Q4 2022 CCL Industries Inc Earnings Call

after the call. The moderator for today is Mr. Jeff Martin, President and Chief Executive Officer, and joining him is Mr. Sean Waschuk, Senior Vice President and Chief Financial Officer. Please go ahead gentlemen.

Thank you, Holly. Welcome, everyone, to our fourth quarter call.

Thank you, Holly. Welcome, everyone, to our fourth quarter call. I'll draw everyone's attention to

Slide number two, our disclaimer regarding forward looking information.

I'll remind everyone that our business faces known and unknown risks and opportunity. For further details on these key risks, please take a look at our 2022 and 2021 Annual MD&A, particularly under the section Risks and Uncertainties. Our annual and quarterly reports can be found online on our company's website, cclind.com.

0.6% acquisition growth and 2.3% positive impact from currency translation, part offset by an organic decline of 0.6%, resulting in sales of $1.59 billion compared to $1.49 billion in the fourth quarter of 2021. The remaining income was $211.2 million.

for the 2022 fourth quarter compared to $208.8 million for the fourth quarter of 2021, a 2% decline excluding the impact of foreign currency translation.

Jeff will expand on our segmented operating results for the CCL Avery checkpoint and Inovia segments momentarily.

Corporate expenses were down slightly for the fourth quarter, with an insurance accrual reversal, offsetting higher expense for long-term variable compensation compared to the prior year fourth quarter.

consolidated EBITDA for the 2022 fourth quarter, excluding the impact of foreign currency translation, increased 2% compared to the same period in 2021.

Net finance expense was $17.6 million for the fourth quarter of 2022 compared to $13.9 million in the 2021 fourth quarter due to an increase in total debt outstanding and an increase in interest rates on our variable rated debt.

The overall effective tax rate was 21.2% for the 2022 4th quarter compared to an effective tax rate of 20.1% recorded in the 4th quarter of 2021.

This reflects the utilization of previously unrecognized deferred tax assets at certain subsidiaries of the company in the prior year quarter that did not reoccur in the 2022 4th quarter.

The effective tax rate may change in future periods depending on the proportion of our tax low income earned in different tax jurisdictions with different rates.

Net earnings for the 2022 fourth quarter were $145.2 million, down 3%, excluding foreign currency translation compared to the 2021 fourth quarter.

For the 2022 year, sales increased 12%.

Operating income increased 5%, including a $3.5 million non-cash acquisition accounting adjustment to fair value. The inventory at Adelbron.

And a net earnings increased 5% compared to 2021. 2022 included results for 12 acquisitions completed since January 1, 2021.

delivering acquisition related sales growth to the period of 4.8%. Organic sales growth of 7.3% and a foreign currency translation headwind of 0.8% to sales.

Moving to the next slide.

Earnings per share. Basic earnings per Class B share were 82 cents for the fourth quarter of 2022 compared to 80 cents for the fourth quarter of 2021. Adjusted basic earnings per Class B share were 83 cents for the fourth quarter of 2022 compared to 80 cents for the

for the 2022 fourth quarter compared to adjusted basic earnings per Class B share of 81 cents for the fourth quarter of 2021. The change in adjusted basic EPS to 83 cents is primarily attributable to an increase of 2 cents from our joint ventures contribution and 3 cents from currency translation partially offset

with one descent from higher tax rate and two cents from increased finance costs.

tax rate and two cents from increased finance costs. Moving to the next slide.

Free cash flow from operations. For the fourth quarter of 2022, free cash flow from operations was $271.6 million compared to $197.2 million for the 2021 fourth quarter.

The increase in cash flow from operations of $74.4 million is primarily attributable to strong working capital management in the fourth quarter of this year compared to 2021.

For the 12 months ended December 31, 2022, free cash flow from operations increased $42 million compared to the 12 months ended December 31, 2021.

This comparative improvement is primarily attributable to increased earnings, better comparative working capital management offset by an increase in net capital expenditures.

Moving to slide 6, returns to shareholders. For the 2022 year, 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 the 2022 Annual Dividend announced in February of this year. Dividends year-to-date have amounted to $170 million, representing a solid 27% dividend payout ratio.

Moving to the next slide, our cash and debt summary. Net debt as at December 31, 2022 was $1.52 billion, an increase of $273.1 million compared to December 31, 2021.

