Good morning, ladies and gentlemen. Welcome to CCL Industries Fourth Quarter Investor Update. Please note that there will be a Q&A 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, everybody. Thank you for joining our call. Crazy times. I'd like to just comment a little bit about the situation unfolding in the Ukraine, and specifically about our company in Russia, where we have 428 people, five factories in a joint venture with CAD 70 million in sales. I'd just like to say on the call, on behalf of all those people, we know perfectly well that none of them had anything to do with the situation that's unfolded in the Ukraine, and they have our continuing support. With that, I'd like to hand the call over to Sean, who will take you through the numbers.
Thank you, Geoff. I'd like to turn everyone's attention to page two of the 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 2021 annual MD&A, which was filed last night. It's on our website, or you can find it on sedar.com. Moving to the next slide, summary of results. For the fourth quarter of 2021, sales increased 10.2% with organic growth of 12.8%, acquisition-related growth of 1.8%, partially offset by 4.4% negative impact from foreign currency translation, resulting in sales of CAD 1.49 billion compared to CAD 1.35 billion in the fourth quarter of 2020.
Operating income was CAD 208.8 million for the 2021 fourth quarter compared to CAD 213.3 million for the fourth quarter of 2020, a 2.5% increase, excluding the impact of foreign currency translation. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint, and Innovia segments. Corporate expenses were up in the quarter, principally due to higher expense for long-term variable compensation versus the prior year quarter. Consolidated EBITDA for the 2021 fourth quarter, excluding the impact of foreign currency translation, increased 2% compared to the same period in 2020. Net finance expense was CAD 13.9 million for the fourth quarter of 2021, compared to CAD 15.8 million for the 2020 fourth quarter.
The decrease in net finance cost is due to a lower average debt outstanding for the comparative quarterly periods. The overall effective tax rate was 20.1% for the 2021 fourth quarter, up from 19% effective tax rate recorded in the fourth quarter of 2020. The comparative effective tax rates for the fourth quarter of 2021 and 2020 are lower than the annual effective rates due to reduction in valuation allowance based on the company's ability to utilize previously unrecognized deferred tax assets. 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 2021 fourth quarter was CAD 145.1 million, largely in line with prior year comparative quarter, but up 4.2% excluding foreign currency translation.
For the 12-month period, sales increased 13.8%, operating income increased 12.8%, and net earnings increased 18.1%, all excluding foreign currency translation for the 12-month periods. 2021 included the results from 18 acquisitions completed since January 1st, 2020, delivering acquisition-related sales growth through the period of 2%, organic sales growth of 11.8%, and a foreign currency translation headwind of 4.4% to sales. Moving to the next slide, our earnings per share. Basic earnings per Class B share were CAD 0.80 for the fourth quarter of 2021 compared to CAD 0.81 for the fourth quarter of 2020. Adjusted basic earnings per Class B share were CAD 0.81 for the 2021 fourth quarter compared to adjusted basic earnings per Class B share of CAD 0.84 for the fourth quarter of 2020.
The change in adjusted basic EPS to CAD 0.81 is primarily attributable to CAD 0.04 negative FX impact, offset with an increase in operating income of CAD 0.02, with changes in corporate expenses, taxes, and interest netting to a CAD 0.01 reduction. For the 2021 12-month period, the CAD 0.29 increase in adjusted basic earnings per Class B share was largely due to CAD 0.44 increase in operating income, a CAD 0.05 increase due to taxes, a lower interest expense of CAD 0.02 offset by CAD 0.15 negative foreign currency translation, and a CAD 0.07 increase in corporate expenses. This resulted in adjusted basic earnings per share of CAD 3.37 for the 2021 year, compared to CAD 3.08 for the 2020 year. Moving to the next slide. Our Free Cash Flow from operations.
For the fourth quarter of 2021, Free Cash Flow from operations was CAD 197.2 million compared to CAD 255.2 million for the 2020 fourth quarter. An increase in working capital and net capital expenditures reduced Free Cash Flow from operations and cash provided by operating activities for the fourth quarter of 2021 compared to the fourth quarter of 2020. For the 12 months ended December 31st, 2021, Free Cash Flow from operations decreased CAD 84.5 million compared to the 12 months ended December 31st, 2020. The comparative decline is attributable to an increase in net capital expenditures and higher cash taxes paid on higher earnings. Moving to the next slide. Our cash and debt summary.
