Q3 2022 CCL Industries Inc Earnings Call
[music].
Good morning, ladies and gentlemen, welcome to.
CCL industries third quarter Investor update please.
Please note that there will be a question and answer session. After the call.
Moderator for today is Mr. Jeff Martin President and Chief Executive Officer, and joining him is Mr song Wal stock Senior Vice President and Chief Financial Officer. Please go ahead gentlemen.
Good morning, Thanks, Tom. Thank you everyone for joining us on our third quarter earnings release, Jeff and I are here in Brea, California, Our Eva headquarters today.
And we can turn everyone's attention to slide two.
Our disclaimer regarding forward looking information.
I'll remind everyone that our businesses face known and unknown risks and opportunities for further details of these key risks. Please take a look at our 2021 annual MD&A under the section risks and uncertainties and you can also see in an update in our third quarter report to those risks and uncertainties.
Our annual and quarterly reports can be found online at the company's website.
<unk> dot com or on SEDAR dot com.
Moving to slide three.
Our summary of financial results for the third quarter and nine months.
For the third quarter of 2000.
22 sales increased 11, 4% with organic growth of eight 8% acquisition related growth of four 9%.
We offset by a two 3% negative impact from foreign currency translation, resulting in sales of $1 $66 billion.
<unk> to $1 $49 billion in the third quarter of 2021.
Operating income was $246 8 million.
For the 2022 third quarter compared to $223 9 million for the third quarter of 2021.
11, 6% increase excluding the impact of foreign currency translation.
Jeff will expand on our segmented operating results of our CCL Avery checkpoint and <unk> segments momentarily.
Corporate expenses were up for the quarter, principally due to higher expense for long term variable compensation versus the prior year quarter.
Consolidated EBITDA for the 2022 third quarter, excluding the impact of foreign currency translation increased seven 9% compared to the same period in 2021.
Net finance expense was $17 1 million for the third quarter of 2022.
Impaired to $14 2 million.
In the 2021 third quarter.
Due to an increase in total debt outstanding and an increase in variable interest rates.
Our revolving debt.
The overall effective tax rate was 22, 9% for the 2022 third quarter compared to an effective tax rate of 24, 1% recorded in the third quarter of 2021.
Primarily reflecting a higher portion of our taxable income earned in lower tax jurisdictions.
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 2023rd quarter.
$163 $9 million up 8%, excluding foreign currency translation compared to the 2021 third quarter.
For the nine months period sales increased 15% operating income increased 7%, excluding a $3 $5 million noncash acquisition accounting adjustment to.
Fair value of the inventory from our <unk> acquisition and.
And net earnings increased 7% compared to the nine months period of 2021.
<unk> 2022 included results from 12 acquisitions completed since January one 2021, delivering acquisition related sales growth for the period of four 8% organic sales growth of 10, 1%.
Foreign currency and a foreign currency translation headwind of one 9%.
Moving to the next slide on page four.
Basic earnings per class B share were <unk> 93 for the third quarter of 2022 compared to <unk> 85.
For the third quarter of 2021.
Adjusted basic earnings per class B share or <unk> 95.
For the 2022 third quarter, a quarterly record compared to adjusted basic earnings per class B share of <unk> 85 for the.
The third quarter of 2021.
The change in adjusted basic EPS to <unk> 95.
Is primarily attributable to <unk> advanced <unk> operating income <unk>.
Equity contribution from our joint ventures.
<unk> from a lower tax rate, partially offset by <unk> negative foreign currency translation.
<unk> from increased finance costs.
And an additional three cents from increased corporate costs.
Moving to page five free cash flow from operations.
For the third quarter of 2022 free cash flow from operations was $148 7 million.
Compared to a $152 4 million in the 2021 third quarter, the slight decline in cash flow from operations of $3 seven.
7 million is attributable to an increase in capital expenditures almost entirely offset by increased proceeds on disposal and improve cash flow by operating activities.
For the 12 months ended September 32020.
2022 free cash flow from operations decreased approximately $91 million compared.
Compared to the 12 months ended September 32020, 'twenty one.
This comparative decline is primarily attributable to an increase in net capital spending.
Sure.
Moving to page six.
Returns to shareholders.
During the first nine months of 2022, the company repurchased almost $3 4 million shares at an average price of $58 95 for total proceeds of $200 million.
Including the 14, 3% increase.
In our 2022 annual dividend announced in February of this year dividends year to date have amounted to $128 million.
Representing a healthy 26, 3% dividend payout ratio.
Yes.
Moving to slide seven our cash and debt summary.
