Q2 2021 CCL Industries Inc Earnings Call
Okay.
Ladies and gentlemen of the operator today's conference scheduled to begin momentarily until the time your lines will again be placed on hold thank you for your patience again, ladies and gentlemen. This is the operator today's conference scheduled to begin momentarily until the time your lines will again be placed on hold thank you.
For your patients.
[music].
Good morning, ladies and gentlemen, welcome to CCL industries second quarter of Investor update.
Please note that there will be a question and answer session. After the call.
On the mother, he thinks like the day, Jeff Martin President and Chief Executive Officer, and joining him Mr. Shawn washed Schott senior Vice President and Chief Financial Officer. Please go ahead gentlemen.
Yeah.
Thank you good morning, everyone welcome to our second quarter.
The conference call will jump right in here.
Starting on page 2 we have a disclaimer regarding forward looking information I'll remind everyone that our business faces known and unknown risks and opportunities for <unk>.
Further details of these key risks please take a look at our 2020 annual MD&A, particularly the section risks and uncertainties.
Our annual and quarterly reports can be found online on the company's website, <unk> dot com or on SEDAR Dot com.
Moving to slide 3.
For the second quarter of 2021 sales increased 15, 1% with organic growth of 25%.
Acquisition related growth of 1.5 per cent, partially offset by $6, 9% negative impact from foreign currency translation.
This resulted in sales of 1 point for $1 billion compared to the $1 billion to $2 billion in the second quarter of 2020.
Operating income was $235.5 million for the 2021 second quarter compared to $163.6 million for the second quarter of 2020 of 51.4 per cent increase excluding the impact of foreign currency translation.
Jeff will expand on our segmented results of the CCL Avery checkpoint and Adobe of segments momentarily.
Included in the second quarter results was an $8 million 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 <unk> 2021 second quarter, excluding the impact of foreign currency translation increased approximately 31 per cent.
Compared to the same period in 2020.
Net finance expense was $14.1 million for the second quarter of 2021 compared to $15.9 million.
For the 2022nd quarter. The decrease in net finance costs was due to lower average debt outstanding for the comparative periods.
The overall effective tax rate was $25.5 per cent for the 2021 second quarter up slightly from $25.1 per cent effective tax rate recorded in the second quarter of 2020.
The effective tax rate was impacted by recent amendments to U K tax legislation enacted into law during the quarter, partially offset by a reduction in valuation allowances due to improved profitability of certain subsidiaries of our company.
The effective tax rate may change in future periods, depending on the proportion of taxable income earned in different tax jurisdictions with different rates.
Net earnings for the 2021 second quarter was $153 million up 55%, excluding foreign currency translation compared to 100 of $3.9 million for the 2022nd quarter.
For the 6 months period.
Sales increased 14% operating income increased 31% and net earnings increased 36 per cent compared to the same 6 months period in 2020.
2021.
Including the results from the 11 acquisitions completed since January 1.2020.
Delivering acquisition related sales growth for the period of 2% organic sales growth of 12, 1%.
And of foreign currency translation headwind of 4.5 for 7% of sales.
Moving to slide for it.
Thankfully the earnings per class B share were <unk> 86 cents for the second quarter of 2021 compared to 58 cents for the second quarter of 2020.
Adjusted basic earnings per class B share were <unk> 89 cents for the 2021 second quarter compared to adjusted basic earnings per class B share of 59 cents for the second quarter of 2020.
The increase in adjusted basic EPS 89 cents.
Primarily attributable to an increase in the operating income, resulting in 36 cents.
The recent reduction of tax expense net.
Beautiful to the net impact of the new U K tax legislation, increasing deferred taxes for future timing differences offset by a reduction in tax valuation allowances.
And these improvements offset by 5 cent negative impact from foreign currency translation and of course on increase in corporate expenses.
For the 2021.6 month period.
The 40% increase in adjusted basic earnings per class B share was largely due to the 47 cent increase attributable to operating income.
Offset by 7 negative foreign currency translation impact.
With an increase in corporate expenses of 6 cents offset by a reduction of tax expense of 5 cents and lower interest expense of 1.7.