Net debt as of December 31st, 2021 was CAD 1.25 billion, a decrease of approximately CAD 141.7 million compared to December 31st, 2020. The decrease is principally a result of the debt repayments during the year, partially offset by a decrease in cash on hand at December 31st, 2021, compared to December 31st, 2020. The company's balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.06 times, declining from 1.24 times at the end of December 31st, 2020. Liquidity was robust with CAD 602.1 million of cash on hand and almost CAD 1.2 billion of available undrawn credit capacity on the company's revolving credit facility.
The company expects to repay any portion of current debt with its free cash on hand. The company's overall average finance rate was largely unchanged at approximately 2.4% at December 31st, 2021, compared to 2.3% at December 31st, 2020. The company's balance sheet continues to be well positioned to get through the 2022 year. Geoff, over to you.
Thank you, Sean, and good morning again, everybody. Now on slide seven, highlights of capital spending for the year. CAD 307 million net disposals, up quite a bit on the last year, which we curtailed in the middle of the crisis around COVID. We're planning to spend CAD 380 million in the year of 2022, some of that catch up for the COVID era. Moving forward to slide eight, highlights of the CCL segment. Regional organic sales growth, North America up low single- digit, Europe up mid- single digit, Latin America and Asia Pacific up double- digit. Sales growth was 7.2%, excluding foreign exchange, so we're pretty happy about that.
Operating income, however, was impacted by significant raw materials, energy and freight inflation, especially in our food and beverage business, that exceeded the price increases that we were able to pass through in the fourth quarter. The chip supply situation that I know you've all read about that's impacting the automotive industry was a big impact on CCL Design, particularly in the second half of last year and the fourth quarter in particular. Moving forward to slide nine, in our joint ventures. Very good year last year. Strong results in both the Middle East and Russia. As I mentioned at the intro to the core, we do have a joint venture in Russia. Sales of CAD 70 million. Our share of the earnings last year amounted to about CAD 3 million after tax. Slide 10, highlights for Avery. Excellent quarter.
Strong recovery continued in all regions and all products. The one area that's still lagging is our event badge business that remains below normal. It's improved in the United States around the opening of sports events and entertainment. That's still lagging considerably in Europe. Business meetings and conferences are also still lagging globally, actually. Raw materials availability, inflation, and elevated freight costs, in particular from China for components we source from there, held back profitability even though it was exceptionally strong in the quarter. Moving on to slide 11, Checkpoint. Another strong quarter for our retail label business here. Our merchandise availability business grew organically in all regions, but our profits were impacted by normalized expenses.
We'd had some benefits last year, particularly in China, around social security rebates, and in particular, significant freight and component inflation from China, where we source a lot of our parts. Our apparel labeling business had its best ever quarter under our ownership. Results far exceeded expectations. Over 30% organic growth in this part of the company driven by RFID. Very pleased to hear about that. A very good start of the Uniter acquisition, which augmented our results. We did benefit from some FX benefits in Turkey on the decline of the Turkish lira as we basically operate in that country in euros. Getting on to slide 12, highlights for Innovia. Very strong sales gains, but largely resin cost pass-through. Volume was up only modestly.
The real story of the quarter was significant energy, particularly energy and freight inflation in Europe, which impacted our profitability. Lower resin pricing in the U.S. was also part of the story. Resins dropped in the U.S., so we had higher inventory of higher cost resin, which we had to eat on the pass-through. Those two things combined. The energy was the big story in Europe for the quarter for the numbers that you see here. Outlook commentary on page 13. The first half of next year will be a pass-through period of a number of inflation drivers. We also expect continuing supply availability issues in a number of our businesses. We're hopeful that comps will ease as the year unfolds. Regardless, Avery should continue to improve, augmented by acquisitions.
