all we can really do in that space is report the organic revenue growth. For sure, there's some inflation in there, not a whole lot. So I think it's really more volume than it is price. That's about all I could really tell you. .

Okay. Fair enough. And if you did see the label inventory build in Europe unwind somewhat in the second half, do you think you can still sustain the sort of consolidated mid-single-digit organic growth you delivered in Q2, in Q3? .

The European inventory thing really only affects Innovia so it has no effect on the CCL segment, that's where we're dealing with the CPG is and all the rest of it. So I think we're more dependent there on CPG volume trends. They are a bit next. Some companies doing quite well, some companies struggling. So I described the volume environment in that space as next, but we don't see it being any worse in the second half than it was in the first time. .

Okay. Fair enough. And just the last question I had. One of your competitors recently pointed to RID growth in the U.S. grocery category as a major rollout begins in in the back half. I believe you've been supporting that retailer with general merchandising. But are you seeing any opportunities on the grocery side? .

We're also working with the same customers. .

Your next question is from Stephen MacLeod with BMO .

Just wanted to ask about the CCL segment, margin is very strong, almost 17%. And I'm just curious if you can talk about sort of some of the drivers there. Is it mostly mix? And then I guess separately from that, how do you expect that to evolve in the back half of the year with the inflationary backdrop? .

I'm not too concerned about the inflationary backdrop because we're starting to see it ease pretty significantly. So I'm not concerned about that. I don't see a lot of difference in the second half to what happened in the first half. We did have the events around the aluminum can business, [indiscernible] can and bottle business in the first half. We had the issue with the piece of equipment in one of our plants that went down. We had rampant inflation in [indiscernible] momentum, which has since eased off . So we'll certainly have a better second half in that business than we have first half. But I don't see a lot to comment on, it's different, except for the issue arise about CCL Design and memory chips. .

Okay. That's great. And then in one of your previous questions, you suggested or talked about demand beginning to soften in the Innovia business in the back half of the year. I was wondering if you could give a little bit more color on that commentary. .

Well, that's to do with -- what happened in the inflation period, the big producers of label materials all announced due to the resin inflation, there are going to be very dramatic price increases. So that prompted all of the label converters in their channel to start ordering like crazy. And that from companies like Avery, Dennison and UPM, the public companies in that channel and all the private companies to start ordering materials from Innovia. So at some point, that will go back to normal. I don't think -- we had some circumstances in our quarter that were separate from that, new plants in Germany, EcoFloat gains, share gain in the U.S. So that was a pretty significant offset to that. So I don't think we will suffer that much, but there will definitely be some some reversal in the second half, very difficult to [indiscernible].

Okay. Yes, fair. I just wanted to make sure it wasn't anything on the consumer side. It was more just a reversal of the prebuying. Yes. Okay. And then just with the new facility that you entered into, the delayed draw term loan. I'm just curious if you can give a little bit of color, maybe this one is for Sean, just about how you're thinking about capital allocation and the backdrop behind the new loan facility and then how you're thinking about M&A in the back half of the year? .

Well, we put the facility in place as a backup plan or a cushion to our upcoming bonds that fall due in the 1st of October. So given kind of the choppy environment in CCL being a small issuer in the bond market, we thought it'd be prudent to have this facility available. If we didn't like where the market was when our bonds come due. So we have secured this undrawn facility at a very attractive spread, less than 100 basis points, and that gives us an attractive all-in interest rate should we not access the bond market. That's the plan. .

Right. Okay. And then maybe just on the M&A backdrop. .

No change, Steve. I think our focus is still very much on bolt-ons. So we have a number of things we're working on in that space but no change. .

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

Geoff, maybe just to start, can you just discuss what you're seeing across your CPG customer base generally, are we seeing an improved volume picture emerging? Or it remains kind of low single-digit growth overall?

Yes, I'd characterize it as mix. So we've seen some sectors doing better than others. And I think the World Cup certainly help in the Food and Beverage space this year. So there won't be a World Cup in the second half. So we'll see what happens in the [indiscernible] category particularly -- spirits, particularly which have been sold for much of 2025 and the first part of 2026. And in HPC, some of our customers are doing quite well in that space. Something that we've got more struggle. So I wouldn't say it's good or bad. I think next is the right word to use on the volume side. .