Good morning, ladies and gentlemen. Welcome to CCL Industries Second Quarter Investor Update. Please note that there will be a question and answer session after the call. The moderator for today is Jeff Martin, President and Chief Executive Officer, and joining him is mister Sean Washak, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen.
Thank you. Good morning, everyone. Welcome to our second quarter conference call. We'll jump right in here. Starting on page two, we have a disclaimer regarding forward looking information.
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 2020 annual MD and A, particularly the section risks and uncertainties. Our annual and quarterly reports can be found online on the company's website, cclind.com or on sedar.com. Moving to slide three. For the second quarter of twenty twenty one, sales increased 15.1% with organic growth of 20.5%, acquisition related growth of 1.5%, partially offset by 6.9% negative impact from foreign currency translation.
This resulted in sales of $1,410,000,000 compared to $1,220,000,000 in the second quarter of twenty twenty. Operating income was $235,500,000 for the twenty twenty one second quarter compared to a $163,600,000 for the second quarter of twenty twenty, a 51.4% increase excluding the impact of foreign currency translation. Jeff will expand on our segmented results of the CCL, Avery, Checkpoint and Innovia segments momentarily. Included in the second quarter results was an 8,800,000 increase in corporate expense due to an increase in short term and long term variable compensation expenses for the comparative periods. Consolidated EBITDA for the twenty twenty one second quarter, excluding the impact of foreign currency translation, increased approximately 31% compared to the same period in 2020.
Net finance expense was $14,100,000 for the 2021 compared to $15,900,000 for the twenty twenty second quarter. The decrease in net finance costs is due to a lower average debt outstanding for the comparative periods. The overall effective tax rate was 25.5% for the February, up slightly from 25.1% effective tax rate recorded in the second quarter of twenty twenty. The effective tax rate was impacted by recent amendments to UK tax legislation enacted into law during the quarter, partially offset by a reduction in valuation allowances due to improved profitability at certain subsidiaries of our company. This effective tax rate may change in few future periods depending on the proportion of taxable income earned in different tax jurisdictions with different rates.
Net earnings for the February was a $153,000,000, up 55% excluding foreign currency translation compared to a $103,900,000 for the February. For the six month period, sales increased 14%, operating income increased 31%, and net earnings increased 36% compared to the same six month period in 02/2020. 2021 included results from 11 acquisitions completed since 01/01/2020, delivering acquisition related sales growth for the period of 2%, organic sales growth of 12.1%, and a foreign currency translation headwind of 4.5 4.7% to sales. Moving to slide four. Basic earnings per Class B share were 86¢ for the 2021 compared to 58¢ for the second quarter of twenty twenty.
Adjusted basic earnings per class b share were 89¢ for the February compared to adjusted basic earnings for class b share of 59¢ for the second quarter of twenty twenty. The increase in adjusted basic EPS to 89¢ is primarily attributable to an increase in operating income resulting in 36¢, a 3¢ reduction in tax expense attributable to the net impact of the new UK tax legislation, increasing deferred taxes for future timing differences, offset by a reduction in tax valuation allowances. And these improvements offset by 5¢ negative impact from foreign currency translation and a 4¢ increase in corporate expenses. For the February period, the 40¢ increase in adjusted basic earnings per class b share is largely due to the 47¢ increase attributable to operating income, offset by 7¢ negative foreign currency translation impact with an increase in corporate expenses of 6¢, offset by a reduction in tax expense of 5¢ and lower interest expense of 1¢. This resulted in adjusted basic earnings per class b share of a dollar 71 for the six month period of 2021 compared to a dollar 31 for the twenty twenty six month period.
Moving to slide five. For the second quarter of twenty twenty one, free cash flow from operations was $94,700,000 compared to a $145,700,000 in the February. An increase in cash taxes paid, net capital expenditures, coupled with the retransmit of net working capital, cash reduced free cash flow from operations, and cash provided by operating activities for the 2021 compared to the second quarter of twenty twenty. For the last twelve months ended 06/30/2021, free cash flow from operations improved a $109,700,000 compared to the last twelve months ended 06/30/2020. The comparative improvement is attributable to the improved cash flow from operations and reduced capital spending for the comparative periods.