Our Checkpoint business needs to execute price increases in the MAS business to recover inflation, but we expect the strength we saw in the ALS business in the fourth quarter to continue on RFID growth. The CCL Design chip shortage issues continue, especially in automotive, but acquisitions in that part are also a significant offset. In the CCL segment, we expect our HPC, food and beverage and healthcare and specialty units all to have to deal with significant inflation in the first quarter and to some extent in the second quarter, while we pass through the rising costs of paper, chemicals, films, energy, insurance, and just about everything we have on our P&L statement. Banknote demand is difficult to predict at CCL Secure.
Resin markets are declining in the U.S., so Innovia must navigate that and energy and freight inflation we're seeing in Europe and manage through the startup line of the EcoFloat investment in Poland. With that operator, we'd like to open up the call for questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question is coming from Adam Josephson. Please announce your affiliation, then pose your question.
KeyBanc. Good morning, everyone. Geoff and Sean, hope you're well.
Morning, Adam. How are you?
I am well, thank you, Geoff, and I hope the same goes for you. Sean, can you help me with FX? You know, Geoff mentioned in the release that at current exchange rates, FX translation would remain a drag this year. Can you help us order of magnitude, 1Q full year, anything you can share with us, particularly compared to the drag that you had in 4Q?
It won't be as significant as the 4Q drag. It likely could be half as much as the 4Q drag, but it's still gonna be a headwind.
Yeah. I think we have to bear in mind, Adam, given the situation in Russia, the foreign exchange markets are likely to be very volatile, so we really don't know the bottom line.
No, I understand, Geoff. Well, just one on the fourth quarter. Geoff, can you talk about, of the 6% organic growth in CCL, how much was price versus volume? Then you'll compare that to what you've seen thus far in the first quarter. Any changes in demand trends thus far across your businesses?
Well, it's very difficult to measure price impact in the label business because we have millions of transactions of labels of all shapes and sizes, so it's difficult to split price and organic growth, so I can't really comment on that. Just tell you that's the number. But we know there is some price in there because we did raise prices in Q4, but they'll have to be raised significantly again in the coming quarter. But right now, the demand patterns is reasonably strong. How much of it's being caused by how much of it is real end user demand, consumer demand, how much of it is people rebuilding inventory and concern about supply chain is less clear. But certainly our order books are reasonably full at the moment.
Perfect, Geoff.
You know, you mentioned in the release that you're experiencing supply chain disruptions and inflationary issues, the likes of which you've rarely seen in your history. Can you try to rank them in order of importance to you at the moment, including the ongoing strikes at UPM's Pulp and Paper mills in Finland that one of your suppliers referenced on its call?
Yes. Well, we're certainly concerned about that. The good thing is it's a strike rather than a factory burning down. Things begin and things have a middle and things have an end. We assume that strike will at some point end. They're a major supplier to the pressure-sensitive materials industry. That's a big concern to us and everybody in our industry. There's a lot of public commentary about it. I'm not, I don't know if I can really add to what's already been said. It's a significant concern for our industry. Like I say, strikes have a beginning, a middle, and an end. All the indications we get is we're heading towards the end rather than the beginning. We hopefully that that'll be the case.
We'll have some good news, hopefully, during the month of March. I would say just on the supply availabilities is as much a concern in our industry as inflation is. I'd rank the two of them pretty equally. It's not just release liner from UPM's mills. I mean, we're just finding that getting what we need on time on the days we need it to be more challenging than any of us can ever remember. On top of that, we're also dealing with inflation, which I think most companies in the manufacturing industry are experiencing sort of mid-teens inflation, and that certainly applies to us in our you know, in all the things that we buy.
You know, some significantly in excess of that, some less, but probably mid-teens is a fair comment on the average. It's pretty significant, and I certainly haven't seen anything like it since the 1970s.
I appreciate that, Geoff. Just one last one for me. It seems clear based on your commentary that your earnings growth will be skewed to the second half of the year. Can you help me at all with what you're thinking in terms of how you're thinking about earnings growth throughout the year? Are you expecting any in the first half? Are you expecting any sense you can give us?
We don't give guidance on our earnings, Adam, so I'm not gonna comment on that. Certainly managing in the short- term at the moment. The short- term is making sure we've got raw materials that we need to supply people. We've given some commentary on the areas that we think where we might see some growth. Beyond that, I couldn't really comment. We expect the first quarter to be like the fourth quarter. I think matching last year will be challenging depending on how the price increases pan out and how volume pans out. We're in a very volatile situation at the moment, and I couldn't really comment more than that, really.
