CCL Industries Inc. — Management Reports 2021

Feb 25, 2021

2020 LETTER TO SHAREHOLDERS

It was an unforgettable year, testing the resilience of our Company, proving again the benefit of portfolio diversity in our products, geographies and end markets. After a soft second half to 2019, we believed an event could trigger a global 2020 downturn following the longest period of economic expansion since World War II, spanning an entire decade since 2009. But, none of us expected the first global health pandemic seen since the Spanish Flu in 1918! China began to shut down in January, shortly followed by the rest of the world as contagion took hold. The first five months of the year saw the greatest contraction in global GDP since the Great Depression of the 1930s. Governments may have failed forward, but their subsequent response, in economic terms was still massive, and in our view, entirely appropriate. During the dark months of February and March, optimism was not high that an economic recovery could be “V” shaped, but that is exactly what happened from June. First quarter results were essentially flat, second quarter sales fell 10% and earnings 14%, followed by a rebound, record third quarter and very strong fourth quarter… a roller coaster year. 2020 sales ended down only 1.5% to just under $5.25 billion. With so many work place and non-essential retail closures, it’s perhaps not surprising Avery and Checkpoint were the Segments most affected by the crisis, sales declining 14.2% and 12.2%, respectively. However, CCL Segment sales grew 1.7%, largely organically, while Innovia increased 10.4%, all by acquisition. The Company benefited modestly from foreign exchange translation and the positive impact of bolt-on acquisitions. Adjusted net earnings increased more than $50 million to $551 million, up 10.8%, while adjusted basic earnings per Class B share improved from $2.79 in 2019 to $3.08 in 2020; foreign currency translation effects were nominal. Restructuring charges and other expenses were $27.6 million including an additional $8.6 million expense to conclude a long-running legacy legal matter at CCL Secure. The balance largely related to restructuring investments across the Company to match operational costs to pandemic related demand levels. We also reined in capital spending and tightly managed working capital, driving free cash flow* to a record $616 million, up $172 million over 2019.

CCL S e g m e n t

2020 sales increased 1.1% organically to $3.4 billion, the same growth rate as 2019, compared to 4.8% in 2018. Geographically, we delivered modest progress in North America and Asia, double-digit gains in Latin America (moderated heavily by currency devaluations), with Europe down slightly and more so in Australia and South Africa. Operating income increased 11.8% while adjusted EBITDA improved 9.6% to $784 million, a margin of 23.4% up 170 basis points compared to 2019.

Home & Personal Care sales were essentially flat at just over $1 billion: profitability improved as strong sales of labels for personal cleansers offset slower markets in cosmetic skin care and products associated with travel or distribution at specialty retail, including hair salons. We made solid profit gains in labels and tubes across the Americas and Europe, but Asia was more impacted by the lockdowns in ASEAN countries and we had some share loss in China. We had a record year at our label joint venture in the Middle East. Our aluminum aerosol business also had a better year on improved volumes, especially in Mexico. Overall, our business followed the mixed fortunes of this industry, brands focused on cleansing did well, but more cosmetic, prestige or travel-related products suffered, especially in the first half. It was a challenging year for our aluminum slug venture. In February, we had to take full control from our German partner who faced financial difficulties and ultimately bankruptcy. Rebuilding capacity at the operation on our own incurred unexpected fully consolidated losses. We hope the plant gets into positive adjusted EBITDA* territory in 2021.

Healthcare & Specialty sales were boosted by the crisis ending 2020 up double digit, with the benefit of bolt-on acquisitions and modest positive currency translation. Profit performance was particularly strong in North America where we are more exposed to OTC medicines, vaccines and medical grade sanitizers. Lawn & Garden chemical markets also boomed in the crisis as consumers were forced to stay at home. Our international business, more focused on prescription drugs and agricultural chemicals, faced slower market growth but still posted gains overall. Global profitability increased significantly on higher sales, cost savings and favourable mix. We are excited about our entry into the pharmaceutical folding carton market with digital technology and our acquisition of Graphics West late in the year.

Food & Beverage posted a low single digit sales decline as customers’ volumes in ‘away from home’ channels, including products sold at travel retail, were deeply impacted by the crisis. Offsetting that, sales of Sleeves continued their recent growth trajectory and were especially strong in the United States and Latin America. Many of the brands we supply are associated with ‘at home’ consumption, booming in the pandemic. This included sales of household disinfectants and cleaning fluids, where we used our assets in this space to support Homecare customers. Sales of closure labels for home delivery bags at fast food chains were also strong. Our new plant in South Africa was closed by the government, along with our customers in the beer sector, for some months, reopening in the second half and profitable in the fourth quarter. Overall profitability was almost flat for the year despite the sales decline. Our joint venture in Russia posted record earnings on strong double digit organic sales growth.

