Q1 2023 CCL Industries Inc Earnings Call
Speaker 1: I.
Speaker 2: morning and welcome to the CCL Industries first quarter investor update. Please note that there will be a question and answer session after the call. The moderator for today is Mr. Jeff Martin, President and Chief Executive Officer and joining him is Mr. Shawn Washchuck, Senior Vice President and Chief Financial Officer.
Speaker 2: Please go ahead gentlemen.
Speaker 3: Thank you, Holly, and good morning, everyone. Thanks for joining us on our first quarter investor update.
Speaker 3: We will begin right away. I'll turn your attention to slide number two, our disclaimer regarding forward-looking information. I'll remind everyone that our business faces known and unknown risks and opportunities for further details of these key risks.
Speaker 3: please take a look at our 2022 Annual Report, particularly the section Risks and Uncertainties.
Speaker 3: Our annual and quarterly reports can be found online on the company's website, cclind.com or cedar.com.
Speaker 3: Moving to slide three, our summary of first quarter.
Speaker 3: For the first quarter of 2023, sales increased 8.6% with 1.4% organic growth.
Speaker 3: 3% acquisition related growth and 4.2% positive impact from currency translation, resulting in sales of $1.65 billion compared to $1.52 billion in the first quarter of 2022.
Speaker 3: Operating income was $257.7 million for the 2023 first quarter, compared to $228.6 million for the first quarter of 2022.
Speaker 3: an 8% increase excluding the impact of foreign currency translation.
Speaker 3: Jeff will expand on the segmented operating results of the CCL A-REAP checkpoint in the Enovia segments momentarily.
Speaker 3: Corporate expenses were up for the quarter due to higher long-term variable compensation versus the prior year quarter.
Speaker 3: Consolidated EBITDA for the 2023 first quarter, excluding the impact of foreign currency translation, increased 6% compared to the same period in 2022.
Speaker 3: Net finance expense was $19.4 million for the first quarter of 2023 compared to $14.7 million in the 2022 first quarter due to an increase in total debt outstanding and an increase in interest rates on our variable drawn debt.
Speaker 3: The overall effective tax rate was 24.9% for the 2023 first quarter, compared to an effective tax rate of 24.4% recorded in the first quarter of 2022.
Speaker 3: The effect of tax rate may change in future periods depending on the proportion of taxable income earned in different tax jurisdictions with different rates.
Speaker 3: Net earnings for the 2023 first quarter was $166.4 million, up 5% excluding foreign currency translation compared to the first quarter of 2022.
Speaker 3: Moving to our earnings per share slide.
Speaker 3: Basic earnings per Class B share were 94 cents for the first quarter of 2023 compared to 84 cents.
Speaker 3: Basic earnings per Class B share were 94 cents for the first quarter of 2023 compared to 84 cents for the first quarter of 2022.
Speaker 3: Adjusted Basic Earnings per Class B Share were $0.94.
Speaker 3: for the 2023 first quarter compared to adjusted basic earnings per class B share of 85 cents for the first quarter of 22.
Speaker 3: The change in adjusted basic earnings per share to $0.94 is primarily attributable to an increase in operating income of $0.08.
Speaker 3: 5 cents due to foreign currency translation offset by a 2 cent impact from higher finance costs.
Speaker 3: 1 cent from higher tax rate.
Speaker 3: one cent from higher tax rate and one cent from increased corporate expenses.
Speaker 3: Moving to our free cash flow slide.
Speaker 3: For the first quarter of 2023, free cash flow from operations was a net outflow of $16.5 million compared to an inflow of $38.1 million in the 2022 first quarter.
Speaker 3: The decrease in cash flow from operations.
Speaker 3: of $54.6 million is primarily due to increased working capital and capital spending in the first quarter of the year compared to 2022.
Speaker 3: For the 12 months ended March 31, 2023.
Speaker 3: Free cash flow from operations increased $36.5 million compared to the 12 months ended March 31, 2022.
Speaker 3: This comparative improvement is primarily attributable to increased earnings, better comparative working capital management, offsetting, and increase in net capital expenditures.