The increase is principally a result of new borrowings to finance the company's acquisitions during the year and the repurchase of shares under our normal course issue or bid.

Although the company's net debt increased, the balance sheet closed the quarter in a strong position. A balance sheet leverage ratio was approximately 1.24 times, increasing from 1.06 times at the end of the prior year. The fee was robust, with almost $840 million of cash on hand.

and US$0.9 billion available on our revolving credit facility. The company's overall average finance rate was 2.9% at December 31, 2022 compared to 2.4% at December 31, 2021.

This reflects an increase in our interest rates on our variably drawn debt. The company's balance sheet continues to be positioned well to move into fiscal 2023. Jeff, over to you. Thank you, Sean. Good morning, everybody. I'm on page eight, highlights of our capital spending for the year.

419 million net of disposals for the year, a little higher than we thought. Probably inflation doing its dirty deeds on us there too. And it excludes right of use, assets and depreciation.

for the comparison you see on the bar charts there. You're planning $415 million spending in the year of 2023.

Moving to slide nine, highlights for the CCL segment. 1.8% organic sales growth, very mixed picture. North America up mid-single digit, Europe and Latin America up high single digit and Asia Pacific which is where the challenges have been and was down a little over 20%.

We had strong results in the home and personal care, healthcare and specialty and food and beverage spaces. An unusually soft quarter at CCL Secure. And then at CCL Design we were impacted by the slowdown in electronics demand at many OEMs. And then the Covid events in China accelerated that even further. That was part of CEL and CCL Design by Gaines in Alternatives.

Moving on to slide 10, an offsetting here on the CCL segment was really the results of our joint benches which were exceptionally strong.

So that's why our earnings were a lot better than our EBITDA result because there were only consolidating earnings here, not the EBITDA numbers and medics and other lines you see on the slide here on slide 10.

Slide 11 results from Avery, strong gains in the direct-to-consumer channels, especially in North America, and we had another good quarter in Brazil at the Edelbrot tapes acquisition. The reason for the decline in the operating income margin is really the mix of business we have now due to the more recent acquisitions in the Avery space.

Checkpoint on slide 12, the MAS merchandise availability business improved overall and in all regions of the world except Asia which had very tough prior year comps on one rollout we had last year and challenging markets overall especially in China.

The apparel label business, which has had a very strong year so far, slowed in the fourth quarter as the apparel industry focused on managing excess inventory at all points in the channel. We expect that situation to continue in the first quarter coming up here.

business which has had a very strong year so far, slowed in the fourth quarter of the apparel industry focus on managing access inventory at all points in the in the channel we expect that the situation to continue in the third quarter coming up here as we speak.

Slide 13, in Novia, volume declined on soft demand in the label industry in Europe and North America. So there's been some trade data published in particularly in Europe where label materials demand, it's not label demand, but the labels are made from declined over 25%.

in the fourth quarter. It's really been due to the build up of inventory due to the many supply chain problems, particularly in Europe in the earlier part of the year, now correcting. So our sales to laminators in that part of the industry have been particularly difficult in the fourth quarter and continue to be so far in the first quarter. Energy and freight inflation and the new Echo Flight Line start.

So, at slide 14, just some comments on the outlook, and then we'll open it up for questions. We call CCL business units, all those pictures, that's healthcare and specialty, home and personal care, food and beverage is still solid. The CCL design picture has not changed, outlook's similar to Q4. We do expect that to pick up as the supply chain situation corrects in China, and the economy there opens up. CCL's secure volume has improved dramatically in the first quarter compared to last year.

last year. The no-deal volume will be subject to the labor industry demand recovery when that occurs. The good news is inflationary pressures have stabilized, particularly on energy and freight, and the energy cost squeeze is reversing in North America.

and we expect a modest foreign exchange tailwind at current rates as we go into the current quarter. So with that operator we'd like to open the call up for questions.

Certainly, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to be removed from the question queue. For participants using speaker equipment and may be necessary to pick up your handset.

when I look at the results it you know a little weaker than expected but it appears that a number of the driving factors look to be temporary so a few of my questions are really to assess whether that with whether in your view it is indeed temporary and I was just starting with CCL Secure. Jeff you called it out as unusually weak.

but having rebounded quite significantly. Any indication is to what caused it to be unusual a week. I know this is a very good business. Is it just, you know, kind of a few events that all happen all at once and now those are done in behind us or just your views on what caused that unusual weakness? We have it sometimes, it's eyeballing in this industry, it's, thanks don't want bank notes. It's not what we can do. There's anyone, customer, country.