CCL Design sales to Electronics customers increased in the low teens, as demand for computers and IT peripherals for homeworking increased significantly during the pandemic. In addition, high demand for Gen 5 mobile devices and data storage hardware for cloud computing fueled already robust technology markets. Results were strong in all geographies, especially China, although notably not the USMCA region as some customers had their operations temporarily closed by government order in Mexico. Profitability improved significantly and operating income margin* remains above the CCL Segment average. Automotive had a tough first and second quarter as customers closed assembly plants globally but rebounded in the second half with fourth quarter sales and profitability above prior year. Profitability dropped significantly for 2020 as sales fell low double digit on the first half performance. Sales to alkaline battery producers were up on pantry loading by consumers. Olympic Tapes reduced losses and made some progress with customer qualification approvals. Overall, profitability at CCL Design improved on 2019.

CCL Secure delivered a record year, with a significant increase in operating income margin* on solid sales growth. Results were strong across the board. In the United States, sales of passport components, security labels, ID cards and specialized government documents offset slower sales of stamps. Polymer currency operations had their best year under our ownership on new business wins, favorable mix, productivity gains and higher cash in circulation in many countries as a result of the pandemic. Quarterly and annual volatility based on large order timing and a long sales cycle remain notable characteristics of this business.

Avery

This part of CCL was the most negatively affected by the pandemic as reported sales fell by $105 million. After a solid start in January and February, things began to change in March as workplace closures hit, attended sports and music events and conferences and conventions completely stopped. Our name

badge categories with pro-forma revenues of more than $100 million in 2019 (including the IDC and Identilam acquisitions, closed in the early days of the year)... fell by roughly two thirds and even higher in event related products. Pandemic education protocols in North America significantly impacted backto-school demand, especially for binders and indexes, on top of lower use in work places; sales dropped more than 20%. Printable media labels held up much better, especially internationally. Kids’ product lines increased on the Stuck-On-You acquisition in Australia, while direct-to-consumer label sales through Avery.com and other e-commerce sites boomed, aided by the InTouch acquisition, only in part fueled by the pandemic. Operating income dropped $43 million to $113 million on sales of $634 million, a return on sales of 17.9%, down 330 basis points. We firmly expect to see recovery in this space as the world returns to normal and have seen gradual recovery since the low point in the second quarter. Despite the pandemic, Avery continues to deliver the highest return on capital* of any Segment in the Company.

Checkpoint

The closure of non-essential retailing in many geographies deeply affected Checkpoint, especially in the second quarter when sales dropped by one third. For the year, sales fell $89 million or 12.2% to $635 million. However, since June we have seen solid sequential recovery, with profitability in the second half above prior year. Apparel labeling results were hit especially hard in the first half as industry supply began its slide in January in China but rebounded strongly in the second half to record levels of profitability for the year, aided by a small acquisition in Spain and robust performance in RFID. Store closures and retailer priority to pandemic safety measures restrained new hardware installs at the Merchandise Availability Solutions business, but higher margin label and tag consumable sales volume in essential retail was a significant offset, improving mix. In Europe, we had good success with our new occupancy/temperature monitoring hardware solutions, while China gained a large, chain wide RFID hardware order. The smaller Meto business, largely in Germany, recovered from second quarter lows to post a profit. Segment operating income* for the year fell $16 million to $80 million, a return on sales of 12.6%, down 70 basis points. Cost savings were a significant factor as we quickly adjusted operational capacity to market demand.

Innovia

Pandemic tailwinds for consumer staples drove a lively market for packaging films. Overall tonnage increased modestly organically, as we pruned and improved mix with most of the growth coming from the new acquisition in Poland, exceptionally meeting our investment return hurdle rate in its first year. Productivity initiatives in the large supply plants in the U.K. and Mexico paid great dividends as did much tighter management of the resin and raw materials supply chain. Resin was a tailwind in the first half but a headwind since the summer, especially in North America where prices doubled by January 2021 from July 2020 lows. Progress around commercial pricing policy and related controls will be tested in the year ahead. Currency effects for the year were immaterial. Sales increased 10.4% on the Flexpol acquisition to $615 million, with a 20.5% adjusted EBITDA margin, compared to 15.2% in 2019 and 12.1% in 2018. Free cash flow from operations, a 2020 highlight, tripled from 2019 levels, aided by much improved working capital performance. In the latter part of the year, we announced a $35 million investment to build a new films line to produce Ecofloat, a hybrid technology film facilitating easier separation of shrink sleeves from PET containers in recycling centres, aiding customers’ circular bottleto-bottle sustainability initiatives. Capacity comes on stream in Europe in 2022, with capital expenditures incurred in both 2020 and 2021. The vast majority of the output will be used internally at CCL Label.