Net debt as at September 32022 was $1 78 billion, an increase of $529 million compared to December 31 2021.
This increase is principally a result of new borrowings to finance the company's acquisitions. During the first nine months of this year and the repurchase of shares under our normal course issuer bid.
Although the company's net debt increase the balance sheet closed the quarter in a strong position our balance sheet leverage ratio was one important 146 times increasing from 1.06 at the end of December 2021.
Liquidity was robust with almost $700 million of cash on hand, $0 8 billion of available Undrawn credit capacity on our revolving bank facility.
The Companys overall average finance rate was largely unchanged at approximately $2, 67% at September 32022, compared to 242% at December 30, <unk> 2021.
Reflecting an increase in variable interest rate on our outstanding borrowings under our revolving credit facility.
The Companys balance sheet continue continues to be well positioned.
To finish the year.
Jeff over to you.
Thank you Cheryl and good morning, everybody I'm on slide eight highlights of our capital spending for the year $298 million, so far net of disposals.
We're forecasting to spend in the range of $390 million to $319 million for the year of 2022.
Turning to slide nine highlights of the Ccs segment.
This quarter 13, 2% organic sales growth only part of the price led profit.
Majority of about $13 two came from price, but about some volume increase to North America, and Asia Pacific up high single digit Europe up double digit in Latin America were up more than 40%.
We had a strong quarter in the personal care health care and food and beverage businesses. It was pretty good at CCL secure the competitive slow.
Period in 2020 from Tcl.
<unk> design was also up on recovery in automotive production volume, but that was offset by a modest decline in electronics slowing computer industry.
Slide 10, the joint ventures, we have.
At a very good quarter net earnings up considerably. So sure that that was very nice addition to the income stream for the quarter.
Slide 11 highlights savory.
Some softness here.
Came as a little bit of a surprise, but we didn't worry about it going into the quarter back to school season started much earlier in Q2 this year than it has ever done.
Retailers, taking in some of their inventory positions with all the supply chain disruption, but that same course in all sort of affected us the back end of the season when normal replenishment orders, which have typically taken typically add an unaffected years in the pandemic going back to 2019, just didn't happen and many retailers ended the seasonality.
We also saw some destocking in some of the channels distribution channels, where we sell our high margin political media products.
Offsetting that we had strong gains in our direct to consumer channels.
I'll turn it acquisitions were soft and slow demand for the types of acquisitions in Brazil met our expectations raw materials availability, especially paper and metal rings, how the sales growth somewhat.
Slide 12 checkpoint.
The solid quarter here in the SaaS business, we had a good period in the Americas, but that was offset by declines in Europe and Asia profits were down on lower volumes unit volumes.
MFS business iterations supply plants, but that was offset by good results in the apparel labeling segment again on double digit organic growth in RFID and acquisitions in that space. Also contributed we did have an $11 9 million gain on excess real estate in China, which drove most of the profitability improvement you see on this slide.
Slide 13 and Olivia.
Volume situation was up in the Americas, but down in Europe , and all that all the down in Europe is all in our plant in Poland, where we moved in the old film line that made packaging films and replaced it with the accurate float line, which is a strategic long term investment we did have some stock cost for that but by far the majority of the problem in the call there was really unprecedented summit.
<unk> cost spike in Europe , and freight inflation. So that was really responsible for all the profit decline for the quarter.
Europe .
In the Americas, we were affected by the margin squeeze from high cost inventories as resin indices decline, reducing outside selling prices the reverse effect of what we experienced in 2021.
Outlook for the coming quarter, the core Ccs business use all this picture still remains solid.
The CCL design space, we see improving automotive output, but that's likely to be offset by slower conditions in the technology space that comes with Tcl secure we're much easier in the second half of the year in the second half of last year, but a harder in Q4 than they were in Q3.
<unk> tried to consumer strength remains well many of our recent acquisitions, but the distributor restocking destocking in the coal business remains potentially an offset although we did see some improvement in that in the month of October .
The checkpoint strong RFID growth at AOS.
No.
I'll set this call device apparel destocking, so I would've been slightly worried about the apparel supply chain and software Emas picture and broad retail.
We do expect another challenging quarter in an idea for the same reasons, we've just been through but we did see some improvement and again in October .
Better situations, where the energy markets in Europe , and we have a slight modest FX headwind to contend with in the coming quarter.
So with that operator, we'd like to open up the call for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you would like to enter the queue to ask a question. At this time you May press star one on your telephone keypad to enter the queue. We do ask with listing on speaker phone. This morning that you pick up your handset if lifting on speaker phone to provide optimal sound quality once again.