So if they if they delay orders from one quarter to the next then we just have to put up with it and move on and so we had an unusually weak Q4 and Orders that we would have normally had in the in the fourth quarter of last year of coming in the first quarter this year That's really the really the drive for it

Okay, so talk that up to timing. On Avery, Jeff, you mentioned the margins were down due to the mix from recent acquisitions. Is that because the acquisitions that you've made are running below your efficiency level, which you hope to bring up, or is it just the nature of the way they operate and they are a lower margin?

albeit a Credo type of business that we should now recalibrate our Avery margins going forward to reflect this the new paradigm of this of these acquisitions. Well we have to wait we have to let that be at all the anniversary's quarter by quarter flow through so but the adult bra and the horticultural the two horticultural acquisitions which can combine sales for all of those three got it together as you know well over well over 200 million.

So the horticultural season, the strong period for that is the very latter part of the year and particularly the first quarter.

Got it. Okay, that's great color. Last question here on China. Clearly the lockdown having impacted your quarter in the fourth quarter. Indications as to how that's adjusting now here in the first quarter? Are we seeing that ramp back up? Could we see it you know any pent-up effect or supply chain issues still kind of?

the guys so there's nobody reporting particularly good news in the in the tech space at the moment so that's definitely a factor that affected our performing

But it was for sure compounded by the lockdown. So the supply factories to those OEMs were severely impaired in Q4. When the sickness epidemic occurred in China, many factories were forced to close. So that was the fact. We do expect the second of those two trends to come back quite strongly.

at some point in the first half of this year. We had an early January Chinese New Year this year, so that also took this factor through the end of January , but the older picture's beginning to pick up now as the supply chain begins to normalize.

in the first half of this year. We had an early January Chinese New Year this year, so that also took this factor through the end of January , but the older picture's beginning to pick up now as the supply chain begins to normalize. Okay, that's fantastic, appreciate the color.

No problem. Your next question for today is coming from Steven McLeod at BMO. Thank you, good morning guys. Morning Steven. Morning, I just wanted to follow up on a couple of things. One was on the CCL Secure, are you able to quantify what impact that had relative to expectations in the quarter? Well the business lost a little bit of money in the quarter which is...

which it doesn't normally do. It's one of our more profitable businesses. It's probably the most color I could really give you. Okay, okay, thank you. And then just on that, Avery. Swing a little over $10 million, quarter to quarter, Steven. Give you a frame of reference.

$10 million in profit? A little over $10 million. Yeah, okay, great. And are you able to quantify what the top, what organic growth might have been, excluding the CCO secure impact? It's not a big business, so it doesn't really, it's not a huge, $200 million in sales, so it's not a huge business.

not a huge factor on the top line. TCL designs a much bigger factor on the top line because of the slowdown in electronics.

Right, okay, okay. Thank you. And then just on Avery with respect to the next shift that you're seeing, you know, we used to think of that business as potentially having a margin profile.

reaching into the low 20s on eBay. Is that something that's still possible or do you think that is now like a high teens 20% tops margin business?

We'll have to wait and see how these new acquisitions bed in and we understand their seasonal patterns. So there will be certainly quarters where we'll have in excess of 20% operating margins and there will be other quarters where we don't.

and I think we'll have to understand the seasonal effect as we go forward quarter to quarter. The Avery business performed very well in 2022 at all levels. The acquisitions contributed.

The core business did well and we had a great year there and it's continuing to be strong in the first quarter of this year. So it's hard. There's nothing we're concerned about on the, about every at all actually.

Yeah, okay. Okay, that's great. And then maybe just higher level, as you think about the year ahead here, 2023, do you sort of expect the first half of the year to look a lot like Q4 and then, well maybe a bit stronger, and then a bit of a redown in the back half of the year? Is that sort of how you're thinking about things unfolding in 2023?

Well certainly we'd certainly say that about Enovia. So you know Enovia will have a you know a difficult top-line Q1 like it had in Q4 because of that label industry raw materials impact. So that's we you know we sell to companies like Avery Denilson and UPF.

that would change in the...

from Easter onwards and that's probably we think it'll be sometime around Easter or early summer when that situation changes that would be the picture for Inovia.

