Stock Symbol: TSX - CCL.A and CCL.NV.B
TORONTO, May 4 /CNW/ -
Dear Shareholder:
Please find enclosed the First Quarter 2006 financial results and related
public disclosures for CCL Industries Inc. This shareholder package provides
detailed information about your Company's business activities and its
financial performance.
The Board of Directors continues to be very pleased with your Company's
progress. Since the sale of the North American Custom Manufacturing business
almost one year ago, CCL has been able to successfully reinvest the cash
proceeds on capital projects in support of organic growth opportunities
combined with key strategic acquisitions. CCL has been able to more than
replace the earnings reduction associated with the sale of the Custom business
with its higher growth specialty packaging businesses.
Your Board of Directors is also pleased to approve a 10% increase in the
quarterly dividend payable on June 30, 2006. This dividend increase is
supported by the strong cash flow and earnings growth of your Company and by
the relatively conservative financial leverage of the business. This dividend
is a continuation of CCL's record of paying consecutive quarterly dividends
for 25 years without a reduction. The dividend is $0.11 per Class B non-voting
share and $0.0975 per Class A voting share.
Conference calls with our stakeholders are held following the release of
our quarterly results. These calls are made to ensure that all stakeholders
can gain further insight into our business and also support our good corporate
governance practices. Presentation materials used during the conference calls
and the annual Investors' Day are posted on our web site along with audio
recordings of the meetings. Instructions for accessing these services are set
out at the end of this earnings release.
We encourage all shareholders to access our web site www.cclind.com on a
regular basis for investor and company news including scheduled dates for
future earnings releases. If you would like to have future Press Releases
e-mailed to you at the time they are issued, please complete the Information
Request Form under the Investor Relations Section on our web site or write to
us at CCL to the attention of Christene Duncan.
Yours truly,
Jon K. Grant
Chairman of the Board
Investor Update
---------------
1. First Quarter 2006 Results and Dividend Release
2. Consolidated Statements of Earnings and Retained Earnings
3. Consolidated Balance Sheets
4. Consolidated Statements of Cash Flows
5. Notes to Consolidated Financial Statements
6. First Quarter 2006 Management's Discussion and Analysis
7. Press Release re: CCL's US$170 million private placement debt
financing - March 7, 2006
<<
Results Summary
Three Months Ended March 31st
------------------------------
(in millions of Cdn dollars except %
per share data) 2006 2005 Change
---------------------------------- ---- ---- ------
Sales $ 313.2 $ 265.7 17.9
----- -----
----- -----
Unusual items - net gain $ 0.4 $ -
----- -----
----- -----
Net earnings from continuing operations $ 21.1 $ 16.1 31.1
Net earnings from discontinued
operations, net of tax - 3.6
----- -----
Net earnings $ 21.1 $ 19.7 7.1
----- -----
----- -----
Earnings per Class B share
Continuing operations $ 0.66 $ 0.50 32.0
Discontinued operations - 0.11
----- -----
Net earnings $ 0.66 $ 0.61
----- -----
----- -----
Diluted - continuing operations $ 0.64 $ 0.60 6.7
----- -----
----- -----
Unusual items included in
continuing operations - net loss $ (0.03) $ -
----- -----
----- -----
Number of outstanding shares (in 000s)
Weighted average for the period 32,184 32,348
------ ------
------ ------
Actual at period-end 32,565 32,569
------ ------
------ ------
Toronto, May 4, 2006 - CCL Industries Inc., a world leader in developing
manufacturing, packaging and labelling solutions for the consumer products and
healthcare industries, announced today its financial results for the first
quarter ended March 31, 2006 and the declaration of its quarterly dividend.
Sales for the first quarter of 2006 of $313.2 million were 18% ahead of
the $265.7 million of sales from continuing operations recorded in the first
quarter of 2005. Financial comparisons to the prior year's results in all
Divisions continue to be negatively affected by the appreciation of the
Canadian dollar relative to the U.S. dollar, the euro and most other
currencies. Business acquisitions in the Label Division have positively
impacted comparisons to prior periods. Sales volume has also grown organically
in the Label, Container and Tube Divisions as CCL continues to benefit from
strong demand from its global customers and with new product offerings. The
performance of recent acquisitions and the Company's expansion into new
international markets have also been positive. Sales volume in the ColepCCL
joint venture was similar to last year's level.
Net earnings from continuing operations for the first quarter of 2006 of
$21.1 million were up by 31% from the $16.1 million recorded in the first
quarter of 2005. Net earnings were impacted by a net gain from unusual items
of $0.4 million before tax (but a net loss of $1.2 million after tax) in the
first quarter of 2006. There were no unusual items in the first quarter of
2005 and net earnings from discontinued operations were $3.6 million in last
year's first quarter.
Earnings per Class B share from continuing operations were $0.66 in the
first quarter of 2006, up by 32% compared to the $0.50 earned in the same
period last year. The unusual items in the first quarter 2006 decreased
earnings per Class B share by $0.03 in the quarter. Earnings per share from
discontinued operations were $0.11 in the first quarter of 2005. Diluted
earnings per Class B share were $0.64 in the first quarter of 2006 and $0.60
in last year's first quarter.
In May 2005, CCL completed the sale of its North American Custom
Manufacturing business for gross proceeds of $273 million. This business was
recorded as a discontinued operation and consequently, its sales and income
contribution were excluded from continuing operations in 2005. Historical
financial information on continuing operations has been restated to reflect
this change.
Donald G. Lang, Vice Chairman and Chief Executive Officer commented, "We
are gratified by the stellar performance of our businesses in the first
quarter, resulting in record quarterly earnings from operations. Our earnings
per share from continuing operations, excluding unusual items, in the first
quarter were 38% higher than last year's comparable period. This record
performance was achieved despite the continued unfavourable impact of the
strong Canadian dollar on our results. Over the last year, we have more than
replaced the earnings from the disposed North American Custom Manufacturing
business with organic and acquisition growth in our specialty packaging core.
Our global customers are continuing to experience good sales growth and CCL's
network of facilities has been successful in supplying key packaging
components to these customers in new and existing geographies.
"The Label Division continues to show strong growth as our strategy to
invest in high-end equipment, new plants and accretive acquisitions are
generating meaningful earnings progress. We are very pleased with the
operating performance of the Prodesmaq business in Brazil, acquired in
January, and expect significant earnings generation in future periods. The
Container Division, which now consists of the extruded aluminum business, ran
at very high utilization and profitability levels in the first quarter and has
seen reduced backlogs due primarily to the significant capacity expansion
installed over the last couple of years. New management in the Container
Division is in the process of restructuring operations to be more effective
and responsive to its customers. The Tube Division, which now consists of
plastic tubes since the disposition of the closure business in February, is
continuing to show both volume and profit improvements under the focus of its
new management. Our ColepCCL joint venture continues to perform reasonably
well and is in a good position to grow further for the balance of 2006."
Mr. Lang added, "During the quarter, we enhanced our financial structure
by borrowing US$170 million, split between five and ten-year term notes, and
swapping a part of this debt into euros, resulting in an overall effective
interest rate under 5%. A portion of the proceeds was used to repay the
maturing US$120 million 6.66% notes that originated in 1996. CCL now has a
very sound financial foundation for the future as we are holding a significant
cash position to take advantage of growth opportunities, with a modest level
of debt leverage and no significant debt repayments until 2010."