Speaker 3: improvement is primarily attributable to increased earnings, better comparative working capital management, offsetting, and increasing net capital expenditures.
Speaker 3: Moving to our cash and debt summary slide, net debt as at March 31, 2023 was $1.59 billion, an increase of $62.9 million compared to December 31, 2022.
Speaker 3: This increase is principally a result of lower cash balances at Q1 2023 vs. December 2022.
Speaker 3: Although the company's net debt increased, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.25 times, virtually unchanged from 1.24 times reported at December 31, 2022.
Speaker 3: Liquidity was robust with $787 million of cash on hand.
Speaker 3: $0.9 billion.
Speaker 3: of available undrawn credit capacity in our company's revolving credit facility.
Speaker 3: The company's overall average finance rate was 3% at March 31, 2023 compared to 2.9% at December 31, 2022.
Speaker 3: reflecting an increase in variable interest rates on the company's outstanding borrowings under its revolving credit facility.
Speaker 3: The company's balance sheet continues to be well positioned as we move through fiscal 2023.
Speaker 4: Good job.
Speaker 5: Thank you, Sean. Good morning, everybody. I'm on slide 7, highlights of our capital spending in the first quarter, up about 25 million year on year. Most of that at Enovia in the new German films plant and at the checkpoint where we're building a new apparel label supply plant in Turkey.
Speaker 5: On to slide eight, highlights for CCL.
Speaker 5: Mixed organic growth picture double digit gains in Europe , but again, soft prior year, very strong results in Latin America, very modest decline in North America, and a double digit decline in Asia Pacific, most of that in the electronics sector of CTO design business, which I'll come to in a minute.
Speaker 5: strong results in the healthcare and specialty and CCL secure business, solid in home and personal care and food and beverage. CCL design, although we had gains in the automotive space.
Speaker 5: There's more than I've said by very weak market in electronics, especially in China, particularly in the PC and server categories of the electronics space. Page nine, has the highest of joint ventures, flattish quarters, and foreign exchange challenges in some of the jurisdictions.
Speaker 5: Slide 10, results for Avery.
Speaker 5: So we did see some inventory rebuild in distribution channels in North America in particular. You might remember in the summer months last year and into the early part of fourth quarter we saw quite some de-stocking in a few of our larger distribution channel based customers in North America and during the first quarter they've been...
Speaker 5: probably cut back a bit too much, have been rebuilding inventory so that really...
Speaker 5: fueled growth in North America, on top of continuing strong growth in the direct-to-consumer space. International results are solid, and we have good acquisition contributions, first time from Flora Media in Europe and out of Brazil for the Q1 period.
Speaker 5: We're going to page 11, results to Checkpoint.
Speaker 5: MAS business was strong on new business wins. We got the benefit of some price increases. And I'm very pleased to say the supply inflation that was a bugbear for most of last year, including freight costs from China, where we make most of these products and ship them to our DCs around the world, that is quite considerably. Power labels results were pretty good.
Speaker 5: But we did see some supply chain focus on managing excess inventory, so that softened sales a bit, but RFID growth continues unabated.
Speaker 5: Slide 12, results for Enovia. Volume declined on double digit drops in the label materials industry, which a number of companies in that space have made public announcements about.
Speaker 5: in Europe and North America, strong double digit drops, which translated into the effect of their purchases on us correspondingly. That was the main driver for the drop in revenue in the quarter. Some of it was also a little bit due to lower resin prices this year comparatively compared to Q1 last year.
Speaker 5: Profitability did improve sequentially on easing inflation, particularly in transportation and in power and energy, good cost controls, and we did work through the higher cost, read in inventory we had in the Americas, which helped Q4. So Q1 was much better in the Americas. Slide 13, some comments on the outlook.
Speaker 5: space. With CCL Design we expect some recovery in Q2 as China has a full quarter. So Q1 we have this impact of the lockdowns and then a Chinese New Year. So Q1 was a particularly low quarter for them and we will have a normal normalized quarter in Q2. We will see some.