Thanks so much, Geoff.
No problem.
Your next question is coming from Walter Spracklin. Please announce your affiliation, then pose your question.
Yeah, RBC Capital Markets. Good morning, everyone.
Good morning.
I'd like my first question to focus on the concept of down ordering. Is there any risk from your customer base and the conversations you're having, whether there will be a movement down in terms of lower- margin products, lower demand for premiumization? Any concerns among your existing base, customer base.
No
Based on the conversations you're having right now?
No.
No? Good. Good.
We haven't seen any of that at all.
Okay, fantastic. On the geopolitical, Geoff, you commented CAD 3 million in earnings in Russia. Is that how we should when I inevitably get the question around that, both in terms of-
Yes
... your production and your sales in the region, is that how we should frame the impact?
We have a joint venture that covers the Russian territory. It's CAD 70 million in sales, which we don't consolidate. The only thing we consolidate is our share of earnings, which were a little over CAD 3 million last year.
CAD 3 million? Yeah.
Earnings.
In earnings, yeah. Yeah.
Yeah.
Got it. Okay. M&A, when you look at your pipeline right now compared to, say, a year ago, what would you characterize it as? How is it different from where it was a year ago? Is pricing expectation still the same, higher or lower? Is there more sellers out there now, lower or higher? Just the overall landscape of what the pipeline might look like as compared to what it would look like a year ago.
I wouldn't say a lot has changed, Walter.
Okay.
We're still very much focused on bolt-on transactions. We were pretty active last year, so we're concentrating also on making sure those are properly integrated and run smoothly. I wouldn't say the environment has changed much so far. You know, what impact this situation in the Ukraine will have on equity markets and valuations is too early to say.
Okay. Back on raw material supply, compared to a lot of your competitors, you've fared pretty well, even Avery, where you highlighted that. It was impacted, but it just means a good result would have just been even better.
Yeah.
Is that just a function of where you're set up and your access into different areas for raw materials, or is it prescient pre-buying that you did that may be running out now and we might need to look with a little bit more concern around raw material supply?
Well, we're in many segments of the global economy, so we're diversified. I think that's the first comment I'd make. That helps. We've got businesses that are in recovery mode from the COVID and doing exceptionally well. We've got businesses that are losing their COVID tailwind and the combination of those two things. Inflation affects businesses that are going down after a COVID tailwind more than businesses that are recovering after a COVID tailwind for obvious reasons. We're certainly not doing a lot of pre-buying, so most of it is execution of prices.
I think the thing that's caught us a little bit in the back end of last year was the energy situation, particularly in Europe, which has just escalated at levels I've never seen before. That's the thing we were most concerned about that we saw in the fourth quarter that we'll be addressing in Q1 with energy surcharges to most of our customers.
Okay, fantastic. Really appreciate the time, Geoff.
No problem.
Your next question for today is coming from Stephen MacLeod. Please announce your affiliation, then pose your question.
Thanks. Good morning, guys. Stephen MacLeod from BMO. Just a couple of questions here. You called out RFID, which I know has been a driver of sales in the Checkpoint business, you know, not just this quarter, but for the last several quarters. But sales were up, you know, more than 30%. I'm just wondering if you can give an update on sort of the size of that business within the Checkpoint segment.
Well, the apparel label business overall is over CAD 200 million, so I can tell you that. A lot of the growth is coming in that was RFID driven.
Okay, great. Thank you. Just turning to the CCL segment, you know, you highlight sort of first half needing to pass through inflation drivers. You know, so I guess, would we expect to see potential margin growth in CCL pushed into Q2, potentially Q3?
Yeah. We've got some catch up to do to the CCL, and we've got price increases coming thick and fast. The problem at the moment is, you know, you have a price increase in October of 8%, and you do your pass through, and then you've got another one coming in January of the same amount. That's the kind of environment we're wrestling with. It's changing literally month to month. We've got some catch up to do in Q1. That energy situation at Innovia, which I've talked about a couple of times, just to give you a frame of reference on that in dollar terms. If we didn't make any price adjustments to Innovia for the cost of energy, the impact would be CAD 15 million. That's a big number.