Mr. Lang concluded, "Our outlook for 2006 remains positive as we have had
a strong start in the first quarter. We are continuing to demonstrate growth
in earnings and cash flow from operations. As a result, your Board of
Directors has declared a 10% increase in the dividend, starting with the next
dividend payment in the second quarter. Based on the improved cash flows from
the business, the dividend rate has been stepped up over the last four years
by 38%. The quarterly dividend will be $0.11 on the Class B non-voting shares
and $0.0975 on the Class A voting shares to shareholders of record at the
close of business on June 16th, 2006 payable on June 30th, 2006. CCL continues
its record of paying quarterly dividends without reduction or omission for 25
years."
At the end of March 2006, cash and cash equivalents amounted to $106
million compared to $47 million at March 31, 2005. Net debt amounted to $362
million at the end of March 2006, which is $83 million lower than the $445
million level from a year ago. Net debt to total capitalization at March 31,
2006 was 38%, down from 49% at the end of March 2005. Book value per share has
now grown to $18.30 at March 31, 2006, up 28% from $14.31 a year earlier.
CCL Industries Inc. manufactures pressure-sensitive labels, aluminum
containers and plastic tubes, providing state-of-the-art specialty packaging
solutions to global producers of consumer brands in the home and personal
care, healthcare and specialty food and beverage sectors. With headquarters in
Toronto, Canada, CCL Industries employs approximately 4,600 people and
operates 46 production facilities in North America, Europe, Latin America and
Asia. CCL's joint venture, ColepCCL operates 5 plants in Europe and employs
approximately 1,800 people.
Statements contained in this Press Release, other than statements of
historical facts, are forward-looking statements subject to a number of
uncertainties that could cause actual events or results to differ
materially from some statements made.
Note: CCL will hold a conference call at 10:00 a.m. EDT on Friday, May 5,
2006 to discuss these results.
To access this call, please dial Toll-Free North America -
1-800-377-5794 or Domestic and International - 416-641-6714.
Post-View service will be available from Friday, May 5, 2006 at
12:00 p.m. EDT until Sunday, June 4, 2006 at 11:59 p.m. EDT.
Dial: Toll-Free - 1-800-558-5253 - Access Code: 21288550.
For more details on CCL, visit our web site - www.cclind.com
Financial Tables follow ...
CCL INDUSTRIES INC.
2006 First Quarter
Consolidated Statements of Earnings and Retained Earnings
Unaudited Three months ended March 31st
-------------------------------------------------------------------------
(in millions of Cdn dollars,
except per share data) 2006 2005 % Change
-------- -------- --------
Sales $ 313.2 $ 265.7 17.9
------------------------------
Income before undernoted items 55.1 43.4 27.0
Depreciation and amortization 18.1 15.5
Interest expense, net 5.6 5.3
------------------------------
31.4 22.6 38.9
Unusual items - net gain (note 5) 0.4 -
------------------------------
Earnings before income taxes 31.8 22.6 40.7
Income taxes 10.7 6.5
------------------------------
Net earnings from continuing operations 21.1 16.1 31.1
Net earnings from discontinued
operations, net of tax (note 4) - 3.6
------------------------------
Net earnings 21.1 19.7 7.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, beginning of period 413.0 272.7
Net earnings 21.1 19.7
------------------------------
434.1 292.4
Less dividends:
Class A shares 0.2 0.2
Class B shares 3.0 3.0
------------------------------
3.2 3.2
------------------------------
Retained earnings, end of period $ 430.9 $ 289.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Class B - Continuing operations $ 0.66 $ 0.50 32.0
Discontinued operations $ - $ 0.11
------------------------------
Class B - Net earnings $ 0.66 $ 0.61 8.2
Class A (x) $ 0.65 $ 0.60
-------------------------------------------------------------------------
Diluted earnings per share
Class B - Continuing operations $ 0.64 $ 0.49 30.6
Discontinued operations $ - $ 0.11
------------------------------
Class B - Net earnings $ 0.64 $ 0.60 6.7
Class A (x) $ 0.63 $ 0.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) Earnings per class A shares are $0.01 lower than Class B shares for
the first quarters for 2005 and 2006.
See notes to interim consolidated financial statements.
Certain 2005 figures have been restated (note 4) for discontinued
operations.
CCL INDUSTRIES INC.
2006 First Quarter
Consolidated Balance Sheets
March December March
31st 31st 31st
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2006 2005 2005
------------- ----------- -----------
(Unaudited) (Unaudited)
Assets
Current assets
Cash and cash equivalents $ 105.8 $ 120.2 $ 47.2
Accounts receivable - trade 181.9 162.2 236.1
Other receivables and
prepaid expenses 22.4 20.7 36.6
Inventories 108.5 102.1 152.1
-------------------------------------
418.6 405.2 472.0
Capital assets 564.9 534.7 540.7
Other assets 26.4 29.2 38.7
Intangible assets 28.1 27.9 38.9
Goodwill 405.6 371.9 321.6
-------------------------------------------------------------------------
Total assets $ 1,443.6 $ 1,368.9 $ 1,411.9
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank advances $ 9.6 $ 8.8 $ 73.2
Accounts payable and
accrued liabilities 232.7 239.9 300.0
Income and other taxes payable 20.6 24.3 10.5
Current portion of long-term debt 17.8 17.3 163.7
-------------------------------------
280.7 290.3 547.4
Long-term debt 439.9 376.5 255.3
Other long-term items 51.9 51.8 54.3
Future income taxes 82.4 84.5 90.5
-------------------------------------------------------------------------
Total liabilities 854.9 803.1 947.5
-------------------------------------------------------------------------
Shareholders' equity
Share capital (note 2) 189.5 188.7 189.3
Contributed surplus 2.6 2.0 0.3
Retained earnings 430.9 413.0 289.2
Foreign currency translation
adjustment (34.3) (37.9) (14.4)
-------------------------------------------------------------------------
Total shareholders' equity 588.7 565.8 464.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,443.6 $ 1,368.9 $ 1,411.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
Certain 2005 figures have been restated for comparative purposes.
CCL INDUSTRIES INC.
2006 First Quarter
Consolidated Statements of Cash Flows
Unaudited Three months ended March 31st
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2006 2005
----------- ----------
Cash provided by (used for)
Operating activities
Net earnings $ 21.1 $19.7
Earnings from discontinued operations - (3.6)
Items not requiring cash:
Depreciation and amortization 18.1 15.5
Stock-based compensation 0.5 0.1
Future income taxes 2.8 3.3
Unusual items (note 5) 1.2 -
-----------------------------------------------------------------------
43.7 35.0
Net change in non-cash working capital (39.7) (24.5)
-----------------------------------------------------------------------
Cash provided by continuing operations 4.0 10.5
Cash provided by discontinued operations - 7.0
-----------------------------------------------------------------------
Cash provided by operating activities 4.0 17.5
-------------------------------------------------------------------------
Financing activities
Proceeds on issuance of long-term debt 200.8 32.3
Retirement of long-term debt (140.5) (1.7)
Increase in bank advances 0.6 35.1
Issue of shares 0.7 1.3
Dividends (3.2) (3.2)
-----------------------------------------------------------------------
Cash provided by financing activities 58.4 63.8
-------------------------------------------------------------------------
Investing activities
Additions to capital assets (42.5) (44.1)
Proceeds on disposals 24.4 -
Business acquisitions (note 3) (62.2) (63.8)
Other 2.9 2.9
-----------------------------------------------------------------------
Cash used for investing activities (77.4) (105.0)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.6 (0.5)
-------------------------------------------------------------------------
Decrease in cash (14.4) (24.2)
Cash and cash equivalents at beginning of period 120.2 71.4
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 105.8 $ 47.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents are defined as cash and short-term investments.