Moving to slide six. Net debt as at 06/30/2021 was $1,260,000,000, a decrease of 128,600,000.0 compared to 12/31/2020. The decrease is principally a result of debt repayments during the first six months of the year, partially offset by a decrease of cash on hand for 06/30/2021 compared to 12/30/2020. The company's balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was 1.05 times, declining from 1.24 times at the December.
Liquidity was robust with $693,300,000 of cash on hand and US 1,200,000,000.0 of available undrawn credit capacity on the company's revolving bank credit facility. The company expects to repay the full portion of its long term debt from free cash flow or using its revolving credit facility before it comes due. The company's overall average finance rate was largely unchanged at approximately 2.3% at 06/30/2021 and 12/30/2020. The company's balance sheet continue to be continues to be well positioned as we move through 2021. Jeff, over to you.
Thank you, Sean, and good morning, everybody. I'm on Slide number seven highlights the capital spending for the year. 132,000,000 spent so far, net of €127,000,000 net of disposals. Just want to point out that we're planning to spend EUR $340,000,000 for the year in total. So capital spending in the second half of the year will be much heavier than it was last year, around EUR 200,000,000 and change.
Moving on to Slide eight, highlights of the CCL business. Very strong quarter, mid teens organic sales growth, very strong in North America, up in the high teens, low double digits in Europe and Asia Pacific and up high single digits in Latin America. We saw strong sales gains in Home and Personal Care, Food and Beverage and CCL Design, slightly down in Healthcare and Specialty due to the pandemic tailwinds in the prior year and the same at CCL Secure, although their profits were up. So moving on to Slide nine, the two joint ventures we have, one in Russia, one in The Middle East, very strong results, particularly given the problems of foreign exchange in both jurisdictions. Slide 10, results from Avery.
Strong recovery in all regions of all products. So we've seen a really big strong bounce back this quarter at Avery. One lag out remains is badges. Although it has improved considerably sequentially, it's still far below normal, but much better than it has been. Our back to school selling has been strong.
We have faced a number of logistic issues, especially supply of critical raw materials from China with the many freight problems and challenges importing from that country into The US currently today. And that may affect replenishment sales in q three. Inflation has also been a factor. Slide 11, Checkpoint. Also big recovery here, especially in the apparel label business.
You have to remember in the second quarter of last year, large parts of that industry were completely shut down. So we've seen a particularly strong bounce back there, but also strong in merchandise availability with nonessential retailing coming back. In the crisis last year, we had still some good business with essential retailing, but nonessential is the part that's really bad spike there. Record profitability in the second quarter, well above Q2 'nineteen and above the previous Q2 twenty eighteen high watermark. Slide 12 is results for Innovia.
This one really surprised us a little bit. We had very good pass through of the higher resin costs. The the profit change really was aided by improved mix. So we've done a fair amount of pruning of low margin product lines, especially in the acquired Polish operation out of the plant in Mexico, and that really helped our mix in the in the court which has come through. Productivity gains, especially in The UK and large Mexican plants also augmented results.
The Polish plant, EcoFlat investment, is on schedule as planned for the second half of twenty twenty one. Slide 13, a few comments on our outlook. Just want to point out that the third quarter last year was a record quarter for the company. Earnings were up 18% last year in that quarter on a normal comparative period in 2019. So that's quite a high bar at today's foreign exchange rates, especially to the weaker US dollar.
EV will improve over the second half of twenty twenty. That's a typo on that slide. So it's the 2020 and the delta which will improve really depends on back to school. We do expect checkpoint progress to continue, but at a more modest pace, although our FID will still be a source of strength. We also see some supply chain issues in the power due to rising COVID restrictions in Asia.
We had a part in Bangladesh shut for two weeks in the month of July due to government imposed restrictions after the EID holiday there. So there's still some challenges in the Asian apparel supply chain appearing as we speak. CCL Design expects a strong second half. And although automotive is much better than it was last year, I think as we get into the third quarter, the chip shortage is beginning to reveal itself in some glory, and we expect some challenges for that, particularly in the third quarter or maybe in the fourth quarter too. But it's certainly a recovered industry compared to how it was in Q2 and the latter part of Q1 last year.