This resulted in adjusted basic earnings per class B share of the dollar 71 for the 6 months period of 2021 compared to $1.31 for the 2026 month period.
Moving to slide 5.
For the second quarter of 2021 free cash flow from operations was $94.7 million compared to $145.7 million in the 2022nd quarter and.
An increase in cash taxes paid net capital expenditures, coupled with the retrenchment of net working capital.
Cash reduced free cash flow from operations and cash provided by operating activities for the second quarter of 2021 compared to the second quarter of 2020.
Yeah.
For the last 12 months ended June 30 of 2021 free cash flow from operations improved $109.7 million compared to the last 12 months ended June 30 of 2020.
The comparative improvement is attributable to the improved cash flow from operations and reduced capital spending for the comparative periods.
Yeah.
Moving to slide 6.
Net debt as at June 30 of 2021 was $1.2.6 billion, a decrease of $128.6 million compared to December 3$1.2020.
The decrease is principally a result of debt repayments during the first 6 months of the year, partially offset by a decrease of cash on hand for June 30 of 2021 compared to December 30 of 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 to 4 times at the end of December 2020.
Liquidity was robust with $693.3 million of cash on hand.
The U S $1.2 billion of available Undrawn credit capacity on the company's revolving bank credit facility.
The company expects to repay the from a 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 June 30 of 2021 and December 32020.
The Companys balance sheet continue b 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 7 highlights of the capital spending for the year.
$132 million spent so far on that.
On June 27 million net of disposals so on.
Of the pointed out that we're planning to spend $340 million for the year in total cash.
Capital spending in the second half of the year will be much heavier than it was last year around 200 million unchanged.
Moving on to slide 8 highlights of the CCL business very strong quarter.
Mid teens organic sales growth.
Very strong in North America were up in the high teens low double digits in Europe, and Asia Pacific on I'll, probably single digits not in America.
The strong sales gains of I'm opposed to the.
Food and beverages, the CTO design slightly down on the health care and specialty true to the Anthony <unk> from the prior year on.
On the same with CCL secure all of the profits were up.
So moving on to slide 9 the 2 joint ventures, we have 1 of in Russia, 1 of the Middle East very strong result, particularly given the problems of the foreign exchange in both jurisdictions.
Slide 10 results from a very strong recovery in all regions on all products. So we see the really big strong bounce back this quarter of debris.
The 1 lagging on the remainder of dispatches.
Proof considerably sequentially, it's still far below normal, but much better than it has been.
Back to school sell in has been strong we have faced the number of logistic issues, especially supply of critical raw materials from China.
The freight problems and challenges importing from the country into the U S. Currently today.
Hi, Thanks for replenishment sales in Q3 inflation is all for being a factor.
Slide 11 checkpoint.
The big recovery here, especially in the apparel label business you have to remember in the second quarter of last year in large parts of the industry were completely shut down so we've seen the particularly strong bank by the bounce back there, but also strong in the merchandise.
With non essential retail in the coming back.
Prices last year, we had still some good business with the central returning the non essential as the part of it's really bounce back.
The record profitability and of the second quarter.
Well above Q2.19 at above the previous Q2.2018 high watermark.
Slide 12 of results for the idea.
The fund really surprised us a little debt.
We had very good.
Pass through of the higher resin costs, but the profit the change really was aided by improved mix of we've done the fair amount of pruning of low margin product lines, especially on the acquired all of this operation out of the plant in Mexico on that.
Really helped on mix in the quarters, just come true productivity gains, especially in the U K and large Mexican plants also augmented resolve the problem.
Of this plan for that kind of flow to the person is on schedule and as planned for the second half of 2021.
Slide 13 few comments on our outlook.
On the point out the call.
Over the last year was a record quarter for the company earnings were up 18% of all share in that quarter on the normal comparative periods. In 2019, So that's quite a high bar of today's foreign exchange rates, especially for the week of U S. Dollar.
Everybody will improve over the second half of 2020, that's the typo on the slide since the second half of 2020 the debt.
Delta, which will improve really depends on back to school b.
We expect checkpoint programs to continue but of the mobile the space Hulu all of that Dave will still be the source of strength.