See notes to interim consolidated financial statements.
Certain 2005 figures have been restated (note 4) for discontinued
operations.
CCL INDUSTRIES INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Periods ended March 31, 2006 AND 2005
(Tabular amounts in millions of Cdn dollars except share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The disclosures contained in these unaudited interim consolidated
financial statements do not include all of the requirements of
generally accepted accounting principles for annual financial
statements. The unaudited interim consolidated financial statements
should be read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2005.
Comparative figures have been restated to reflect discontinued
operations (note 4) and reclassified where necessary to correspond
with the current period's presentation.
2. SHARE CAPITAL
Issued and outstanding
March 31, December 31, March 31,
-------- ----------- --------
2006 2005 2005
---- ---- ----
Issued share capital $ 196.9 $ 196.1 $ 191.1
Less: Executive share
purchase plan loans (1.8) (1.8) (1.8)
Shares held in trust (5.6) (5.6) -
-----------------------------------
Total $ 189.5 $ 188.7 $ 189.3
-----------------------------------
During 2005, the Company granted an award of 200,000 shares of the
Company. These shares are restricted in nature; 120,000 shares will
vest in 2007 dependent on performance conditions, and 80,000 shares
will vest in 2009 dependent on continuing employment. The Company
purchased these 200,000 shares in the open market and has placed them
in trust until they vest. The fair value of this stock award is being
amortized over the vesting period and recognized as compensation
expense.
Actual number of shares:
March 31, December 31, March 31,
-------- ----------- --------
2006 2005 2005
---- ---- ----
Class A 2,421,784 2,422,204 2,439,187
Class B 30,142,759 30,088,789 30,130,256
-----------------------------------
Subtotal 32,564,543 32,510,993 32,569,443
Less: Executive share
purchase plan shares (150,000) (150,000) (150,000)
Shares held in trust (200,000) (200,000) -
-----------------------------------
Total 32,214,543 32,160,993 32,419,443
-----------------------------------
-----------------------------------
March 31, December 31, March 31,
-------- ----------- --------
2006 2005 2005
---- ---- ----
Year-to-date weighted average
number of shares 32,183,601 32,171,433 32,348,460
-----------------------------------
-----------------------------------
Year-to-date weighted average
diluted number of shares 33,250,268 33,010,605 33,177,107
-----------------------------------
-----------------------------------
3. ACQUISITIONS
In January 2006, the Company purchased Prodesmaq, based in Vinhedo,
Brazil. Prodesmaq operates two state-of-the-art plants and is
Brazil's largest supplier of pressure-sensitive labels for many
global companies in the home and personal care, healthcare and
premium food and beverage markets. The purchase price was
$62.2 million, net of cash acquired. The Company is reviewing the
valuation of the net assets acquired, including intangible assets,
therefore, certain items disclosed below may change when the review
is completed in 2006.
Details of the transaction are as follows :
Current assets $ 11.0
Current liabilities (2.1)
Non-current assets at assigned values 9.4
Future taxes (0.5)
Goodwill and intangible assets 44.4
-----------
Net assets purchased $ 62.2
-----------
-----------
Total consideration:
Cash, less cash acquired of $1.7 million $ 62.2
-----------
-----------
In January 2005, the Company purchased Steinbeis Packaging based in
Holzkirchen, Germany, for $64.1 million, net of cash acquired. The
purchase price was financed by cash on hand and bridge bank financing
denominated in euros. In addition, the Company completed the purchase
of the Holzkirchen building and land right for $4.0 million euros in
March 2006. Steinbeis Packaging, through its plants in the U.S.,
France, Germany and China, supplies battery labels on a global basis
and provides premium decorative label solutions for the European
consumer products market.
Details of the purchase price allocations, as finalized at
December 31, 2005, are as follows :
Current assets $ 34.9
Current liabilities (39.2)
Non-current assets at assigned values 44.8
Long-term liabilities (7.6)
Future taxes (4.6)
Intangible assets 3.7
Goodwill 32.1
-----------
Net assets purchased $ 64.1
-----------
-----------
Total consideration:
Cash, less cash acquired of $4.8 million $ 64.1
-----------
-----------
4. DISCONTINUED OPERATIONS
In May 2005, the Company sold its North American Custom Manufacturing
Division for $272.8 million in cash to KCP Income Fund, a Toronto
based contract manufacturer of private label household products. The
sale resulted in a gain of $131.0 million ($108.5 million after tax).
The disposition is reported as discontinued operations and the
results are as follows:
Three months ended March 31st
---------------------------------------------------------------------
2005
----
Sales from discontinued operations $ 163.8
-----------
Income before undernoted items 9.5
Depreciation and amortization 3.4
Interest expense, net 0.7
-----------
Earnings before income taxes 5.4
Income taxes 1.8
-----------
Net earnings from discontinued operations $ 3.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense reported above in discontinued operations included
an allocation from the Company's total interest expense based on the
ratio of net assets sold to total net assets. Income tax expense has
been based on the effective income tax rate in the local country.
5. UNUSUAL ITEMS
Three months
ended March 31
---------------------------------------------------------------------
Segment 2006 2005
------- ---- ----
Container segment
restructuring Container $ (1.3) $ -
Gain on net assets sale
of CCL Dispensing
Systems, LLC Tube 1.7 -
---------------------
Gain $ 0.4 $ -
---------------------
---------------------
Tax - unusual items $ (1.6) $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
In 2006, the Company commenced a senior management restructuring of
the Container segment and recorded a provision related to severances
totalling $1.3 million ($0.9 million after tax). Further costs will
be incurred in 2006 as the Company completes its evaluation.
In February 2006, the Company sold its CCL Dispensing Systems, LLC
net assets for $24.4 million cash and realized a gain of $1.7 million
(loss of $1.3 million after tax).
In March 2006, the Company repaid US$120 million in unsecured senior
notes which resulted in a foreign exchange gain and a capital gain
for tax purposes. This resulted in the utilization of a previously
unrecognized tax benefit from a 2002 unusual item write-down, and
generated an unusual tax recovery of $1.0 million in the current
quarter.
6. EMPLOYEE FUTURE BENEFITS
The expense for the defined benefit plans in the first quarter is
$0.4 million (2005 - $0.4 million).
7. SEGMENTED INFORMATION
Industry segments
In 2006, the Company has separated the Container segment into
Container and Tube, to more closely represent the current management
structure and give readers more relevant information. The new
Container segment manufactures aluminum aerosol containers while the
Tube segment manufactures plastic tubes.