Speaker 5: due to many retailers being concerned about supply chain deliveries. We do not think that will repeat in 2023, so that will create tough comps for us in Q2 and easier ones in Q3.
Speaker 5: The checkpoint we think apparel market conditions are unlikely to improve much until we get into the second half of the year but offsetting that the MSAS outlook continues to be good and also with easier comps and this time last year we were struggling with inflation and transportation costs.
Speaker 5: I don't believe the novia volume picture will change much in the coming quarter. Label material industry demand is still very low. A lot of inflation in the system.
Speaker 5: but we will benefit from inflationary pressures and inventory cost squeezes which are both easing.
Speaker 5: and like Q1, if exchange rates stay as they are, we would expect a modest FX pair win in the coming quarter.
Speaker 2: So with that operator, we'd like to open up the call to 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 1 on your telephone keypad.
Speaker 2: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: One moment while we poll for questions.
Speaker 2: Your first question for today is coming from Ahmad Abdullah at National Bank of Canada.
Speaker 3: Yeah, thank you for taking my question. At the CCL segment, overall, very solid results, but you highlighted some customers working through inventories at Home and Personal Care North America, specifically in Labeled and Tubes. Can you elaborate further on that? And overall, for this segment, how are inventory levels at your customers' position?
Speaker 5: but as you've probably seen from most of the results from...
Speaker 5: The CPG sector, everyone's been reporting revenue rises and volume declines.
Speaker 5: So, you know, I think that's just how the world is. And certainly last year we know many of these customers build up their inventory banks when getting stuff is more difficult.
Speaker 5: this year getting stuff is quite a bit easier. So that's about the only color I could give you, but I think it's fair to say that volume's not going to be easy for the next couple of quarters in our opinion.
Speaker 3: Okay, that's fair. And on Avery, you highlighted inventory rebuild and distribution channels in North America helped the quarter with results. Is this a dynamic that's expected to continue in the second quarter?
Speaker 5: Well, they cut them back probably too much and there was a huge cut back last year at a couple of very large distributors.
Speaker 5: in the United States and they probably cut back too far and then rebuilt. We do have good visibility into that situation but they, you know, we're a very small part of these distributors' business so sometimes their behavior can be erratic so it's very hard to say what will happen.
Speaker 3: in the coming quarter, but certainly in Q1, we saw some benefit from the inventory rebuild to show. Okay, and just finally on the margins for the segment, I believe seasonality of horticulture business was highlighted as a potential headwind for the margins. You were able to more than offset that.
Speaker 3: Can you give us a bit of color on the puts and takes there? And will this be something that you can repeat going forward to deal with the margin dampening effect that the seasonality has?
Speaker 5: Well the seasonality in Q1 is positive because it's in the horticultural space you've shipped in the latter part of the year and all the way through the first quarter so those are the peak four months so we didn't have Flora Media last year when we were going through that peak period we did have in this year.
Speaker 5: That's the main driver for that. They make most of their profits for the year in that November through March timeframe.
Speaker 3: All right, thank you for the color. That's it for me.
Speaker 6: Thank you.
Speaker 2: Your next question for today is coming from Steven MacLeod at BMO Capital Markets.
Speaker 7: Thank you. Good morning, guys.
Speaker 3: Morning Stephen. Good morning. I'm just wondering if you could give a little bit of color if there was any noticeable trend. Just how sales trended through the quarter sort of beginning in January and through March. Well comparatively January and February were better than March.
Speaker 5: But there are lots of puts and takes in there.
Speaker 5: So I couldn't really give you much more insight than that Steve, but January and February were comparatively stronger than March.
Speaker 3: Yeah, okay. Okay, that's great. And then just on CCL design, I mean, I know electronics has been quite a headwind over the last few quarters. With China opening up, do you expect that recovery to continue through the year?
Speaker 5: Well we expect there to be some output recovery so...
Speaker 5: We know in Q1 some of the players in that space had their output constrained by the COVID.
Speaker 5: challenges in China that were particularly prevalent in the month of January . Then we went into Chinese New Year's so we had a Covid January and then...