So see some supply chain issues in the apparel due to rising COVID-19 restrictions in Asia.
For the Bangladesh up for 2 weeks of the month of July choose the government imposed restrictions after the holiday the so theres still some challenges in the <unk>.
The apparel supply China, appearing as we speak.
CCL designed expects the strong second half, although automotive is much better than it was last year I think as we get into the third quarter of the chip shortage is beginning to repeat itself and some glory and b.
Expect some challenges for that particularly in the third quarter, maybe the fourth quarter 2 but it has said the recovered industry compared to how it was in Q2 of the lots of parts of Q1 last year. We do have some strong new business wins coming in electronics, which will probably offset that.
The food and beverage on the home and personal care with both expected to be solid.
The specialty comes from a difficult for the second half of the year, especially in the <unk> space.
Secure debt.
Think of the challenge extremely elevated Q3 of.
Based on the high margin windfall all of US 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.
Adobe the still as soon as it navigates continuing resin volatility and we have to manage well the kind of slowed investment in Poland on the renewable easy comes to come.
So with that operator, we'd like to open up the call for questions. Please.
Ladies and gentlemen of I reminded you ask the question.
The press star 1 on the telephone.
A question for Pat.
The Sunbelt Vicky Hahne Rocketing again, if you would like to ask a question. Please press star 1.
Your first question comes from the line of Adam Josephson from Keybanc, Sir Your line is open.
Jeff and Shawn good morning, Good morning, Adam.
Hope you're well.
1 on translation, Jeff for Sean based on current Canadian dollar exchange rates, what magnitude of drag would you expect.
These rates persist through the end of the quarter, John do you want to handle that 1 sure.
Adam I think the way you have to think of it is.
You asked the CAD for.
Every 1% move.
In the U S dollar of CAD relationship.
We would take a 1% or 1 cent change in the 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.
Per to where we're at now and where we were last year and.
About a 1% move is out of 1.1 cent change on an annualized basis.
So I think in the second half out of it'll be it'll be mid.
The mid single digit cents, EPS, something something like that impact if the rates stay where they are.
For the for the second half as a whole not per quarter correct right got it okay. Thanks, Jeff.
Difficult to model because he got some offsetting.
Currencies around the world too so.
The Australian dollar strong and few other a few other places and we do have some assets.
Yep got enough. Thanks, Joe.
You don't normally provide much in the way of explicit quarterly guidance, Jeff. So I'm just wondering what you see more.
Forthcoming the normal about 3 youre thinking about <unk> and even for the second half for that matter and you know when I look at consensus consensus already expects an earnings decline of about 4% of the second half. So I'm just wondering what prompted you to b as forthcoming as you were on both the release and presentation.
Your your second half thoughts just to remind everybody Adam in the second half just to remind everybody. It's.
The first of the first half the comps are very easy in the second half of the difficult.
And then on the currency is something.
Something that not everyone picked up on before.
On the lots of thoughts for the last quarter. So think of it is also just to remind everybody of how the translation impact.
The 2 of the T V.
For the second half of foreign exchange translation.
Q3 quarter, we Havent CCL skill in Q3 lost share, but I think the night something over $20 million on the.
The lucky to do 25% of that.
Cool.
Got it and I appreciate that Jeff you mentioned, the supply chain issues and apparel, resulting from Robert 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.
True.
Because governments are very much keen I think it all in all parts of the wells the go through the.
So the.
The path of the world it's difficult for the.
At the moment is the age of Asia Pacific, The Indian subcontinent, Thailand, Indonesia and Malaysia.
Australia.
Countries of whole golf sort of pretty severe restrictions in place at the moment, the kind of and be able to operate for this.
The certain times of the government.
On the accident Bangladesh in July So we were closed down for 2 weeks of an additional 2 weeks on top of the movement of holiday.
July.
There was a shutdown in the night.
And there have been from the restrictions also in Thailand, but it's material of the company level, but both of them.
Yeah, no understood Jeff on of Nobody of you mentioned the results were surprisingly good for you and mix was the bake out there can you just talk about you.
Exactly where that came from and then given how well the the segment handled resin inflation of 2 Q.
How much reason do you have to be concerned about <unk> along those lines.