Three months ended March 31st
---------------------------------------------------------------------
Sales Operating income
---------------------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Restated Restated
-------- --------
Note 4 Note 4
------ ------
Label $ 205.1 $ 157.3 $ 29.2 $ 19.1
Container 44.4 36.1 6.2 5.3
Tube 19.1 21.0 1.0 0.9
ColepCCL 44.6 51.3 4.1 5.4
---------------------------------------
Total operations $ 313.2 $ 265.7 40.5 30.7
-------------------
Corporate expense (3.5) (2.8)
-------------------
37.0 27.9
Interest expense, net 5.6 5.3
-------------------
31.4 22.6
Unusual items - net gain 0.4 -
-------------------
Earnings before income taxes 31.8 22.6
Income taxes 10.7 6.5
-------------------
Net earnings from continuing
operations 21.1 16.1
Net earnings from discontinued
operations, net of tax - 3.6
-------------------
Net earnings $ 21.1 $ 19.7
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable Assets Goodwill
------------------- --------
March December March December
31st 31st 31st 31st
----- -------- ----- --------
2006 2005 2006 2005
---- ---- ---- ----
Label $ 862.0 $ 756.2 $ 320.3 $ 276.7
Container 186.2 177.0 12.8 12.7
Tube 94.2 118.2 30.3 40.4
ColepCCL 165.6 163.3 42.2 42.1
Discontinued
operations - - - -
Corporate 135.6 154.2 - -
-----------------------------------------------
Total $ 1,443.6 $ 1,368.9 $ 405.6 $ 371.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation &
Amortization Capital Expenditures
-------------- --------------------
Three months ended Three months ended
March 31st March 31st
------------------ ------------------
2006 2005 2006 2005
---- ---- ---- ----
Continuing operations
---------------------
Label $ 11.7 $ 9.0 $ 28.8 $ 33.6
Container 2.5 2.1 9.7 6.7
Tube 1.9 2.1 3.1 0.6
ColepCCL 1.8 2.1 0.9 0.6
Discontinued
operations - - - 2.6
Corporate 0.2 0.2 - -
-----------------------------------------------
Total $ 18.1 $ 15.5 $ 42.5 $ 44.1
---------------------------------------------------------------------
---------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
First Quarters Ended March 31, 2006 and 2005
This document has been prepared for the purpose of providing Management's
Discussion and Analysis (MD&A) of the financial condition and results of
operations for the first quarters ended March 31, 2006 and 2005 and an update
to the 2005 Annual MD&A document. The information in this interim MD&A is
current to May 4, 2006 and should be read in conjunction with the Company's
March 31, 2006 unaudited first quarter financial statements released on May 4,
2006 and the 2005 Annual MD&A document, which forms part of the CCL Industries
Inc. 2005 Annual Report, dated February 16, 2006.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and in accordance with the
requirements of section 1751 of the CICA Handbook. Unless otherwise noted,
both these financial statements and this interim MD&A are expressed in
Canadian dollars as the reporting currency. The measurement currencies of
CCL's operations are primarily the Canadian dollar, the U.S. dollar, the euro,
the Danish krone, the U.K. pound sterling, the Mexican peso, the Thailand
baht, the Chinese renminbi, the Brazilian real and the Polish zloty. CCL's
Audit Committee and its Board of Directors have reviewed this interim MD&A to
ensure consistency with the current approved strategy and actual results of
the Company.
Management's Discussion and Analysis contains forward-looking statements,
including statements concerning possible or assumed future results of
operations of the Company. Forward-looking statements typically are preceded
by, followed by or include the words "believes", "expects", "anticipates",
"estimates", "intends", "plans" or similar expressions. Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and assumptions, including, but not limited to: the impact of
competition; consumer confidence and spending preferences; general economic
and geopolitical conditions; currency exchange rates; and CCL's ability to
attract and retain qualified employees and, as such, the Company's results
could differ materially from those anticipated in these forward-looking
statements.
Overview of Business Conditions
The markets in which CCL's customers operate have continued to be
generally favourable through the first quarter of 2006. CCL has experienced
good growth in most of its product categories in line with its customers'
performance. The economies in the countries where CCL operates continue to
grow despite higher energy and commodity costs on consumers and throughout the
supply chain. The U.S. Federal Reserve has continued to raise short-term
interest rates in its attempt to soften the impact of potential inflation and
to stem the weakening of the U.S. dollar. The European economy appears to be
improving while Asian markets are still growing rapidly and Brazil's economic
recovery is ongoing.
Most of CCL's global marketing customers continue to be experiencing
higher sales volumes than last year, reflecting the positive world economy. As
a result, CCL is also enjoying reasonable growth in most product categories
and regions. Overall, customer demand for CCL's products was very strong in
the first quarter, slightly softer fourth quarter in 2005. In general, new
orders so far in the second quarter continue to show reasonable strength.
The impact of higher material prices on our customers' products and the
supply chain's ability to access raw materials continues to be a major
challenge. All CCL business units are direct or indirect users of
hydrocarbon-based commodities and energy. The costs of many raw materials used
to manufacture CCL's products have again pushed through all-time high levels.
Management generally has been able to control these costs and maintain profit
margins with price increases to customers. Managing these record high input
costs and the timing and size of negotiated customer selling price increases
in response will continue to be a challenge throughout 2006.
The Label Division continues to enjoy good volume growth as our global
customers are expanding product lines and the business is realizing the
synergies of our international network in the marketplace. The significant
additional new manufacturing capacity installed in the Container Division has
had the expected effect of reducing customer order backlogs and improving
service levels. At the same time, there has been reduced order intake in
certain products such as beverage and in specific sizes of containers. The
Tube Division continues to experience a steady turnaround in sales volumes
with a good growth trend. ColepCCL, CCL's 40% owned joint venture, overall had
a flat sales performance, excluding the negative effect of currency, versus
last year's first quarter. Further details on divisional sales trends can be
found later in this report.
Discontinued Operations
On May 17, 2005, CCL completed the sale of Custom to KCP Income Fund for
$273 million in cash, resulting in an after-tax gain of $108.5 million. CCL
has recorded this divestiture as a discontinued operation in the prior year
and consequently, the sales and income contribution from Custom has been
excluded from the disclosure of continuing operations.
Review of Consolidated Continuing Operations
Sales for the first quarter of 2006 of $313.2 million were 18% ahead of
the $265.7 million recorded in the first quarter of 2005 for continuing
operations. Financial comparisons to the prior year's results have continued
to be negatively affected by the appreciation of the Canadian dollar relative
to the U.S. dollar, the euro, and most other currencies. In addition, business
acquisitions and a disposition have impacted the comparison to prior periods.
Sales increased for the quarter by 29% due to acquisitions and organic growth,
partially offset by a decrease of 11% due to foreign exchange and the
disposition. On a comparative basis with last year's first quarter, sales
volumes increased in all divisions with the exception of ColepCCL where
volumes were similar to the prior year level.
The following acquisitions and divestiture affected financial comparisons
in the first quarter. Further details on these transactions follow later in
the Discussion of Divisional Business Segments section:
On January 31, 2005, the Label Division acquired Steinbeis Packaging,
based in Holzkirchen, Germany for $64 million.
Effective July 1, 2005, the Tube Division acquired the remaining 30% of
CCL Dispensing Systems that it did not already own for $3 million.
On August 2, 2005, the Label Division acquired the remaining 49% of the
CCL-Pachem European joint venture for $23 million including debt assumed and,
in addition, purchased the assets of Merroc Ltd., a label converter located in
Cumbernauld, Scotland for $2 million.
On September 13, 2005, the Label Division acquired the business of
Inprint Systems headquartered in Ashford, England for $63 million.
On January 11, 2006, the Label Division acquired the label converting
assets of Prodesmaq and its subsidiaries for $62 million.
On February 7, 2006, the Company divested the assets of its CCL
Dispensing business in Libertyville, IL for $24 million.
Net earnings from continuing operations for the first quarter of 2006
were $21.1 million, up by 31% from the $16.1 million recorded in the first
quarter of 2005. Net earnings were impacted by a net gain from unusual items
of $0.4 million before tax (but a loss of $1.2 million after tax) in the first
quarter of 2006. There were no unusual items in the first quarter of 2005 and
net earnings from discontinued operations were $3.6 million in last year's
first quarter. Operating income from continuing operations improved by 32%
from last year's first quarter due to a substantially stronger performance in
the Label, Container and Tube Divisions but slightly lower income from the
ColepCCL joint venture. These improvements were partly offset by the negative
effect of currency translation and transactions due to the depreciation of the
U.S. dollar and the euro relative to the Canadian dollar.