Speaker 5: a short month in February and then March. So it was a pretty strange quarter really. But the computer industry, the laptop industry in particular, so laptops and desktop computers, I mean it's down 25, 30%.
Speaker 5: For everybody, you know, Apple, Dell, HP, you know, all the players in that space are reporting 25 to 30 percent drops. So that was the big factor.
Speaker 5: then the impact of service for cloud computing so there's been a that's also an area that's quite difficult cell phones are kind of flattish
Speaker 5: the impact of service for cloud computing. So there's been a, that's also an area that's quite difficult. Cell phones are kind of flattish, but we do expect.
Speaker 5: we do believe there's some need to get inventory rebuilt and get supply chains working better again. So we do expect to see some sequential improvements in Q2 driven by the need to produce.
Speaker 7: Okay, that's helpful. Thank you. And then maybe just finally, on the last call.
Speaker 7: With respect to the acquisition pipeline, you talked about sort of multiples coming down to prices that you're more willing to pay. Just curious if you've seen any change in the acquisition backdrop or landscape?
Speaker 5: No I would say I wouldn't have changed my comments anymore than we said last this time last quarter Steve.
Speaker 8: Okay, that's great. Thanks, Jeff.
Speaker 2: Your next question is coming from Walter Spracklin at RBC Capital Markets.
Speaker 9: Yeah, thanks very much, operator. Good morning, everyone. Maybe Jeff, I could start with some macro questions just out of curiosity. We're focusing on supply chain, we focus on inflation, we focus on the economy these days. And in your remarks, I kind of heard you say that supply chain issues facing your company have been moderating. I heard you say that in some cases inflation, I know particularly transportation was easing.
Speaker 9: And, you know, is that a fair, is that fair extraction from your commentary and also could you go ahead? Yeah, I had both of them. That's your question. Yeah, yeah, I was just gonna say and also within your product segments, you have a few leading indicator segments.
Speaker 9: that kind of indicate to you that the economy is not doing so well. Can you speak to a little bit on those as well if you're seeing signs of weakness in those product categories? Sure, sure. Well, we're certainly seeing easing inflation for sure. Transportation, freight from China, different things we saw from China.
Speaker 5: No question about that. So we're certainly seeing easing inflation and more importantly much easier availability. So we're not having the challenges we had last year of being able to source stuff on time. We're not having to hold excess inventory that we were this time last year. So that's definitely helping.
Speaker 5: But it's hurting, that fact is also hurting some businesses like at Enovia, the label converting channel has been stuffed with label materials for most of last year.
Speaker 5: Now the capacity challenge in that industry of ease.
Speaker 5: That means that Enovia's got less demand for its face films than it had last year. So there's a double-edged sword to most of these situations we're in.
Speaker 5: I think economically, there's no question, I think the consumer is challenged right now. So I think most of the CPG companies we do business with.
Speaker 5: have found it relatively easy to get their price increases through, but a lot of them are reporting low to mid single digit volume declines. And we see it in some categories more than another. So for example, our aluminum aerosol business has been very strong.
Speaker 5: But our plastic tube business has been quite weak, so quite why there would be those differences between those two categories, which is servicing the same customers, is not always clear to us. And we definitely noticed some categories weaker than others. On the point of easing in-
Speaker 5: industries, for example, our aluminum can business, where we have pass-through pricing.
Speaker 5: So, you know, there it just flows right through other spaces like the pharmaceutical sector.
Speaker 9: it's more possible to keep some of it. So that's kind of a mixed picture on that on that score. Okay and my last question on Avery I heard what you were saying with regards to the tougher comps in second quarter with with back to school having happened earlier. Just curious though I mean you've always had a much larger second quarter.
Speaker 9: than your first quarter seasonally, even notwithstanding the back to school comp.
Speaker 9: you know, are we still expecting a seasonal lift in Q2 versus Q1 similar to prior periods? Or perhaps a bit muted compared to prior periods? Or is this so big that that seasonal pattern is interrupted? Preparing for Q2 last year. So Q2, if you look at the results of Avery for Q2 and Q3 last year.