Delivering to Shareholders

Following our February 2021 Board meeting, we announced a 16.7% increase in the dividend, a meaningful premium to our 10.8% adjusted net earnings* growth. The annualized payout now stands at $0.84 per Class B share and $0.83 per Class A share, up 110% over the last five years. The Company has paid dividends without omission or reduction for more than three decades. Despite spending $161 million on acquisitions and $266 million on capital expenditures (net of disposals), the Company’s net debt to adjusted EBITDA ratio ended 2020 comfortably inside investment-grade territory at 1.24 times, down 0.37 turns. Priorities for 2021 include returning Avery and Checkpoint to former glories, improving organic growth for the CCL Segment and Innovia and building capacity where needed, adding bolt-on transactions that meet our disciplined valuation metrics while paying down debt to build capacity for larger transactions in the future. Working capital performance remains top quartile. We plan to invest at least $330 million in 2021, compared to an expected $320 million depreciation and amortization expense, excluding right-of-use assets. With 97% of sales outside Canada, CCL continues to provide domestic shareholders considerable geographic risk diversification.

Diversity, Leadership and Governance

We are a global company. Less than 10,000 of more than 22,200 employees are of White Caucasian descent, with the balance of Latin, Asian (including the Indian subcontinent), African and other origins. For these reasons, our Company has long since affirmed to local leadership of our businesses around the world. It’s not only the right thing to do socially, but it also makes practical sense… only those born and bred fully understand the cultural nuances of doing business in their country. We are a highly decentralized Company that thinks globally but really does act locally… 191 operations in 42 countries. Our top global business leaders are required to have served their formative years in the engine rooms of our industry; we do not and will not hire outsiders to such roles. That is not the case with our small professional corporate team that continues its technically excellent, agile, highly responsive mantra, costing less than 1% of sales.

65% of employees are men, 35% women, a ratio we seek to improve, although that will take time. Change starts at the top. In January, we announced the appointment of two new Directors to the Company’s Board: Ms. Linda Cash, former Vice President of Global Quality and New Model Launch at Ford Motor Company, and Dr. Susana Suarez-Gonzalez, Chief Human Resources, Diversity & Inclusion Officer of International Flavors & Fragrances Inc., a NYSE listed company that sells non-competing products to many of our customers. Both women bring deep global operating experience to our Board while adding diversity to the table. Our Board continues to represent all shareholders through good governance practice, while providing seasoned wise counsel to management.

At this year’s Annual General Meeting, we bid farewell to Mandy Shapansky, who is retiring after seven years of service to the Board. Mandy’s authentic, direct personality and great humor will be sorely missed. As Chair of the Board’s Corporate Social Responsibility Committee, she has overseen the Company’s move to measure sustainability throughout its operations and leaves behind a great legacy in this respect.

Sustainability

In December 2020, we published our first annual Sustainability Report, which we encourage all stakeholders to read. It concludes an 18 month painstaking effort to track greenhouse gas emissions

and other key environmental metrics from all our global operations, beginning our journey to a new future with a solid data foundation in compliance with recognized, auditable standards. We followed the practices of many global customers in the consumer goods industry, our future performance is inexorably linked to theirs….. we simply cannot succeed should they fail. In our industry, the most important initiatives surround the idea of making primary packaging a circular economic activity, with products continuously recycled, dramatically reducing waste going to landfill. For that reason, our Company signed on to the New Plastics Economy Global Commitment led by the Ellen MacArthur Foundation, a charitable organization and global thought leader dedicated to accelerating the transition to a circular economy. We will be updating our sustainability progress annually, with the report for 2020 due in the summer of 2021, and annually thereafter at the AGM. The world cannot continue to grow economically by consumption of virgin planetary resources alone. We will do our part alongside our customers.

2021 Outlook

We enter the year with many uncertainties remaining over when and how this pandemic will finally end, but end it surely will. During this once-in-a-generation event, we strengthened the Company significantly….the best decisions are often made in times of crisis and better investment opportunities sometimes uniquely arise. We will take advantage of those around the world: organically and by acquisition, without drifting from the industry we know, as the best use of the Company’s excess free cash flow. We are confident about the year ahead, and especially the first half where comparisons are on our side.

We close by taking this opportunity to acknowledge the stunning agility, courage and utter dependability of our people throughout this crisis. Tirelessly supporting customers, often in very difficult circumstances, while staying safe, considering colleagues and unquestionably delivering for shareholders; without them we are nothing. To our customer and supplier partners, we know it has been a challenging year for some of you, but we remain loyal to all those invested in our past success and wish you a successful 2021.

Donald G. Lang

Executive Chairman

Geoffrey T. Martin

President and Chief Executive Officer

• Non-IFRS measures; see Section 5A of CCL’s Management’s Discussion and Analysis for more detail.