So we got a hurricane season to get through in the U S.
These days for all of mine for the web we can do to the resin supply.
So it was slightly.
Somewhat cautious about that.
But we did a good job of managing the pass throughs.
100%, but a good chunk of it.
Because of all of our customers with RASM was down last year changed the arrangements to be more real real time of the moves of residents without benefit of the outspend of the kind of went the other way.
But the big the big impact of this quarter was really a mix.
And getting out of some of the low margin volume, we had in particular and part of it on the particularly on the cloud in Mexico.
And presumably those benefits for sustainable Josh Beck.
Yes.
Otherwise the the large transaction that was announced about a month ago on the label converting industry. What did you make of it particularly the multiple then and what do you think it says about the going multiples in the label industry. These days.
I think.
Yes.
The price multiples of things cannot be the going rate for buy anything in the industry.
We've seen we've seen multiples paid for.
Quite small businesses.
Already in the highly elevated.
Challenging at the moment, so theres a lot of money chasing too few deals.
And some of the prices that are being paid in our opinion of the pretty ridiculous.
But that's just our opinion.
This is what they think yes.
Yeah, No I appreciate that and 1 last 1 I mean, you don't give guidance I think for for good reason for.
<unk> net to the World is always uncertain, how would you characterize your level of uncertainty about what's to come in the months of had compared to whatever it might be might have been historically I just not just the variant, but brazil's hiking interest rates because of the very significant inflation. There. Obviously it is very significant inflation elsewhere.
<unk> you just talk about what your level of visibility.
So the next few months compared to whatever you would consider normal.
No.
In facing different difficult external circumstances for the seems like forever.
I wouldn't say today.
More elevated than they were last year in the middle of the pandemic. So the more confident.
March and April and May last year for sure and we've got some on some of our businesses has still got some runway left on the bounce back, particularly at Avery So.
So I think it's just we.
Like many companies we had a very strong recovery in the second half of the year last year. So the.
The period of easy comps has gone on.
For those that we've got the.
The U S dollar weakening pretty significantly so those 2 impacts.
The business is doing pretty well right now, but you know the external at those 2 things the payment situation a little bit difficult.
Thanks, a lot channel the problem.
Your next question comes from the lineup was the Spike Lee from RBC capital markets.
Your line is open thanks, very much operating good morning, everyone.
So starting with the Avery.
You mentioned and looking at your different divisions. It is the 1 that hasnt debt is still kind of below pre pandemic.
On a fairly meaningful basis, and I believe last last quarter. You had indicated Jeff that you did expect it to be up year over year now, albeit on a on a tough comp are you getting more encouraged I mean, it looked like a great quarter things seem to be coming back.
You mentioned a few of the driving factors, but are you getting.
If you would take debt expected to be up year over year.
I think it was actually on the fourth quarter call you said that.
Do you feel better about this division the are you do you do.
Do you expect it to B.
Performing better than you than when you gave that guidance for that comment in the fourth quarter.
With respect debris.
Well, we made in the second quarter of 2018 of 29, we made about 45 million and B.
Both of those 2 quarters.
The <unk> 19.
This year, we made 38, but at the very different foreign exchange right. So if you normalize foreign exchange.
It comes from we would've been in the sort of low for too. So we're not far of the pre pandemic level. The business is still a drag of patches.
So.
Sales of some categories of badges defined 90% to 95% in the crisis. They have bounced back for the business has got profitable again.
The events continue to unfold and particularly in the U S and Europe, which is where that business is tight.
That's really the the.
The thing that has to as 2 of the.
The other business, it's still difficult for the moment is the ring by the business on the comments I made about China on the difficulties we have the dual around the importation of range for the back to school of business. So the world supply of range pretty much for the whole plan is it all comes out of China.
Just getting getting them out of zone and get into the shift to where we need them shift that's being quiet challenge of in the current environment.
So just to give you sort of frame of reference in the emergency 45 foot shipping containers out of China today accounts for $45000 versus $4.2 years ago.
So much of the world has changed.
<unk>.
So those are the 2 underlying provinces the put them on.
On the downside of other people on the upside.
On the label business is really has really returned to normal.