Ladies and gentlemen, that'll be star one on your telephone keypad at this time, if you'd like to enter the queue to ask a question. Please hold a moment, while we poll for questions.
And the first question. This morning is coming from Mark Neville from Scotiabank Mark. Your line is live. Please go ahead.
Hey, good morning, Jeff Good morning, Scott.
Good morning.
If I can start with Adobe Novia, Jeff.
I guess two part question.
I'm just curious how much inventory you typically keeping this business in the U S and the second part the surcharges that you put in place in Europe to effectively as mark to market on that.
Energy prices.
Yes so.
We the reason we get again the squeeze on the margins, which I think is the underlying of your question.
Pass through.
And what happens on the index it is immediate.
So at the index goes up or down.
Have an immediate pass through and that benefits us in a rising resin market because we have lower cost inventory in the system and we get the reverse impact.
In a declining market and that cost us a few million Bucks this quarter and mainly in mainly in the Americas.
Resin declines as benign.
What was the second part of your question.
Suddenly the surcharges that you put in place in Europe .
Got you.
We didn't get any real benefit, though that we did put them in place as soon as the energy market spiked. It was very sudden and very quick as I'm sure you all know.
So we did see some benefit from that in the month of October. So we had a much better October than any of the months. We added in Q3, largely as a result of the energy surcharge that we put in place.
Okay, and maybe just given all the volatility.
Commodities and Blitz, I mean should we thinking is it better to think about sort of profit dollars.
What percentage of this business.
Yes, it's a power through industry. So.
So we get we get swings swings in the revenue line.
Driven by driven by power through so.
The point is quite valid mark yes, the answer okay.
Okay, and maybe on <unk>.
It feels like there's quite a few moving parts.
Primarily on the margin that would that be sort of the mix and the lower direct to consumer.
No.
The big impact has really been the destocking on the margin side within the Destocking and the principal media business. So we had a couple of as large or very large distributors destocking in the quarter.
Seen some reversal of that in the month of October but it is a high margin business. So when that happens that's where the impact really comes.
Yeah.
Evidenced just ask.
More broadly Jeff.
Obviously, you guys touch a lot of geographies types on our markets.
I listen to your commentary, it's still stands reasonably constructive obviously, a touch of conservatism or uncertainty, but this.
Hey, guys.
I'd love to get your thoughts sort of just broadly sort of what youre seeing in your business and sort of how youre thinking about 'twenty two as we move into 2023.
But it's a mixed picture.
It probably wouldn't be surprised to hear me say.
Still see some solid good areas of growth.
So the month of October was pretty much.
The reflection of what happened in Q3, so the Ccs business continues to do well, we did see that a much better October and.
And then we had in Q3, because some of those impacts in Q3 with us.
Check point is still hanging around and they're doing quite well in them.
And then the commodity inflation deflation, depending on which side of the coin you're on.
So I don't know if we've got the problem of the.
The resin is going down and the impact on pricing and then you've got the energy markets all over the place so having to manage our way through that month by month.
Thanks, Jeff.
Adam.
Thank you.
Your next question is coming from Stephen Macleod from BMO capital markets. Steven Your line is live. Please go ahead.
Great. Thank you and good morning, guys.
Let me see.
I just wanted to follow up on <unk>.
You talked about some of the margin impact so given the fact that some of those destocking impacts of reverse in October would you expect to see margins sort of reverting back to that 20% range and everything.
Yeah.
Not until next year Q4 is it low call. It very very so when we get into next year, we would certainly expect to see that and I think you might need to look at the excess margin we had in Q2.
<unk> surprised on the upside in Q2. So if you combine Q2 and Q3 will probably go to more realistic reflection of what's really going on in the business. Because Q2 was because of the early start to the back to school season.
Really inflated Q2, the cost of Q3, so that's really what's going on.
As our underlying themes that Avery.
Alright, okay. Okay. Thank you.
And then just just as you think about.
In the Eagle.
Yes.
Well I guess a couple of questions. One is on the eco cloud can you just give an update as to where you stand on those production impacts and then you talked about <unk> results.
Mining comparatively I assume you mean on a year over year basis.
Yes.
Okay.
Okay.
Yes.
October was significantly better than any of the any of the months we had in Q3 at an earlier.
<unk>.
<unk> I think is your question. So we are building that business from scratch. So we don't have any volume to light onto the line.
We have to qualify each each volume, but it's for the interest is very significant so we've got.
Inside the company at CCR, but also outside of the free convert the market. We've got a lot of interest in the <unk> product line. So it will take a quarter or two to get through the startup phase while we go through customer qualifications in approvals, but we are very pleased with the progress we're making.