Net interest expense from continuing operations was $5.6 million, $0.3
million higher than last year's corresponding quarter due primarily to higher
floating interest rates and interest allocated for discontinued operations in
2005. Since the sale of the North American Custom Manufacturing Division
("Custom") in mid-May of last year, all interest expense and the interest
income received on the cash from the sale of Custom are included in continuing
operations. Corporate expenses for the quarter were $0.7 million higher than
last year due primarily to higher public company costs. The overall effective
income tax rate for continuing operations was 29% for the quarter, excluding
the tax on unusual items, equivalent to the rate in the first quarter of 2005.
Earnings from continuing operations per Class B share were $0.66 in the
first quarter of 2006 compared to the $0.50 earned in the same period last
year, an increase of 32%. Unusual items in the first quarter of 2006 decreased
earnings per Class B share by $0.03. There were no unusual items in last
year's first quarter. For comparative purposes, if the unusual items were
excluded, net earnings from continuing operations increased by 38% in the
first quarter 2006 versus 2005. Earnings per Class B share from discontinued
operations in the first quarter of 2005 were $0.11. The impact of the unusual
items on a per share basis is measured by dividing the after-tax income of the
unusual items by the average number of shares outstanding in the relevant
period. Management will continue to disclose the impact of significant unusual
items on its results because the timing and extent of such items do not
reflect or relate to the Company's ongoing operating performance. Management
evaluates the operating income of its divisions before the effect of unusual
items. Diluted earnings per Class B share were $0.02 lower than basic earnings
per Class B share in the first quarter of 2006.
There were three unusual and one-time items in the first quarter of 2006
for a total gain of $0.4 million (but a loss of $1.2 million after tax) as
follows:
- Sale of CCL Dispensing - CCL acquired 70% of CCL Dispensing in 2001
and acquired the remaining 30% in 2005. This business was part of the
Tube Division. Its net assets were sold for a pre-tax profit of
$11.9 million, excluding $10.2 million of the segment's goodwill,
which was allocated to this disposition, resulting in a pre-tax profit
of $1.7 million. Tax of $3.0 million was incurred on the sale,
resulting in an after-tax loss of $1.3 million.
- Container Division Restructuring - During the latter part of the first
quarter of 2006, the Company reorganized the management of this
business and incurred severance and other related costs on this
restructuring. The new management is reviewing all aspects of the
business and anticipates that further restructuring costs will be
incurred in the second quarter of 2006. This unusual expense was
$1.3 million ($0.9 million after tax) for the current quarter.
- Unusual Tax Recovery - In March, with the repayment of the
US$ 120 million notes, certain foreign exchange gains were realized
for tax purposes only. Tax payments are not required due to the
ability of the Company to utilize previously unrecognized capital
losses generated from a 2002 unusual item write-down. The utilization
of these capital losses gave rise to a reduction in tax expense of
$1.0 million.
In summary, the unusual items in the first quarter of 2006 are as
follows:
Tax Expense After Tax
Gain/(Loss) (Recovery) Gain/(Loss)
----------- ----------- -----------
Sale of CCL Dispensing $1.7 $3.0 $(1.3)
Container Division Restructuring (1.3) (0.4) (0.9)
Unusual Tax Recovery - (1.0) 1.0
---- ---- ----
$0.4 $1.6 $(1.2)
---- ---- ----
---- ---- ----
The earnings impact of these unusual items was a loss of $0.03 per Class
B share for the first quarter of 2006.
The following table is presented to provide context to the change in the
Company's business as a result of the sale of Custom. CCL's strategy has been
to replace the income previously generated by Custom. The progress of the
replacement of the Custom income is of primary importance to our shareholders
and the financial community. This progress is measured based on earnings per
Class B share from the following table. The gain from the sale of the Custom
business in 2005 is excluded for this purpose. If the net negative impact of
unusual items was excluded from these results, there is major improvement over
the prior year earnings performance.
(in Canadian dollars)
---------------------
Three Months Ended March 31
---------------------------
Earnings per Class B shares 2006 2005
---- ----
From continuing operations $ 0.66 $ 0.50
From discontinued operations $ - $ 0.11
Net loss from unusual and one-time tax items
included in continuing operations $(0.03) $ -
The sale of Custom required a restatement of results including allocating
certain costs between continuing and discontinued operations. Interest expense
was allocated based on the ratio of the net assets employed in the business
(not the proceeds from the sale) to the total net assets of CCL. The income
tax expense was based on Custom operating as an independent business in Canada
and the United States and incurring income tax at the appropriate federal,
provincial and state tax rates.
The following is selected financial information for the nine most
recently completed quarters.
(in millions of Canadian dollars, except per share amounts)
-----------------------------------------------------------
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
----- ----- ----- ----- -----
Sales-continuing operations
2006 $313.2
2005 265.7 $280.1 $281.9 $282.4 $1,110.1
2004 240.7 232.0 220.0 221.2 913.9
Net earnings-continuing
operations
2006 21.1
2005 16.1 5.1 15.3 13.5 50.0
2004 11.5 9.1 13.6 9.8 44.0
Net earnings
2006 21.1
2005 19.7 113.8 15.3 15.0 163.8
2004 14.8 11.9 18.6 13.9 59.2
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
----- ----- ----- ----- -----
Net earnings per
Class B share
continuing operations
Basic
2006 $0.66
2005 0.50 $0.16 $0.48 $0.43 $1.57
2004 0.36 0.28 0.42 0.30 1.36
Diluted
2006 0.64
2005 0.49 0.16 0.46 0.41 1.52
2004 0.35 0.27 0.42 0.30 1.34
Net earnings per
Class B share
Basic
2006 0.66
2005 0.61 3.53 0.48 0.48 5.10
2004 0.46 0.37 0.58 0.43 1.84
Diluted
2006 0.64
2005 0.60 3.45 0.46 0.46 4.97
2004 0.45 0.36 0.57 0.43 1.81
Unusual items and one-time
tax benefit and gains
per Class B share
2006 (0.03)
2005 - 2.96 - (0.02) 2.94
2004 - - 0.13 (0.07) 0.06
-------------------------------------------------------------------------
The impact on net earnings per Class B share of unusual items and the
gain on sale of Custom in 2005 are included in the table above. Net earnings
per Class B share have fluctuated significantly due to these unusual items.
Excluding unusual items, there has generally been an improvement in earnings
over the last two years.
As only about 10% of CCL's sales are generated from Canadian
manufacturing locations, the 90% of sales from international operations are
recorded in foreign currencies and then translated into Canadian dollars for
reporting purposes. The U.S. dollar is the functional currency for about 40%
of the Company's total sales and it depreciated 6% on average compared to the
Canadian dollar in the first quarter 2006 versus last year's first quarter. In
addition, European currencies are now the measurement currencies for over 40%
of CCL's sales and the primary European currency, the euro, has substantially
weakened by 14% compared to the Canadian dollar versus the prior year quarter.
Changes in foreign exchange rates have reduced earnings per share due to
currency translation by $0.06 in the first quarter compared to 2005.
Additionally, CCL has a hedging program to lock in a portion of its
expected U.S. dollar revenues earned in Canada by the Container Division.