That's CAD 50 million on,
15.
Oh, 15 on EBIT? On operating income.
If we didn't do anything to recover that through surcharges, the negative impact would be CAD 15 million just in energy.
Right. I see. I see. Wow. Okay. Okay.
Big number.
Okay. Yeah, big number, absolutely. Just maybe sticking on the Innovia business. You know, you talked a lot about the top line growth being largely price. Can you give a breakdown as to how much was price and how much was volume?
It was largely price.
Okay. Okay, great. Just finally.
Volume terms, we grew a little bit in the U.S. The Treofan operations in Mexico, they're the ones that grew last year and also grew in the fourth quarter. That's where the volume's coming from.
Okay. Great. Thank you. On the Avery business, the event badge business is continuing to recover but still below pre-pandemic levels. Can you just give any color on how far down you are, like how much more ground you need to make up to get back to pre-COVID on the badge business? Obviously, Omicron was an impact there.
It's about CAD 100 million pro forma, and it declined 70% during the COVID era, and it's back to about half the level it was for the last year. We expect this year to be still below where we were in 2019, but a lot closer than we were for 2021, where we were about CAD 50 versus CAD 100. We'll be, I don't know what the exact number will be, but maybe we'll be CAD 20 million below where we were in 2019. I think the thing that needs to change is the business convention. Sports and entertainment is certainly making quite a comeback in the Americas, less so in Europe.
The business conventions, which are another source of ID badges, they need to return to some sort of normality before we'll see that business bounce back to normal levels. But every month it's getting better.
Right. Okay.
It's a high- margin business, so.
Okay. That's great. Okay, well, thanks, Geoff. Thanks, Sean. Appreciate it.
Yeah, no problem.
Your next question for today is coming from Mark Neville. Please announce your affiliation, then pose your question.
Scotiabank. Good morning, Geoff. Morning, Sean.
Morning, Mark.
Geoff, the energy inflation you're dealing with at Innovia in Europe, why wouldn't that be impacting sort of the rest of your businesses in through CCL segment?
Because of the amount of energy we use in extruding film, it's an energy-intensive process. We have our own energy, you know, gas turbine plant at the operation that makes our own energy, and we buy some from the grid. Energy's a big factor in the extrusion of films. It's much more so than it would be to running a label plant or a Checkpoint plant or an Avery plant.
Okay. Yeah. That makes sense. Got it. The CAD 15 million number you quoted, Geoff, that was Q4. That's or that's like an annualized number.
Annualized.
Okay. Let me just sort of on the Russia-Ukraine situation, appreciate the numbers that you helped us with. The facilities you have in Russia, would that be a local business and would they still be operating?
Oh, no. I mean, our major customers. I mean, it's well known that some of the major consumer packaged goods customers have significant operations in Russia. The largest consumer products company in Russia is PepsiCo. I think they're well over CAD 5 billion in Russia. So P&G, L'Oréal, Unilever, you know, the HPC and food and beverage customers, Carlsberg, all have got huge multi-billion dollar operations in Russia. Those are our major customers there.
Okay. I guess when you think about the broader region, the Ukraine, the Baltics, I don't know how far west you wanna go, but I mean, do you guys have significant exposure outside of Russia in that sort of part of the world?
Only in Poland.
Only in Poland? Okay. Got it.
We've got a couple of large operations in Poland.
Okay. Sorry, on the CapEx budget for the year, the CAD 380, that's a bigger number than we've seen in recent years. I'm just curious-
Yeah.
Is that sort of stepping up growth or is some of that inflationary as well?
Some inflation in there. You know, capital equipment prices. It's kinda like the secondhand car market, you know, it's no different. Inflation's just everywhere. There's probably, you know, if we went back to 2019 prices, that number probably would be CAD 330 million rather than CAD 380 million. But it's the cost of putting up a building, it's the cost of buying equipment, chipsets, you know, you name it, steel, aluminum, all the things that you have in capital by the nature of capital equipment. The inflation there is running at a high, you know, actually, frankly, higher than some other areas of the economy.