I think Avery will start off the year strong. I think checkpoint will be okay. We do have to remember the apparel industry is going through a compression in its inventory management situation, just addressing bloated inventories, at all points in the supply chain and correcting that, so that's a pretty common theme in that space.

so that'll have a more negative effect. And then the core CCL businesses look okay. So that's the picture as we see it, as I tried to put on the outlook slide comment.

Okay, that's, that's what we call our thanks guys. I'll go back in line. Okay. Your next question is coming from Michael Glenn at Raymond James. Hey, good morning. Jeff, I just tried to fully understand the commentary surrounding the software man for the labels, label materials industry in Europe . Now you need to know a special buckets you made ??? to know. Think is the are??, I'm sure are still.ails, Colez interviewed essentially nice brother.

supplier to the to the label materials industry of release liner and that caused everybody in the label converter channel to over order and panic and create it

forced demand on the labour materials industry that was not really reflective of the end-use demand.

So many label converters, including ourselves, stocked up of pressure sensitive material supply, particularly in the first half of last year. And then once the strike ended in April of last year, and then gradually as the rest of the year unfolded, things began to ease.

then the labour converter channels stopped ordering materials from those suppliers.

So as our films are used by them to make those materials, they stop ordering on us and that's basically what's happened.

And it'll probably, I think it'll go...

Pretty big phenomena in Q4, I think it'll carry on in Q1.

Sometimes in cuters, probably ease off and then move on back to normal.

Okay, that's really helpful. And then just in terms of some customers, like customer trends on volume across some of the large CPG companies have continued to see some challenges in Q4. Are you seeing any of that show up in your order book? It didn't in Q4. So in Q4 we have.

was lower than it was in the prior year in those three spaces.

So, so far, you know, I would describe it as a fairly solid picture, but we read the results for those companies the same as you do.

and they're all noting sort of low to mid-single digit declines in unit volume. But so far we haven't seen that translate into actual label demand. And in some categories, like in our aerosol can business, we're booked out as.

almost through the summer. It's very strong. If I go back to Q3, I think you highlighted beer in Q3 was a particular outlier for strength. Did that continue in Q4?

It's very strong. If I go back to Q3, I think you highlighted beer in Q3 was a particular outlier for strength. Did that continue in Q4? It did.

Okay thanks for taking the question. Not in the US, I mean we're not a big supplier in the US and the beer industry in the US is very concentrated as you know but around the international beer business was strong in the second half of the year for sure and it started off okay this year as well.

Okay, thank you. Your next question for today is coming from David McFadden at Coremark Securities.

Oh hi, yeah, I'm a couple of questions.

Hi, how are you doing? So yeah, just a couple of questions. So when I look at the organic growth across all the segments, obviously it was a lot lower in the fourth quarter. So is it safe to conclude that the pastures are basically done now and we're going to get more into a more normalized organic growth going forward?

Yeah, I think that's a fair statement, David. And I think we also have to bear in mind we've passed through very considerable price reductions in the Enovia space with the huge declines in resin. So resin went up at a very escalated level in 2021 and then de-escalated at the same phase all the way through 2022. So we've been passing price reductions ready for 2021.

pretty much all of last year and that's now stabilized. So as we go into Q1, resin, resin slot on the slide I'll think again in the US.

in the early part of Q1. So just continuing on that theme, how many more months or quarters will it take for you to work off that high cost inventory at Anovia?

I think probably one more quarter. Okay. And then just on Check Point, so you talked about the excess retail apparel inventory and it's going to take a few months to work that down. I was wondering how many months. But do you think that that business might also be starting to see the negative impacts of a recession?

I think it's more inventory than a recession to be honest with you. I think it's just probably driven by a slowdown in demand but I wouldn't say a recession. I mean I think demand is definitely down.

compared to a year ago, but I wouldn't say it's shrinking. The rate of increase has stopped at the speed it was accelerating at. And then the other factor we have to think about in that space is RFID and the strength of RFID. So that's a...

The nature of that space is they sell in seasons. At some point you haven't got the inventory you have for the season you're in and it corrects.

I think both time we get into the spring and summer we should be back in a normal situation. Okay, I mean when I look at your business,

at least in the past, it was very recession resilient, but you didn't have Avery at the time. I'm wondering what your thoughts are on Avery and how that would do in a recession.