And the internationally, it's in very good shape. So we're feeling very confident about about Avery.
For.
For the coming calls on the second half of the year over year of growth.
Fantastic.
Moving to of Novia, Jeff.
I believe when you first looked ahead to post the re org in Mexico or the new plant startup.
Believe you were guiding us back then too.
Kind of a low double digit margin, which subsequently went on and I'm, referring to EBIT EBITDA margin.
Subsequently went up to the mid teen range.
And now now we're.
Nicely trending above 20%.
Is north of 20 of the new normal or is that mix that you mentioned more temporary and should we look more at 20%.
The ore or less than that as.
Normalized margin for <unk> for these are the margins of the business is making when we bought it.
So we've done a very good job of cleaning it off of sorting it out.
I think we would have to wait and see what happens in a declining resin market.
It happens when the Brooklyn resins, the rise and you do have some inventory of low price resin.
And since you as prices rise.
So you have the benefit of that is typically offset by price increases you don't get quite true.
It usually ends up being awash.
Curious to see what happens is what happens when rent when resin prices for let's say with the fall dramatically.
We would then have high price inventory.
And while the impact of that would be as prices fall on the path through so that's appropriate for the thing we don't experience yet that could happen if the resin supply situation normalizes in 2022.
But all of it is in on.
Run rate.
Yes.
High teens 2020, low twenty's is probably as high as it's ever going to get.
Both of them if that answers. Your question. It does thank you that's great and lastly on the Capex I noticed the small increase I think in your Capex spend and are you getting can you give us a little bit of color around any interesting projects that youre looking at new projects are these growth initiatives what areas Youre for.
<unk> on your attention just from a capital expenditure standpoint.
Well this is probably the most interesting 1 zone.
All around the electronics business, the CCL design, but building a couple of new plants in China, 1 of them is very big.
For $25 million projected from new business wins behind that that will be coming in 2022.
And the other part of 'twenty 'twenty 1.
That's probably the main thing I think also we have to bear in mind, we kind of sales of Capex.
The crisis for liquidity reasons for <unk>.
Some of this is.
Did I of projects coming back to the full on.
It takes a bit of time the other machine building industries also go to the challenges.
The ability of raw materials, and chips from steel and aluminum and all of the rest of the so getting the machines. You will go on time today is also not easy. So we've had some delays in getting equipment, we need in parts of the business we had other.
The ones, we would've liked.
That's great I appreciate the time as always Jeff the problem Walter.
Again, ladies and gentlemen, thank you I wanted to ask the question. Please press star 1.
Your next question comes from the line of Stephen Maguire from yet.
The ammo capital markets. Your line is open.
Thank you good morning, guys good morning, Steve.
Good morning.
I had a couple of questions.
On the CCL segment, you had a nice had another nice quarter of good margin growth and I'm. Just wondering if you can point to any specific margin drivers that may be were where were driving the the.
The Q3 Q2 strength.
The strength.
The.
CCL, Steve is really driven by the low.
The recovery in the automotive business.
Big factor so the <unk>.
CCL design the automotive was it was in the total obviously <unk> last year and it bounced back pretty strongly.
The CTO of design margins were up quite significantly in the quarter was the result of that.
Year over year on food and beverage also bounce back and sort of the on premise.
Shares of its really hurt that business.
The other big change so, let's say of the 3 main changes margin loans CCL to kill.
Also the good quarter, but there's other good quarter last year.
The the Delta there is some of the space for the 2 the 2.
The margin impacts on the on the.
The operating margin of already food and beverage and the <unk> zone.
Okay. Okay. That's that's helpful. Thank you and then I just wanted to confirm what I thought and 1 of the previous questions. You mentioned something about CCL secure did you say that you would be lucky to do 25 per cent of what CCL secured of last year in Q3 correct.
So I would say.
The headwind in Q3 at CCL secure.
EBIT of the order of 15 to 20 million. So we had a really nice.
The windfall windfall. So we had the big orders that came in last year and the number of jurisdictions for top up orders at premium prices and this year, they're absolutely.
Okay.
Okay, that's the Delta.
The quarter on quarter. So we had an exceptional quarter in Q3 Q4 is normal that'd be the effect.