Yeah. I guess just broadly on inflation, again, obviously, you guys are managing it quite well. You're raising prices. I mean, when you think about sort of your ability to recover and pass through, is there any sort of areas or parts of it or where you don't think you can recover? I'm just curious, like how big of an impact, sort of, will this have sort of on margin, sort of the things that actually sort of calm down?
I think every company on the planet is in pass-through mode. I think that applies to our suppliers. It applies to our customers. It applies to retailers. I think every company on the planet is in pass-through mode, and we're no exception.
Got it. Maybe just one last one if I could. Just curious about the buyback. Balance sheet's in great shape, generating lots of cash. I can't remember the last time the stock's traded sort of in the low nines. Just curious about your thoughts there.
Nothing to add other than what you've seen in the press release on the normal course issuer bid.
All right. Thanks a lot. Take care.
Okay, no problem.
Your next question for today is coming from Michael Glen. Please announce your affiliation, then pose your question.
Raymond James. Hey, good morning. Geoff, maybe just to start on Checkpoint, how do you characterize where your market share is in both the verticals in Checkpoint?
Well, in the MAS business, we're the global leader in RF technology. In the merchandise availability sector, I would characterize us as a global leader. You know, we're one of the two main players in the world in that business, and it's a global enterprise. In the apparel labeling business, I've got the exact number here now. We did CAD 240 million sales last year in 2021 in apparel labeling. The market leader there is about CAD 1.5 billion in revenue, and there are maybe a pack of four or five companies about our size chasing them, and we're one of them. Our business in apparel labeling is somewhat focused on Europe.
Okay. A recent M&A transaction, the auto into the auto parts vertical, can you talk about your interest in that segment in particular? What did you find attractive about that acquisition in particular?
Well, we've been building our CCL Design business in the automotive space for some time. Any technologies which are focused on small added value parts that involve film technology or extrusion or surface decoration or coating or technical screen printing or clean room activities is of interest to us. But probably what really the big driver was its big footprint in China. It's got a very nice large operation in China, and our business in China in automotive, before that acquisition, was rather small, barely CAD 5 million. It was the footprint in China that was the principal attraction, as well as the product set fit very neatly into the businesses we already own.
Are there resin pass-throughs associated with that business that were already in place?
Well, resin's a very tiny portion of raw materials. Raw materials are a tiny portion of the component prices in a lot of those businesses.
Okay. Just in terms of maybe for Sean. Sean, can you give an indication on working capital for the coming year?
Well, it's a bit of a challenge to predict. You know, it's something we work at every day. I think, supply chain issues and different things like that are going on in the current environment make it, even more challenging to predict. We're managing for improvement, but we have to deal with the current environment.
Okay.
Let me add something. A big factor, Michael, you know, you have to bear in mind that, you know, when you have a big change in inflation, it impacts inventory, you know, pretty quickly, you know, when you have double-digit price increases. That's a big factor. Once you get past the anniversaries of those inflation, you tend to be comparing like to like. While we're going through the transition, there'll be some build there for sure.
Got it. Any thoughts on the tax rate in 2022?
Sean?
Sure. No, we would be expecting an annual rate around 25%.
25%. Okay. Thanks a lot. That's it.
Your next question is coming from Daryl Young. Please announce your affiliation, then pose your question.
TD Securities. Good morning, gentlemen.
Morning, Daryl.
First question is just around the consumer packaged goods companies. This past quarter, we saw most of the growth coming out of price versus volume. I'm just curious if you'd have any commentary about the sort of volume trend there, and if we're looking more like 2019 period where volumes were petering out or if it's just far too early to tell given all the disruption.
I think, well, we follow the results of our customers the same as you do, and they were certainly, you know, the volume uplift was not great. I mean, there were some companies that did well, so it wasn't universally flat. Depending on who your customer was, you could do well or not so well. I think all of those consumer packaged goods companies are very worried about supply availability. I'm sure there's some precautions being taken in inventory of raw materials that in a normal world they probably wouldn't be doing.
Okay. Just in terms of EcoFloat, is there anything specific in terms of margin concerns there that alongside the ramp up or specific downtime that we should be factoring in or modeling in to be aware of or just the general risks of starting up a major new project?