Okay great.
And then and then just on acquisitions the acquisition backdrop.
There's been a lot of macro noise out there, but I'm just curious if youre seeing any easing in multiples or anything like that how are your conversations trending.
Well I would say.
We've all seen some contractions in the.
And multiples in the public space still some pretty hefty transactions had going on in the private space. So theres been a few public announcements about a couple of transactions in the industry still in double digit EBITDA margins. So we haven't seen any real change in the in.
And the transaction multiples that are going on out there so.
So.
So we still have a good a good flow of bolt on transaction deals in.
In the pipeline, but nothing of nothing of any major scale.
Okay, great. Thanks, Jeff Thanks, Sean.
Adam.
Thank you.
And your next question is coming from Amit <unk> from National Bank of Canada.
Your line is live please go ahead.
Thanks, and thanks for taking my question.
On the 2023 outlook commentary and acknowledging the fact that visibility is usually between 46 weeks could you speak maybe to the magnitude of the impact that could come from higher inventory levels at customers.
Have you already seen.
Outlook commentary slides is really about the coming quarter, it's not a 2023 outlook its outlook on the coming quarter.
So I think it will be.
It is.
The picture it looks quite similar in terms of.
Q3, so I think I provided some comments call define those beyond that I don't think we'd be able to do.
Okay, that's fair.
On EV.
As we look into a possible recession in 'twenty three.
Performed in previous recessions and is there room for you to cut costs to maintain our boost margins.
Topline pressure.
Well, it's a continuum of staples so.
So it's a.
Fairly resilient business too.
Macro macro influences.
So we're quite optimistic about every for next year, we've done a few deals in the industry that are going quite well.
So.
So I think it's really the Q3 performance today, everybody has to be seen in the context of Q3 and Q2 together because it's really it's really driven by timing of shipments both of its driven by anything else.
Thank you.
Your next question is coming from David Mcfadden from core Mark Securities.
Your line is <unk>. Please go ahead.
Great Yeah, a couple of questions.
I'm, just wondering where we're at.
Putting through all of the cost input pass throughs.
Because I'm just wondering going forward when would we.
Expect to see that most of the organic growth is actually volume driven versus price.
Well I think it'll be a little while yet because.
Quarterly comparative does still include a fair amount of price.
But we did see volume increase in that.
13, 2%, it's very difficult to measure in that in that segment.
We think it's roughly two thirds, one third volume something like that.
And to give you to give you a rough idea. So we certainly saw unit volume increase in the Ccs segment space This quarter.
<unk>.
But I think it'll be it'll be well into next year before we cycled through get into into the market.
Comparing inflation.
Okay, and then just on EMEA.
In Q2, it was weak this quarter is actually up and then Q4, it looks like youre, saying its going to be down and just kind of wondering what's going on there and what's the EMEA side right, yes, well, let's say it was it was up slightly slightly this quarter is better than it was in.
In Q2, some without some of that was price driven price recovery driven.
So the profits were down this quarter because of the unit volume was still below prior year.
So it's.
Both of those products are sold into retail.
Retail the retail markets.
It's not strong at the moment.
But.
We expect Q4 to look so far has looked like it pretty much a repeat of what happened in Q3, so far.
Okay, Okay alright. Thanks.
Thank you.
Your next question is coming from Daryl Young from TD Securities.
Daryl Your line is live please go ahead.
Hey, good morning, everyone.
Just two quick ones for me.
<unk> CCL design.
In the release I think you mentioned to some new applications that we're able to offset some of the weakness in the technology sector.
You just get a little bit of detail on that and is that expected to carry in the next several quarters.
Yes.
The CCL design electronics Tech the tech industry as you probably all know is somewhat challenged at the moment, but we have won some new applications mainly in functional parts that are used on laptop display screens.
That's the main area of game, we've had will go into more details than that but that's been the main source of the game and that share gain is offset some of the decline in just the unit volume is going on in the industry just in general.
Yeah.
Okay great.
And then with respect to checkpoint.
$12 million gain from the China real estate sale.
Yes.
Do you have a normalized EBIT number preferred checkpoint would have happened in the quarter without that.
Well take $11 9 million off the number and then you got it.
Okay perfect. Thanks.
That's all for me.
Okay.
Thank you.
Your next question is coming from Michael Glen from Raymond James.
Michael Your line is live please go ahead.
Hey, Thanks, Jeff some of the large CPG companies that you would do business with have seen some.
Volume declines in the recent quarter or are you not are you seeing that at all in terms of the CCL label business.
So far no.
So.