Q4 to be normal so it's really going to be of Q3 phenomenon.
And did you say the loss last year's windfall of 15 to 20 million of those the Delta difference the difference of Zane the the difference the table, we're likely to make this year.
We made lost share is of the order of $15 million to $20 million at Evo Okay. Okay.
Okay. That's helpful. Thank you.
I'm just trying to April you mentioned about just the supply chain issues.
You had a strong back to school.
But you talked about supply chain impacting the potential replenishment orders how much does replenishment usually impact Q3 like like is there any way to quantify or.
On a 2 to pick up the quantified for you can see last year, we had the the.
The fiasco of all of the school the school restarts in the U S from Canada, which I'm sure you remember well.
The retailers this year.
I think with some validity to the back to school will be normal.
So typically what you get is you have the set and all of the usually goes out in the latter part of the June in the early part of July of this year, but on mostly of the latter part of June and then.
July and August you guys top up all of us from retailers of.
And if you have the inventory you can sort of hope for.
The selling season is extremely short for back to school. So if either of you Havent sold at the September you're done.
So if we don't get the ring the supply we need it could affect our ability to keep retailers suppliers of what we need true on the sort of replenishment period. So that's the challenge at the moment.
Thank you.
And then maybe just finally.
Just on the <unk> I just wanted to clarify.
At the very good job managing through resin inflation in Q3 of Q2 story.
But I guess, what Youre, saying is Q Q3, you can manage the resin price inflation in the <unk>.
All of our way, but I guess, you're just saying that the hurricane season as a debt.
Quite a bit of uncertainty on the supply is that right.
Yeah.
The resin is still going up.
Leasing of the relevant leafing up but still thats still going on.
In the U S and Europe, the residue of double the price of the.
Of resin in China.
But the so many difficulties importing from China at the moment.
The other thing anybody not many people on the world I know the thinking about sourcing from the Chinese the net importer of resin anyway. So that's the world did that.
The net availability anyway.
So.
The real the real challenge has really been.
What's going to happen in the future in the.
On the Hurricane season, you already have out of that every year because of it knocks out of the car.
<unk> cloud.
The usual the usual impact short term.
So we'll have to wait and see what happens.
Okay.
The.
Makes sense great. Thank you Jack Thanks, Sean.
Your next question comes from the line of David Macgregor from Mike.
Mark Securities Sir Your line is open.
Great. Thank you a couple of questions.
So you talked about the bachelors business, how it's improved the debt.
Tail down.
I guess compared to normal levels of say 2019 can you give us an idea of how much of it.
They'll be down compared with Q2.19.
Still down 60, 70% over 2019.
I mean, it literally the.
And thats part of it.
Stock concept from sports events and things in the business conventions and things like that.
That dropped 95% on the crisis some of it.
Assets sort of 25 under the normal level.
Okay.
It should continue to improve a fair bit of.
But we're expecting it to continue.
Proved in July, but it's the long road back so until.
So the conventions and the sports events and attended sports events in the non attended sports events, such as many badges. So attended sports events.
The becomes normal it's still it's still got a ways to go.
About $100 million businesses talked out of Asia the thought.
Right.
Okay.
And then on just on can you give us an idea of how the direct to consumer performed in buying your specifically and Adrian on the corner of direct to consumer performed very well with the exception of batches.
The volume also.
Also performed quite well because of the.
The the sell in for back to school, but we had some from inflation challenges in range of apply a lot of true.
Balls around freight.
Okay.
And then just on the balance sheet, obviously, you guys have.
Moving on leverage.
I think on the last conference call.
Cash sent about.
Just the optimal capital structure I think he said it was below optimal levels. So are you looking out of potential of substantial issuer bid or something.
There's the normal course issue a bit out of that.
Let's see what happens.
Okay, I could there be any with.
But any more of that I'll just comment on.
Okay alright. Thanks.
There are no further question at this time please continue.
Yeah.
Okay, everybody. Thank you for joining the call and we look forward to talking to you in November for the for the third quarter. Thank you very much for today at this time.
Ladies and gentlemen, this concludes on today's conference call. Thank you for participating you may now disconnect.
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