Well, it's probably the latter of those two things. Most of the sales will be internal to CCL, so we'll be, you know, making our own film versus sourcing it on the outside. We haven't got to go out to the market to look for the volume. We're looking for it internally rather than externally, certainly to begin with. The story is more about sustainability. There's a lot of interest in the film, so we're making it on a piece of very old equipment in Mexico at the moment, and it's sold out, and so the signs are quite encouraging. When you start up an extrusion line of that size, there will be some dollar cost to do that. It's not free of charge.
We don't expect the line to start up until sometime in the second quarter, maybe towards the end of Q2.
Okay, that's great. That's all for me. Thanks, gentlemen.
Okay, thank you.
Your next question for today is coming from David McFadgen. Please announce your affiliation, then pose your question.
Cormark Securities. Yeah, just start off on Avery. You talked a little bit about the badges business, how it's recovering. I was surprised at the level of organic growth in the quarter. I was wondering if you can give a little more color on the other components like direct-to-consumer, sheet protectors, indexes, binders, you know, just how all those various segments performed in the quarter and what was driving the results.
It was just a, you know, the pre-prior year was still somewhat COVID impacted. I think it was really around that, David, not anything else. It was across the board. Other than badges, everything else was up on the same period last year. Fourth quarters are, you know, you can often be impacted by people rebate chasing. There may have been some activity around that, so people trying to build inventory to get rebate, get up a tier on rebates. There may have been a bit of that. Generally, in general terms, Avery's performed pretty well all the way through 2021, and we saw that continuing in Q4.
Okay, just moving on to Checkpoint. You know, obviously greater than 30% growth at ALS is pretty strong. Is a lot of that just the retail reopening that's driving that, or is it just you're gaining more and more clients 'cause they want the RFID technology?
I think it's RFID is the driver there, but even in the base business we're seeing quite strong growth. How much of that is the apparel supply chain recovering in COVID, so retail stores reopening and you know across Europe and the U.S. in the way they weren't in 2020. How much of it is you know supply chain rebuilding versus real end user demand? Hard to say. But currently the market's strong and continues to be strong so far this year.
Okay. Can you provide us any commentary on MAS, like what the growth was at that business in Checkpoint?
It was, I think we've given some commentary on that on the slides that I don't really want to add to. I think the biggest story in MAS was it was impacted by inflation. Freight. We make all of those products in China, or the vast majority of them are made in China. Freight inflation from there was a huge factor in the fourth quarter, impacted margins. Also component sourcing in China itself for electronic components and chips was also a factor.
Okay. All right, thank you.
No problem.
Your next question for today is coming from Ben Jekic . Please announce your affiliation then pose your question.
PI Financial. Hi, Geoff. Hi, Sean.
Yes, please.
Two quick questions. Just on the Checkpoint, it seems like this quarter, the theme was a lot about growth and obviously the contribution of the acquisition. If I recall in the third quarter that you were mentioning also about the need for pricing to adjust. Has that not been an issue at Checkpoint, or am I mixing it up with something else?
I think you're probably referring to the comment I just made about MAS to the last caller. Freight inflation from China to our distribution hubs dotted around the world in every country. We make most of the MAS products in China. They're distributed around the world to distribution centers, largely in country. The freight bills are really what was the major source of inflation. Then some, to a lesser extent, the component increase in component costs, particularly for gates and antenna.
Okay. Thank you. I just wanted to ask, is the build-out of the EcoFloat capacity in Poland finished now or-
Not yet. Not yet.
Not yet. Is there any?
We expect the line to be ready to start production at some point in Q2, maybe towards the end of Q2.
Okay, perfect. Thank you. That's it for me.
Thank you.
You do have a follow-up question coming from Adam Josephson. Adam, your line is live.
Thank you. Geoff and Sean, thanks very much. Geoff, just back to the supply chain discussion. Other than the chip shortage and the paper situation in Europe, are there any regional differences you've experienced in terms of supply chain issues? Some other companies have talked about the U.S. being a particular problem, others not. Any regional commentary you can provide?
Well, I would say the release liner problem is a North America slash Europe issue. There's no issues in Asia, none that I've heard of emanating out of Latin America, so it's really a North America and Europe issue. That's what I'd say about that. Just wanna point out that Russia is the world's largest producer of aluminum as well as natural gas. I don't know what will happen to the price of aluminum if there are more problems to do with importing from Russia. Yeah, I think those are the main comments I'd make.