I think having a lot of people hold up pretty well. The business has changed in the ten years or so that we've owned it. So we've bought a lot of new businesses that are performing.

significantly better than the old legacy business. And so that's an upside. And there's some categories in Avery that have still got to come back.

So we've begun to see in some of the legacy product lines as a more gradual return to work, a demand increase there. So that's still a factor. Parts of the badge business that are really involved around business conferences which were on the way pretty much all of last year, they've started now to come back. So we've still got some.

uptick cycles to come in Avery to get back to the sort of pre-2019 pre-pandemic levels.

So I would expect our Avery business to perform well in 2023 and have a good start. Certainly has in January .

Okay, and could you provide the same commentary for Check Point, sorry?

Okay and could you probably the same commentary for Checkpoint sorry?

Similar to the situation in Q4, we expect our M&S business to do pretty well. People are still focused on store security and protecting merchandise. That's nothing to do with whether you're in a difficult retail sales position or not. The apparel supply chain will eventually create.

and then we'll be back to where we were pre-pandemic. Okay. All right, thank you.

be back to where we were you know pre pre-pandemic. Okay all right thank you. Thank you baby.

Once again, if there are any questions or comments, please press star 1 on your phone at this time. Your next question for today is coming from Daryl Young at TD Securities. Good morning, everyone. First question will just be on the M&A environment. If you're seeing any improvement or any availability.

know, LBO transactions are challenged in the in the private equity space in our industry because debt financing is very difficult for the private equity firms to get a hold of to do these kinds of deals at the moment so that's all helping the...

market situation for businesses we would like to buy. So we're quite encouraged by that. Okay great and then just in terms of the CCL segment profitability and you gave some good color already around CCL Secure and CCL Design. If you strip those out was the the core label performance effectively in line with traditional profitability.

So I think in CCL design, you know, the Delta profit number was quite large in the electronic space due to the situation in China. So that's that was the big driver and then the then the slow quarter at CCL secure were pretty both pretty big offsets.

I think in the past you said that on the labels, the core labels, there are a pretty small percentage of the cost structure for the CPGs, but are you expecting any headwinds on pushing price through or price gains just given they're going to be very cautious around their price volume mix?

in light of the week of the pandemic.

price points we need. I think in the label industry...

The inflationary period we went through in last year seems to have come to an end. So we're moving into more of a deflationary cycle on the raw materials side there. So that's a good news story. And where we do have some cost increases like in the aerosol business, metals have started to rise again.

You know we've got very clear pass-through mechanisms in that space and the business is performing very well and demand is solid so I Don't I don't see anything to be concerned about in those three businesses

So what we're hopeful is to see the situation that CCL design in the electronic space

Once a supply chain gets back to normal in China, we do think there's probably some inventory de-stocking there and most of the OEMs would like to have more inventory out and around the world than they have.

And although their business isn't in great shape, stock-outs are a problem because of availability of inventory. So we would expect the supply side of that equation to improve as we go through, particularly Q2. So January we have the early Chinese New Year, so the year really only started in China.

I just have a follow-up regarding Enovia and I'm just wondering if you can help us sort of think about the margin profile as you work through the year particularly as you get through the high-cost inventories and run through some price declines as you give some of that price back. Just curious if you could help us think about how that shapes the margins.

Yeah, there's a lot of moving parts in that, Stephen, so I don't know that I can help you much more than... We'd expect Q1 to be a little better than Q4 because we've got some of the inflationary issues calming down.

Europe so that's a that's a good news story I think the demand picture will be similar in Q1 as it was in Q4 I don't think we'll see much improvement in that then we'll have a pick up as the year unfolds in Poland where we've got the Eka float line starting up so that's going to accelerate as we go through the year

We've got a lot of interest in that product from many of the consumer packaged goods customers from a sustainability standpoint.

And then in the Americas, we'll have the benefit of a rising resin market, so once we work through those Q1 high cost inventories, the squeeze there will disappear.

Okay, that's great. Thank you.

We have reached the end of the question and answer session and I will turn the floor back over to Jess Martin for closing remarks.

Okay everybody, well thank you very much for joining the call and we look forward to seeing you and hopefully a sunny and May and the gloomy snowy Toronto this morning. Thank you very much for attending the call.