We do have some strong new business wins coming in electronics, which will probably offset that. Food and beverage and home and personal care are both expected to be solid. Health care and specialty comps remain difficult for the second half of the year, especially in the ag chem space. CCL Secure has the most difficult challenge in extremely elevated Q3 up based on the high margin windfall orders we received in 2020 from the cash shortages in many developed countries around the world for the comps return to normal in the fourth quarter. Innovia is still optimistic, navigating continuing resin volatility, and we have to manage well the Echo Float investment in Poland, and there are no more easy comps to come.
So with that, operator, we'd like to open up the call for questions, please.
Ladies and gentlemen, as a reminder, to ask questions, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while compile the queue in roster. Again, if you would like to ask questions, please press 1. Your first question comes from the line of Adam Josephson from KeyBanc.
Sir, your line is open.
Jeff and Sean, good morning.
Morning, Adam.
Hope you're well. One on translation, Jeff or or Sean. Based on current Canadian dollar exchange rates, what magnitude of drag would you expect if these rates persist through the end of the quarter?
Sean, do you wanna handle that one?
Sure. Adam, I think the way you have to think of it is US to CAD. For every 1% move in the US dollar CAD relationship, we would take a 1% or 1¢ change in EPS on an annualized basis. So look at the year over year exchange rates and what you expect for the back half of the year compared to where we're at now and where we were last year. And about a 1% move is a a $1.01 cent change on an annualized basis.
So I think in the second half, Adam, it'll be it'll be, you know, mid single digit cents EPS, something something like that, impacted if the rates stay where they are.
For the for the second half as a whole, not per quarter? Correct.
Right. Got it. Okay. But Thanks, Kevin.
It's a difficult demand because we've got some offsetting characters around the world too. So the Australian dollar is strong and few other places. So we do have some offsets.
Yes. Yes. No. Thanks, sir. You don't normally provide much in the way of explicit quarterly guidance, Jeff.
So I'm just wondering what you see more forthcoming than normal about '3 you're thinking about 3Q and even for the second half for that matter. And when I look at consensus, consensus already expects an earnings decline of about 4% in the second half. So I'm just wondering what prompted you to to be as forthcoming as you were in both the release and presentation about your your second half thoughts.
Well, just to remind everybody, Adam, in the second half, just to remind everybody, the first first half becomes very easy and the second half are difficult. You know, that's and the and the currency is, I think, something that's not everyone has picked up on before, you know, the latter part of the last quarter. So, I think it was also just to remind everybody about the translation impact. The two the two big impacts in the second half of foreign exchange translation and that q three quarter we had at CCL Secure in q three last year where I think we made something over $20,000,000, and we'll be we'll be lucky to do 25% of that this this quarter.
Got it. No. I appreciate that, Jeff. Yeah. You mentioned the supply chain issues in apparel resulting from rising COVID restrictions in Asia.
Are there any other aspects of the Delta variant that are causing you particularly concern regarding the second half?
Not particularly. I do think we'll get through it because governments are very much keen in it. I think in all in all parts of the world to get through this. So but the the part of the world that's difficult at the moment is the age of Asia Pacific, you know, the Indian Subcontinent, Thailand, Indonesia, Malaysia, Australia. You know, these these countries have all got sort of pretty severe restrictions in place at the moment.
We're currently able to operate, but there's there's certain times when governments act, and they acted in Bangladesh in July. So we were closed down for two weeks an additional two weeks on top of the Muslim holiday there in July. So it was a shutdown, and, you know, there may and there have been some restrictions also in Thailand. But the it's not material at the company level, but it's both of them.
Yeah. No. Understood, Jeff. On Innovia, you mentioned the results were were surprisingly good to you, and next was a big help there. Can you just talk about exactly where that came from?
And then given how well the segment handled resin inflation in 2Q, how much reason do you have to be concerned about 3Q along those lines?
Well, you know, we got hurricane season to get through in The US. So when you when you these days are all mindful of what weather can do to the resin supply. So so we're we're slightly, you know, somewhat cautious about that. But we we did a good job of managing the pass through. Well, not a 100%, but it's been a good chunk of it.