Okay. Perfect. On resin, Geoff, you know, Brent crude, I think is at $99 a barrel now.
Mm-hmm.
I know prices have been falling in the U.S., they've been more resilient.
Yeah
... in Europe. What is your outlook on resin, just considering what's happening to oil prices?
Well, normally, when oil goes up, resin at some point reacts to it. It's hard to imagine that in the current environment, resin's gonna continue to fall. Might have done otherwise. It did spike pretty significantly after the Texas storm in the U.S. That was somewhat false interruption to the supply-demand curve. I think once things calm down in the U.S., some things went back to normal, you saw resin prices drop. We haven't seen much of a drop anywhere in Europe, little bit here and there, but not much. We don't know any more than anybody else knows. If we all knew the answer to that, we wouldn't be on this call, we'd be rich, you know?
You wouldn't wanna be talking to us, Geoff?
That's it. If you go back to history, you know, if natural gas goes up and if oil goes up, resin usually at some point follows.
Yeah.
I think you're spot on with that.
Yeah. In terms of CCL, I mean, historically, the growth range has been anywhere from 1%- 6%, depending on the state of the economy.
Mm-hmm.
This year could be particularly unusual because you've rarely, if ever, had the inflation you're gonna be dealing with.
Sure.
You're gonna be implementing very significant price increases, which will obviously influence that organic growth number.
Mm-hmm.
How would you have us think about, you know, where in that range you might expect to fall given the price increases you're implementing and any impact on volume that could come from that?
Well, that's the second part of your question is the unanswered question. If volume was to stay as it were, you know, and we were gonna implement, let's say, a global average of a 6% price increase, well, you have to be, you know, obviously would appear in our organic growth numbers. But the bigger question is how much of the demand we're currently seeing is real versus people building inventory because of concern about supply and what will happen when that's over. That's the unanswered. We just don't know the answer to that any more than anybody else does.
History would suggest that after a period of shocks like this, the pandemic followed by this outbreak of war in Europe, at some point there'll be a correction to the current supply shock and so whether that'll happen this year or next year remains to be seen.
Are you getting any indications from your customers either way, Geoff? Or is it just that there's just no way to know?
No, not really. I mean, if you look at the results of some of the you know the home and personal care customers, which we're very close to, some of those companies have done exceptionally well, like L'Oréal. Others have done not so well. You know, it's hard to really say, really. It depends also which products you're making for those customers. It's not just who the customer is, but what you're making for them. In the beer industry, you know, some of the big beer producers have commented on the declines in volume in Asia during the pandemic crisis. If you make the labels for the branded goods that have premiums attached to them, they've been rising.
It just depends on who, you know, not only who your customer is, but where how you sit with that customer. I would expect it's hard to imagine that there would not be some correction to the current demand curve in the consumer packaged goods business at some point, once these shocks to the system sort of, you know, come back to the norm. It's hard to imagine.
Yeah. Just one last one for me, Geoff , on your leverage ratio. Obviously, the balance sheet remains in terrific shape. Just given the outbreak of war, everything else that's going on, has that changed your thinking in any way, shape, or form about where you wanna be levered over the next year plus?
Well, we've always taken a conservative view of leverage. You know, we never levered up particularly highly. Our guardrails have always been not to take any risk to our investment grade rating. That would probably imply a 3.5-4 at the top end. We've never been up that high. Once leverage sinks below one, we begin to think about capital return to shareholders. We're at 1.06 today, but we've also had a number of transactions done and maybe some more to come. We've got a pretty volatile situation out in the world. We'll have to ponder that and see how things unfold in the next couple of quarters.
Yep. Thanks so much, Geoff.
No problem.
There are no further questions in queue. I would now like to turn the floor back over to the CCL management for any closing comments.
Okay. Well, thank you very much, everybody, for joining the call, and sorry it's been such difficult times for the people of the world, and particularly in Europe. Hopefully when we talk again in August or in May, things will be a lot calmer, and we'll have also good news to report. Thank you for joining the call.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.