These hedge transactions for continuing operations were at an average rate of
$1.23 (US$ 5.3 million sold forward) for the first quarter of 2005 and was
$1.24 (US$ 6.0 million sold forward) for the first quarter of 2006. The
Container Division also took in an additional US$ 6.3 million at this year's
average rate; 6% below the prior year rate. The change in the exchange rates
on U.S. currency transactions reduced comparative income for continuing
operations by $0.4 million in the first quarter of 2006 and reduced
comparative earnings per share by $0.01 for the quarter. As at March 31, 2006,
outstanding foreign exchange contracts for 2006 and 2007 had a positive fair
value of $0.7 million.
Net interest expense for continuing operations was $5.6 million for the
first quarter of 2006, up from $5.3 million from the comparable period last
year due to higher floating interest rates and interest allocated for
discontinued operations for 2005. However, the depreciation of the U.S. dollar
and the euro partially offset the increased interest expense as CCL's
borrowings are primarily denominated in U.S. dollars and in the form of
private placements from U.S. institutional investors with a portion swapped
into euros. Net interest expense is net of interest earned on both short-term
investments and interest rate swaps.
On March 7, 2006, the Company completed a private placement financing of
Senior Unsecured Notes with U.S. institutional investors. The amount of the
borrowing was US$ 170 million with US$ 60 million to be repaid in five years
and US$ 110 million to be repaid in ten years. Interest rates for the
five-year and ten-year financing are 5.29% and 5.57%, respectively. The
five-year component was effectively swapped into euro fixed rate debt at an
interest rate of 3.82%. Further information on this hedging transaction
follows later in this report. The proceeds from this financing were used to
repay the US$ 120 million Senior Unsecured Notes that matured on March 15,
2006 that had a ten-year term with the balance of the proceeds to be used for
future business opportunities and general corporate purposes.
Interest Rate Swap Agreements ("IRSA") have had the effect of converting
U.S. dollar fixed rate debt into U.S. dollar floating rate debt. Cross
Currency Interest Rate Swap Agreements ("CCIRSA") have had the effect of
converting U.S. dollar fixed rate debt into euro floating rate debt. In March
2006, the Company completed the amortization of a gain realized on the sale of
an IRSA in 2001. In addition, the Company entered into two distinct CCIRSAs in
March 2006 that, on a combined basis, had the effect of converting US$ 60
million fixed rate debt into euro fixed rate debt for a notional amount of
50.0 million euros. The recent CCIRSAs reflect the terms of the Company's new
U.S. dollar borrowings matching the five-year tranche and are ultimately a
hedge against CCL's European investments and cash flow. The new CCIRSAs expire
in 2011.
The unrealized loss on all of the above agreements as at March 31, 2006
amounted to approximately $5.8 million. The effect of the IRSAs and CCIRSAs
has been to reduce interest expense by $0.5 million in the first quarter of
2006 compared to a reduction of $1.0 million in the first quarter of 2005.
Interest coverage (defined as operating income before unusual items and net
interest expense divided by net interest expense calculated on a 12-month
rolling basis) improved to 5.7 times in 2006 compared to 4.9 times in 2005 as
at March 31.
The Company's financial position is solid. As of March 31, 2006, cash and
cash equivalents amounted to $106 million compared to $47 million at March 31,
2005. Net debt amounted to $362 million at March 31, 2006, $83 million lower
than the net debt of $445 million at the end of March 2005. The decrease in
net debt in this time-frame is primarily due to the Custom divestiture and
operating cash inflows offset in part by the previously noted acquisitions and
capital spending. Capital spending in the first quarter of $42.5 million
compared to $44.1 million last year. The major capital expenditures in the
first quarter were for further payments on two production lines for the
Container Division, many new presses for the Label Division, and new plant
installations and equipment in Poland and Thailand. This level of capital
spending was higher than the $18.1 million of depreciation and amortization in
the first quarter of 2006. Non-cash working capital increased $39.7 million in
the first quarter of 2006 due to the typical seasonal build-up following the
slow holiday period including acquisitions and abnormally large income tax
payments. The increase in non-cash working capital in the first quarter of
2005 was $24.5 million.
In June 2005, the Company announced its intention to acquire, via a
Normal Course Issuer Bid ("Bid"), up to 10,000 Class A voting shares and
2,100,000 of its issued and outstanding Class B non-voting shares between June
16, 2005 and June 15, 2006. This Bid represents 0.4% of the issued and
outstanding Class A shares and 9.8% of the public float of the Class B shares.
As of today's date, no shares have been acquired under this Bid.
During the first quarters of 2006 and 2005, the Company generated cash
from all operations of $4.0 million and $17.5 million, respectively. The
reduction in cash flow is primarily due to $15.2 million more cash expended on
working capital in 2006 compared to 2005.
Net debt to total capitalization, defined as net debt divided by net debt
plus shareholders' equity, at March 31, 2006 was 38%, down from 49% at the end
of March 2005 primarily due to the Custom divestiture. Book value per share,
defined as shareholders' equity divided by total period end shares, was $18.30
at the end of the first quarter of 2006, 28% above $14.31 a year ago. The
increase is primarily the result of earnings retained in the Company,
including the significant gain on the sale of Custom, offset in part by the
reduction in shareholders' equity due to foreign currency translation
adjustments.
Discussion of Divisional Business Segments
Label Division
Sales for the Label Division were very strong at $205.1 million for the
first quarter, up 30% from $157.3 million in the same quarter last year. The
sales increase was a result of acquisitions contributing 30% and organic
growth 11% partially offset by negative foreign exchange of 11%.
Sales growth in the first quarter was predominantly due to the Steinbeis
(owned by CCL for only two months in 2005), Inprint, Pachem and Prodesmaq
acquisitions, but the base business also experienced a continuation of the
very positive volume trends in its businesses seen since late in 2004. North
American personal care volume was well ahead of last year for the quarter,
with continued growth from its global customers. Specialty products volume was
also well ahead of last year's first quarter with good growth in agricultural
chemical labels, while the promotional label market was flat but with a good
current order level. The North American healthcare business again recorded
strong sales growth, particularly in inserts, as the business has made
meaningful advances with customers in the pharmaceutical industry.
In Europe, sales volume was much improved in personal care compared to
last year, and there was good growth in food and beverage. Healthcare volume
was down slightly although the business remains very profitable and the
battery business continued to show strong performance. The Steinbeis, Merroc
and Inprint acquisitions, along with the increased ownership of Pachem, have
significantly improved CCL's European position in all categories.
Sales volume in Thailand was over 60% ahead of last year with further
growth expected, and the plant in Hefei, China continues to progress. Product
is now being shipped from CCL's new plant in Poznan, Poland. In addition, the
Guangzhou, China operation commenced trading in the second quarter of 2006.
The Prodesmaq acquisition in Brazil had a very strong sales performance as it
is being integrated into the CCL Label network. The label business continues
to benefit from its international presence dealing with large global
customers. There are many new opportunities for growth in the developing
countries and from new product introductions.
Operating income for the first quarter of 2006 was $29.2 million, up 53%
from the $19.1 million in the first quarter of 2005 despite the continuing
negative effect of currency translation. Drivers of this improvement were the
performance of all the acquisitions and most product categories in each
region. Key increases in operating income excluding acquisitions versus last
year were earned in the Asian operations, in the healthcare and specialty
businesses in North America, and in the personal care, food and beverage and
battery businesses in Europe. Operating income as a percentage of sales at
14.2% exceeded our internal targets and the 12.1% return generated in last
year's first quarter. The first quarter has generally been the strongest
quarter for the Label Division.