I would just caution you a little bit it's a mixed picture in the Cpg's.
And the base effect.
The world's largest brewers reported pretty strong volume gains.
So it's really in the personal care space, I think you're probably referring to where we saw some of the some of the customers in that space reporting declines not all of them. So so the ones that are more focused on the beauty care industry from some of those reported quite nice gains.
I'd say, it's a mixed picture in the CPG space, but with.
With the customers we have on balance we've seen we've seen so far reasonably reasonably solid orders picture because we read the same releases you do.
And the same concerns that you do about 2023.
And we'll see what happens.
And just to understand that a bit more.
The volume of labels that you sell to say one of your larger.
Home and personal care product CPG companies are they largely just in time or is there any sort of inventory lag to think about there.
While the revenue line is determined but more than anything else by mix not.
Not by unit volume.
Cause label sizes and levels of complexity really determined revenue rather than the number of units the customer south.
So there's no translation relationship between the customer's unit volume and a revenue volume.
But so far we haven't seen too much softness in the <unk> space. It was a strong quarter.
And the order picture is still quite solid.
Okay. Thanks for taking the questions.
Adam.
Yeah.
Thank you and your next question is coming from bad traffic from Pi financial.
Your line is live please go ahead.
Thank you I just have one question, Jeff on account sales.
With checkpoint in China is that.
Reflection of.
Sort of efficiencies and consolidating production and less real estate or is it some strategic sort of geographic repositioning.
So what's the question.
When it comes to your sales or exits can you hear me okay.
Sales award.
When it comes to sales.
Excess real estate in China.
Real estate, yes, we inherited a factory in downtown Shanghai very close to the Disney Disney Park in Shanghai.
Check point used to make and assemble it.
MS product line, and we built a new factory.
Three hours outside of Shanghai, and a much lower cost place.
And a much nicer facility and then we sold the real estate from the original building.
It hasn't.
Perfect. Thank you.
Okay.
Thank you and as a reminder, ladies and gentlemen, if you'd like to join the queue. At this time you May press star one on your telephone keypad.
And we do have a follow up question from Mark Neville from Scotiabank.
Mark Your line is live please go ahead.
Thanks.
I'm just curious about the <unk>.
<unk>.
I hope you didn't buy anything in Q3, obviously, a very busy first half just how youre thinking about that how we should think about that is it more just sort of opportunistic around price.
More sort of weighing macro just just just how you think about and how we should think about it. Thanks.
Yes, I think when you think about it.
We have an ownership mentality here service, if we feel the stock is.
It is undervalued. So we can so we had a buyback at an average price of $50 95 at the time and let's start with so we thought the market.
Probably $10 below.
Real value for the company. So if we haven't felt that situations arrived again, we'd be buyers of the stock. So we'll have to wait and see what happens next year, depending on how things unfold in the markets.
Alright, thanks, guys.
Problem.
Thank you and your next question is coming from Walter <unk> from RBC.
Walter Your line is live please go ahead.
Hi, This is Louis on Walter Hi, Jeff Hi, Shawn.
Good morning, guys.
Okay.
Going into a slower economic environment like have you are you seeing any weakening in any of the demand segments, where you have historically seen a reduction first.
You mean competitive prior recessions.
<unk>.
Yes, I would say, we haven't seen a lot so far.
There is still more wrestling with inflation volatility in energy than we are.
Weakening demand in that respect.
So.
We have the same concerns everybody else has but so far the oldest picture has been.
Decent.
It's not spectacular, but it's decent.
So but.
<unk>.
We read the newspapers like either and we got the same concerns as either.
So far we haven't seen any early signals.
The one area, that's noticeably weak as the tech space.
Peter industry laptops servers cloud computing so phones.
That industry, we've seen some.
Some slowdown, but we also gained share in new applications. So we've been I would say so far net that off against each other.
So far.
Yeah.
Okay. Okay. That's fair and then does does moving theres moving into a weakening economic environment provided you guys have any opportunity to acquire we can drive all.
Yes, we hope we hope so.
It has it has it has in the past.
So.
And we've got a very strong balance sheet as you've seen so we certainly investors and at times. When other people are running for the hills, we like to we like to buy but.
Probably need a few more things to unfold useful.
Four things to become clearer before before those kind of opportunities arise.
Okay. Thanks for taking my questions no problem.
Thank you and there are no further questions in queue. At this time I would now like to turn the floor back to Jeff Martin for closing remarks.
Okay, everybody well. Thank you very much for joining our call appreciate it and we look forward to talking to you again early next year.
Thank you ladies and gentlemen, this does conclude today's conference call.
You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
Yeah.