Because a lot of our customers, when Reddit was going down last year, changed their arrangements to be more more real real time with the moves of resin for that benefit results from the curve went the other way. But the big the big impact this quarter was really mixed and and getting out of some of the low margin volume we had in particularly in Poland and particularly in the plant in Mexico.
And presumably, those benefits are sustainable, Jeff?
Correct.
Yeah. Two other ones. The the the large transaction that was announced about a month ago in the label converting industry, what did you make of it, particularly the multiple? And and what do you think it says about the going multiples in the label industry these days?
Well, I think, you know, our our our stock price multiples seems to not be the going rate by anything in the industry. We've seen we've seen multiples paid to quite small businesses, that are already highly elevated. So it's challenging at the moment. So there's a lot of money chasing a few deals, and some of the prices that are being paid, in our opinion, are pretty ridiculous. But that's just our opinion.
You have to ask others what they think.
Yep. No. I appreciate that. And one last one. I mean, you don't give guidance, I think, for for good reason.
And Yes.
Yes. Appreciating that the world is always uncertain. How would you characterize your level of uncertainty about what's to come in the months ahead compared to whatever it might be might have been historically? I just not just the variant, but, know, Brazil's hiking interest rates because of very significant inflation there. Obviously, there's very sick significant inflation elsewhere.
Just talk about what your level of visibility into the next few months compared to whatever you would consider normal.
Well, you know, we've been facing different difficult external circumstances for things like forever. So I wouldn't say today is more elevated than they were last year in the middle of the pandemic. So they're more confident than we were, you know, in March and April and May last year for sure. And we've got some some of our businesses have still got some runway left on the bounce back, particularly at Avery. So, so I think it's, just we had a, like many companies, we had a very strong recovery in the second half of the year last year.
So the period of easy comps is is gone. And on top of that, we've got the the the US dollar weakening pretty significantly. So those two impacts, you know, just make it you know, the business is doing pretty well right now. But, you know, externally, those two things make the situation a little bit difficult.
Thanks a lot, sir.
No problem.
Your next question comes from the line of Walter Spracklin from RBC Capital Markets.
So starting with Avery, you mentioned and looking at your different divisions, it is the one that hasn't that is still kind of below pre pandemic on a fairly meaningful basis. And I believe last quarter, you had indicated, Jeff, that you did expect it to be up year over year, albeit on a tough comp. Are you getting more encouraged? I mean, looked like a great quarter. Things seem to be coming back.
You mentioned a few of the driving factors. But is it are you getting if you were to take that, expected to be up year over year, I think it was actually in the fourth quarter call you said that. Do you feel better about this division? Are do you expect it to be performing better than you than when you gave that guide or that comment in the fourth quarter with respect to Avery?
Sure. Well, we made in the 2018 and '29, we made about 45,000,000 in both of those two quarters, know, 2Q twenty eighteen, 2Q twenty nineteen. This year, we made 38 but it's a very different foreign exchange rate. So if you normalize foreign exchange, you know, to make it constant, we would have been in the sort of low forties. So we're not far off the pre pandemic level.
The business is still a drag in badges. So, know, sales of some categories of badges declined 90 to 95% in the crisis. They have bounced back, so the business has got profitable again. And as events continue to unfold in in particularly in The US and Europe, which is where that business is based, that's really the, you know, the thing that has to has to occur. The other business that's still difficult at the moment is is is the ring binder business.
And the comment they noted about China and the difficulties we have there is all around the importation of rings for the back to school business. So the world supply of rings pretty much for the whole planet, it all comes out of China. And, you know, just getting getting them out of there and getting them shipped to where we need them shipped has been quite challenging in the current environment. So just to give you a a frame of reference, an emergency 45 foot shipping container out of China today cost $445,000 versus $4,000 two years ago. I mean, that's how that's how that's how much the world has changed.
So, so those are our two, underlying comments with the sort of on the downside of it. But on the upside, you know, the label business has really has really returned to normal. And, and internationally, it's in very good shape. So we're feeling we're we're very confident about about Avery both for the coming quarter, the second half, and the year over year growth.