On January 11, 2006, the Label Division acquired the label converting
assets of Prodesmaq and its subsidiaries for approximately $62 million in cash
on a debt-free basis. Prodesmaq is Brazil's largest supplier of
pressure-sensitive labels in the home and personal care, healthcare and
premium food and beverage categories. In the 2005 year, Prodesmaq had sales of
$37 million and operated with exceptional profit margins.
CCL acquired Inprint Systems on September 13, 2005 for $63 million in
cash. Inprint, based in Ashford, England, primarily produces specialty
healthcare labels and rounds out CCL's European presence in this business with
plants in England, the Netherlands, Italy and the United States. At the
beginning of August 2005, the Label Division acquired the remaining 49% of the
Austrian-based CCL-Pachem joint venture for $23 million, paid in a combination
of cash, 200,000 CCL Class B shares and debt assumed. At the same time, CCL
also acquired the assets of Merroc Ltd. located in Cumbernauld, Scotland for
$2 million in cash. Merroc provides leading European paint manufacturers with
pressure-sensitive colour chip labels.
The Steinbeis Packaging business was acquired by CCL on January 31, 2005
for $64 million in cash. The transaction was paid for with cash on hand and a
bridge bank line of credit. Steinbeis Packaging, based in Germany, supplies
battery labels on a global basis and provides premium product decorating
solutions for the European consumer products market. Steinbeis' plants are
located in Germany, France, the United States and China.
Incremental sales and operating income in the first quarter of 2006 for
the above-noted acquisitions were $47.6 million and $9.3 million,
respectively.
Sales backlogs for the label business are generally low due to short
customer lead times, but indications are that customers' orders continue to be
firm through the second quarter of 2006. There is seasonality in the overall
label business with the first quarter generally stronger than the other three
quarters. This seasonality is a result of summer vacations primarily in
Europe, strong agchem label production before the spring planting season, and
the increased battery label production in the late summer and fall for the
Holiday season. Certain locations are particularly impacted by lengthy plant
shutdowns at year-end. Raw material pricing and our ability to pass on cost
increases and maintain profit margins continue to be a challenge.
The Label Division invested $28.8 million in capital in the first quarter
of 2006 compared to $33.6 million in the same period last year. The capital
was spent throughout the Division to maintain and expand its manufacturing
base by adding presses in strategic locations, including the plant
construction for the relocated Robbinsville, NJ operation. The Division
expects to continue to spend capital to increase its capabilities, expand
geographically, and replace or upgrade existing plants and equipment to
improve efficiencies over the next few years. Depreciation and amortization
for the Label Division were $11.7 million for the first quarter of 2006 and
$9.0 million in the comparable 2005 period.
Container Division
------------------
During the first quarter, the former Container Division was split into
two management teams with new leadership for each business. The former
aluminum container unit is now the Container Division and the former Plastic
Packaging unit is now the Tube Division. Henceforth, the two new Divisions
will be separate segments and CCL will be providing more detailed information
on these businesses.
Sales in the first quarter were $44.4 million, up 23% from $36.1 million
last year. Sales increased for the quarter by 26% due to organic growth,
offset in part by a decrease of 3% due to foreign currency translation.
The Container Division continued to benefit in the first quarter from the
strong demand for aluminum aerosol containers and other new applications for
shaped-can technology. Personal care volume in the aerosol format continued to
grow. The impact of added internal capacity and lower demand for smaller
diameter and beverage products has resulted in the Division reducing its
backlogs to more acceptable levels and also reducing the outsourcing of
production to overseas suppliers in support of customer requirements. Mexican
aerosol container sales volumes were substantially higher in the first quarter
compared to last year.
Operating income for the Container Division before unusual items for the
first quarter of 2006 was $6.2 million, up 17% from $5.3 million in the first
quarter of 2005 despite the unfavourable foreign exchange impact. The
improvement in operating income is due primarily to the higher sales volumes.
Return on sales for the first quarter of 2006 was 14.0% compared to 14.7% in
last year's first quarter.
The aluminum container plant in Penetanguishene, Ontario sells a large
part of its production to the United States market in U.S. dollars. As
previously discussed, the business hedges part of these sales in Canadian
dollars by way of forward contracts. The change in the exchange rates on U.S.
currency transactions reduced comparative income for the Container Division by
$0.4 million in the first quarter of 2006.
During the first quarter, the Container Division reorganized its
operations by bringing in a new management team to improve operational
effectiveness and to be more responsive to its customers. This restructuring
includes a complete review of all operations and assets with a goal of
improving financial returns and cash flow. It is expected that the
restructuring review will be completed during the second quarter of 2006.
During the first quarter, this restructuring resulted primarily in severance
costs totalling $1.3 million ($0.9 million after tax). These costs are
recorded as an unusual item.
The Container Division invested $9.7 million in capital in the first
quarter of 2006 compared to $6.7 million in the same quarter last year, to
maintain and expand its manufacturing base and reduce its production costs.
Depreciation and amortization for the first quarters of 2006 and 2005 were
$2.5 million and $2.1 million, respectively. The Division has successfully
installed five new aluminum container lines in the last three years and has
now installed a sixth new line which will be operational in the second quarter
of 2006. A seventh new line is on order for 2007 although its destination has
not yet been determined.
The Container Division continues to hedge some of its anticipated future
aluminum purchases through futures contracts. The fair value of these futures
at March 31, 2006 was a positive $11.8 million. The cost of aluminum has
continued to rise to new record levels and the Division will be challenged to
recover all of these cost increases by pricing changes since certain customer
contracts are at fixed prices and the level of hedged aluminum purchases has
not been completely matched with customer contracts.
Tube Division
Sales in the first quarter for the Tube Division were $19.1 million, down
9% from $21.0 million last year. Sales decreased for the quarter by 22% due to
foreign currency translation and the divestiture of CCL Dispensing Systems.
However, this reduction was partially offset by a 13% increase in tube sales
due to organic growth. The demand for plastic tubes showed good improvement in
the quarter and new orders to be manufactured for the busy summer season
appear to be strong.
In early February 2006, the Company divested the assets of its CCL
Dispensing business in Libertyville, IL for $24 million in cash to AptarGroup,
Inc. This business was deemed to be non-core as it is a small player in the
global closures market. Operating income contribution from this business in
2005 was approximately $1 million. The gain on the sale of this business was
$1.7 million (but a $1.3 million loss after tax) after allocating $10.2
million of goodwill from the Tube Division. The goodwill allocated to this
divestiture originated primarily from the plastic tube acquisition in 1997.
Operating income for the Tube Division for the first quarter of 2006 was
$1.0 million, up 11% from $0.9 million in the first quarter of 2005 despite
the unfavourable foreign exchange impact and the $0.4 million reduction in
income from the disposed closure business. The return on sales of 5.2% in the
first quarter compared to a 4.3% return in the prior year first quarter.
The Tube Division invested $3.1 million in capital in the first quarter
of 2006 compared to $0.6 million in the same quarter last year, to maintain
and expand its manufacturing base and reduce its production costs.
Depreciation and amortization for the first quarters of 2006 and 2005 were
$1.9 million and $2.1 million, respectively.
ColepCCL Joint Venture
The ColepCCL joint venture was created in mid-July 2004. For the first
quarter of 2006, CCL's 40% proportionate share of the joint venture's sales
was $44.6 million. This sales level was 13% lower than the comparative sales
last year of $51.3 million due primarily to the 14% decline in the value of
the euro for the comparable quarter. In local currency, sales were flat
compared to the same quarter a year ago with increases in the metal packaging
segment offset by reductions in the contract manufacturing business. New order
levels are somewhat stronger and it is anticipated that sales will improve
over the balance of the year.