Fantastic. Moving to Innovia, Jeff, you had I believe when you first looked ahead to post the reorg in Mexico or the new plant start up, I believe you were guiding us back then to a kind of a low double digit margin, which subsequently went and I'm referring to EBITDA margin. It subsequently went up to the mid teen range. And now we're nicely trending above 20%. Is north of 20% the new normal?
Or is that mix that you mentioned more temporary? And should we look more at 20% or less than that as a normalized margin for Innovia?
So these are the margins the business is making when we bought it. So we've done a very good job of cleaning it up and sorting it out. I think we'd we'd have to wait and see what happens in a in a declining resin market. You know, what happens when the when resins are rising, you do have some in inventory of lower priced resin. In, you know, in in situ as prices rise, so you have the benefit of that.
That's typically offset by price increases you don't get quite through, but it usually usually ends up getting a wash. So what we're curious to see what happens is what happens when resin prices fall, if they were to fall dramatically, then we will then have high price inventory our in our silos. The more the impact of that would be if prices fall on the past three. So that's probably the thing we've not experienced yet that that could happen if the resin supply situation normalizes in 2022. But I there's an ongoing run rate.
This would high teens, 20, you know, 20 low twenties is probably as high as it's ever gonna get. Paul, does that answer your question?
It does. Thank you. That's great. And lastly, on the CapEx, I noticed a small increase, I think, in your CapEx spend. Any are you getting can you give us a little bit of color around any interesting projects that you're looking at, new projects or these growth initiatives?
What areas you're focusing your attention just from a capital expenditure standpoint?
Well, probably the most interesting one is all around the electronics business, the CCL design. We're building a couple of new plants in China. One of them is very big, for 25,000,000,000 project and some new business wins behind that that will be coming in 2022 and and the latter part of 2021. So that's probably the the main thing. I think, also, we have to bear in mind, we we curtailed CapEx, you know, in the in the crisis for liquidity reasons.
So some of this is, you know, delayed projects now coming back to the fall and, takes a bit of time. You know, the machine building industry has also got its challenges with availability of raw materials and chips and steel and aluminum and all the rest of it. So getting the machines you want on time today is also not not easy. So we had some delays in getting the equipment we need and parts of the business. We'd otherwise would have liked to have had it early.
That's great. Appreciate the time as always, sir.
No problem, Walter.
Again, ladies and gentlemen, if you want to ask question, please press star one. Your next question comes from the line of Steven McCoy from b BMO Capital Markets. Your line is open.
Thank you. Good morning, guys.
Good morning, Steve.
Good morning. I just had a couple of questions. On the CCL segment, you had a nice another nice quarter of of good margin growth. And I'm just wondering if you can point to any specific margin drivers that maybe were were driving the Q2 strength.
So Q2 strength CCL, Steve, is really driven by the recovery in the automotive business. That was a big factor. So, you know, CCL Design Automotive was was in the toilet, obviously, 2Q last year, and it bounced back pretty strongly. So CCL Design margins were up quite significantly in the quarter as a result of that, you know, year over year. And food and beverage also bounced back into the on premise issue that has really hurt that business.
There's always we have a big change. So those are the two main changes, largely mine. PCL Secure also had a had a good quarter, but it had a good quarter last year, and it's you know, the the delta there is no space. So the two the two margin impacts on the on the operating margin are really food and beverage and CCL Design.
Okay. Okay. That's that's great. That's helpful. Thank you.
And then I just wanted to confirm, I thought in one of the previous questions, mentioned something about CCL Secure. Did you say that you would be lucky to do 25% of what CCL Secure did last year in q three?
Correct. Yeah. So I'd I'd say a headwind in in q three of CCL secured and EBIT of the order of 15 to 20,000,000. So we had a really, when I say windfall, I meant windfall. So we had those big orders that came in last year in a number of jurisdictions to top up orders with premium prices, and this year, they're absent.
Okay.
That's the Okay. That's the delta. It's quarter on quarter. So we had an exceptional quarter in q three. Q four was normal, and we expect q four to be normal.
So it's really gonna be a q three phenomenon.
Right. And did you say that last last year's windfall was
15 to 20,000,000? Or the So there's a delta difference. So the difference between the the difference between what we're likely to make this year and what we made last year is of the order of 15,000,000 to $20,000,000 as he did.
Okay. Okay. That's helpful. Thank you. Just turning to Avery, you mentioned about just some supply chain issues.
You had a strong back to school, but you talked about supply chain impacting potential replenishment orders. How much does replenishment usually impact q three? Like like, is there any way to quantify or or or kind of magnitude?
I think we quantified, Steve. Because the last year, we had the, you know, the the the fiasco of all the school the school restart in in The US and Canada, which I'm sure you remember well. Yeah. We said this year are assuming, I think, with some validity, the back to school will be normal. So, typically, what you get is you have a selling order that usually goes out in the June and the July of this year, and that's mostly in the June.
And then in July and August, you get top up orders from retailers. And, and if you have the inventory, you can sell it. Obviously, the selling season is extremely short for back to school. So if you if you haven't sold it by September, you're done. So if we don't get the the ring supply we need, it could affect our ability to keep retailer supplies of what we need during that sort of replenishment period.
So that's the challenge at the moment.
Okay. I see. Thank you. And then and then maybe just finally, just on Innovia, just wanted to clarify. You did a very good job managing through resin inflation in q three in q two.
Sorry. But I guess what you're saying is q q three, you can manage the resin price inflation in a similar way, but I guess you're just saying that the hurricane season is a bit creates a bit of uncertainty on supply. Is that right?
It's just it's just, you know, resin is still going up. You know, it's it's creeping up now rather than leaking up, but still it's still going up. You know? And, in The US and Europe now, resin is at double the price of, you know, of resin in China. And, but there's so many difficulties importing from China at the moment.
And I don't I don't think any not many people in the world I know are thinking about sourcing from there. And China is the net importer of resin anyway. So if the world did that, you know, there'll be no availability anyway. So the real the real challenge has really been, you know, what's what's gonna happen in the future. And in hurricane season, you worry about that every year because it knocks out a a cracking plant, you know, with the usual the usual impact short term.
So we'll have to wait and see what happens.
Okay. That's that that that makes sense. Great. Thank you, Jack. Thanks, Sean.
Your next question comes from the line of David McLagan from mark Cormark Securities. Sir, your line is open.
Okay. Thank you. Couple questions. So you talked about the the badges business, how it's improved a bit, but it's still down, I guess, compared to normal levels, say, 2019. Can you give us an idea how much it it would still be down compared with q two nineteen?
It's still down 70% over 2019. So it may let's see. The the event has part of it. That's, you know, it's not comfortable for events and things that and and business conventions and things like that. You know, that's that's dropped 95% in the crisis, and we're we're back at sort of 25% of normal level.
Okay. I mean, it it should continue to improve after
a bit of Yeah. It's possible. I mean, we're we're expecting it to be getting I mean, it's improved in July, but it's a long road back. So until until, conventions and sports events and attended sports events and non attended sports events don't use any badges. So attended sports events till that becomes normal.
It's still it's still got a ways to go. It's about a $100,000,000 business, part part of Avery. It's part of Avery.
Okay. And then, just on, can you give us an an idea how the direct to consumer performed in in Binder specifically in Avery in the quarter?
The direct to consumer performed very well with the exception of Badges. And buyers also performed quite well because of the the the selling for for back to school, but we had some some inflation challenges in drinks supply, a lot of it to indulge around trade.
Okay. And then just on the balance sheet, you know, obviously, you guys have very low leverage. I think on the last conference call, there was a question about, you know, is this the optimal capital structure? I think you thought that it was below optimal level. So are you looking at a potential substantial issuer bid or something?
Well, there's a no recourse issuer bid out there, and we'll we'll see what happens.
Okay. And and could there be any
I can't afford any more than I just called in.
Oh, okay. Alright. Thanks.
There are no further question at this time. Please continue.
Okay, everybody. Thank you for joining the call, and we look forward to talking to you in in November for the for the third quarter. Thank you very much for today's time.
Ladies and gentlemen, this concludes on today's conference call. Thank you for participating. You may now disconnect.