Operating income in the first quarter of 2006 for ColepCCL was $4.1
million, indicating a return on sales of 9.2%, and in the first quarter of
2005, operating income was $5.4 million, with a return on sales of 10.5%.
Operating income was below last year's level due to currency translation, the
inability to fully pass through cost increases to customers and unfavourable
product mix.
In June 2005, ColepCCL completed the closure of its plant in Madrid,
Spain. Some of its production lines were moved to the U.K., Poland and
Portugal. The land and building were up for sale and an agreement to purchase
the property was reached with a developer with closing of the sale expected in
the third quarter of 2006.
Liquidity and Capital Structure
The Company's debt structure is primarily comprised of three private debt
placements completed in 1997, 1998 and 2006 totalling US$ 345.5 million
(Cdn.$ 403.5 million) at March 31, 2006. The US$ 120 million notes issued in
1996 were repaid on March 15, 2006. The Company's overall average interest
rate is 5.5% after factoring in the related Interest Rate and Cross Currency
Swap Agreements.
A new private placement totalling US$ 170 million closed on March 7,
2006. The new series of notes has two tranches: US$ 60 million for five years
at 5.29% and US$ 110 million for 10 years at 5.57%. The Company effectively
converted the five-year notes into a five-year fixed rate euro debt by
entering into two independent CCIRSAs with a financial institution. The intent
of this transaction was to more effectively hedge CCL's assets and cash flows
in Europe. This transaction reduced the effective rate on the five-year notes
to 3.82%. The additional borrowed funds were used to repay the US$ 120 million
notes on March 15, 2006 with the balance to be used for general corporate
purposes and for funding future growth opportunities.
The summary of net debt is as follows:
March 31, December 31, March 31,
$ Millions 2006 2005 2005
---------- ------------ ------------ ------------
Total debt $467.3 $402.6 $492.2
Cash on hand 105.8 120.2 47.2
------ ------ ------
Net debt $361.5 $282.4 $445.0
------ ------ ------
------ ------ ------
Net debt has increased from 2005 year-end, primarily due to the Prodesmaq
acquisition, the seasonal working capital build-up and the extensive capital
expenditure program, offset in part by earnings and the disposition of the
dispensing closure business. The major reason for the reduction of net debt
from a year ago was the disposition of Custom.
Working capital grew in its typical seasonal fashion including the impact
of acquisitions in the first quarter by $39.7 million compared to $24.5
million last year. Additional income tax payments in the first quarter of 2006
were partially responsible for this increase.
For the first quarter, capital spending of $42.5 million was consistent
with the $44.1 million spent in the first quarter of 2005. Capital spending
also exceeded this quarter's depreciation and amortization of $18.1 million.
This major capital expenditure program was to provide for increased capacity
and geographic reach, to implement cost reduction programs and to maintain the
existing business and asset base. Plans for capital spending in 2006 are
expected to be approximately $160 million as the Company continues to expand
its business base into new markets, and invest in assets to add capacity and
improve its competitiveness.
Dividends declared in each of the first quarters of 2006 and 2005 were
$3.2 million. The total number of shares outstanding as at March 31, 2006 and
2005 was 32.6 million due to the exercise of stock options and the issuance of
shares for the Pachem acquisition, offsetting the shares repurchased under the
prior Normal Course Issuer Bid. The Company has historically paid out
dividends at a rate of 20-25% of normalized earnings. Since the Company's cash
flow and financial position is strong, the Board of Directors approved an
increase of the quarterly dividend rate of 10% up to $0.0975 per Class A share
and $0.11 per Class B share to shareholders of record as of June 16, 2006 and
payable on June 30, 2006. The annualized dividend rate will be $0.39 per Class
A share and $0.44 per Class B share.
The Company has no material "off-balance sheet" financing obligations
except for typical long-term operating lease agreements. The nature of these
commitments is described in note 14 of the December 31, 2005 Annual
Consolidated Financial Statements. The Company does not have any material
related party transactions. There are no defined benefit plans funded with CCL
stock.
Risks and Strategies
The 2005 Management's Discussion and Analysis in the Annual Report
detailed the risks to the Company's business and the strategies that were
planned for 2006 and beyond. There have been no material changes to those
risks and strategies. CCL is now more exposed to the inherent risks associated
with running a more internationally diverse specialty packaging business. The
Company now has more dependence on the European, Latin American and Asian
economies and their currencies. These non-Canadian risks were described in the
2005 Management's Discussion and Analysis.
Outlook
The Company continues to be focused on the growth prospects of its
specialty packaging business and the prudent management and reinvestment of
the cash generated from the disposition of Custom with a view to the continued
improvement in shareholder value in 2006 and beyond. CCL will also be
integrating and reorganizing the large number of recent acquisitions it has
made to improve profitability and simplify administration. The Company is
continuing to investigate mid-sized potential acquisition candidates that meet
its criteria of core products and customers, and the expectation of earnings
accretion in the first year of ownership.
The organic growth in sales and income experienced in 2005 and early 2006
are anticipated to continue into the balance of 2006 as the Company is
expected to generate additional returns from its recent significant capital
investments and acquisitions. However, the seasonality of the business
continues to evolve, particularly in the Label Division, with the first
quarter being generally the strongest. There are challenges expected in the
remainder of 2006 associated with managing the balance between cost increases
due to the significant inflation and volatility of energy and packaging
components, and the Company's ability to recover these cost increases through
higher selling prices to its customers. The strength of the Canadian dollar
relative to the currencies of CCL's foreign operations continues to negatively
impact earnings compared to 2005 performance levels and is anticipated to do
so throughout 2006.
CCL Industries Announces Completion of US$ 170 Million Private Placement
Debt Financing
Toronto, March 7, 2006 - CCL Industries Inc., a world leader in specialty
packaging solutions for the consumer products and healthcare industries,
announced today that it has completed a private placement financing of Senior
Unsecured Notes with U.S. institutional investors. The amount of the borrowing
totals US$ 170 million with US$ 60 million to be repaid in five years and US$
110 million to be repaid in 10 years. Interest rates for the five-year and
ten-year financing are 5.29% and 5.57%, respectively.
Donald Lang, Vice Chairman and CEO of CCL Industries said, "There was
significant demand for our private placement offering with a number of our
current lenders and a few new lenders. We believe that this level of interest
is an example of the market's confidence in CCL and our strategy."
Mr. Lang added, "This financing establishes a solid financial foundation
for CCL for the foreseeable future."
Proceeds from the transaction will be used to repay CCL's US$ 120 million
Senior Unsecured Notes at 6.66%, which are due March 15, 2006, with the
balance to be used for general corporate purposes.
CCL Industries Inc. manufactures pressure-sensitive labels, aluminum
containers and plastic tubes, providing state-of-the-art specialty packaging
solutions to global producers of consumer brands in the home and personal
care, healthcare and specialty food and beverage sectors. With headquarters in
Toronto, Canada, CCL Industries employs approximately 4,600 people and
operates 46 production facilities in North America, Europe, Latin America and
Asia. CCL's 40% joint venture, ColepCCL, operates 5 plants in Europe and
employs 1,800 people.
Statements contained in this Press Release, other than statements of
historical facts, are forward-looking statements subject to a number of
uncertainties that could cause actual events or results to differ
materially from some statements made.
For more details on CCL, visit our web site - www.cclind.com
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