Speaker 9: as well in your in your CCL core business. This is the reverse you normally have a very strong first quarter merge and it tails off in second and third. Is there any reason why that seasonal pattern wouldn't apply here or should we consider some other factors? CCL space should be not the normal pattern.
Speaker 3: Okay perfect. Okay that's all my questions. Thanks very much for the time. Your next question for today is coming from Daryl Young at TD Cowan. Good morning everyone. Maybe just following on Walter's train of thought on the macro and potential areas we can...
Speaker 5: We haven't seen.
Speaker 5: The interest in premiumization is still rampant, I would say. But because, you know, I think all the CPP companies still see the premium consumers as the way, the easiest way to get revenue growth. So we're not seeing any lack of interest in it.
Speaker 7: And then with respect to the margin at Avery, very strong. Would you attribute that to the higher volumes or a mix shift? Or is there any color there you can get? And I guess what I'm trying to get at is just the sustainability of those healthy margins. The printable media business.
Speaker 5: which is the highest margin business we have at Avery of any category, had double digit growth in the quarter which is pretty unusual.
Speaker 5: and it's the highest margin business we have. So that was a big factor.
Speaker 5: The second one is the Flora Media acquisition, so we didn't have that in our comps last year. We had it this year and it's their highest margin quarter for the year. So they were the two big drivers in the quarter at Avery.
Speaker 7: On Enovia, you gave some good color in terms of the inventory levels in the system and that the stocking needs to happen.
Speaker 5: Would you see it being an end market demand softening? Is that partly? It's not end market demand, Darryl. It's the label converter channel. So Avery Dennison and UPM, who are the two largest suppliers to the label converting channel, are the two largest suppliers to the label converting channel.
Speaker 5: both reported massive drops in volume in Q1. So the label industry trade data for Q1 for pressure sensitive materials which those two companies make was down by 33% excluding the impact of sales to Russia.
Speaker 5: So that's a biblical, historical, unheard of drop. And so if you get that kind of challenge in their space, all driven by huge build ups in the year of 2021 when there was a release line of Stryker.
Speaker 5: in the industry which compounded things. And then when things normalize as they have done so far this year.
Speaker 5: and everyone's eating the imagery they bought over the last year, 18 months.
Speaker 5: So until that cycle ends, it has nothing to do with the consumer packaged goods industry, it has nothing to do with the consumer packaged goods industry.
Speaker 5: the raw materials that we use in our factories and the label can build the channel in general.
Speaker 2: Okay, that's great. Tell it all. I'll get back into Q. Thanks very much. I'll get back into Q. Thanks very much. Your next question for today is coming from Michael Glenn at Raymond James.
Speaker 10: Oh, hey, good morning. Jeff, sorry to make you repeat things, but I just want to make sure I understand completely. Like for label, if I'm thinking about operating margin through the balance of 23 on a year over year comp basis, it should it is it likely to be down through the balance of the year? Is that is that the communication?
Speaker 5: No, we're not saying that, we're just, I think what we're saying is we see some signs of slowness in the level of order intake. Not in all categories, in some categories. What that impact of that will be on our operating margins is yet to be determined, so we're not giving guidance on that, we're just letting you know.
Speaker 10: few quarters remains to be seen. Okay and then in CCL Secure can you give some information around the volume outlook for that business?
Speaker 10: Okay, and then any guidance that you can provide on the corporate expense line for this year? Sure, it will be roughly the same as what you saw in Q1 for the remainder of the year, each quarter. Each quarter, okay. Thank you for taking the questions. No problem. Your next question is coming from David McFadgen at Cormac, Cormark, I'm sorry.
Speaker 3: Hi everyone. A couple of questions. Good morning. First of all, just on Check Point, if the retail environment doesn't start to improve slightly over 40% folks this year, what are you planning to learn?
Speaker 3: Don't you think that would start to maybe drag down MAS and potentially RFID as well?
Speaker 5: Well I think one of the things you have to bear in mind about MAS, its core mission in life is to improve, shrink retailers.
Speaker 5: And in the last two years retailers have been so buoyant with demands through the pandemic.
Speaker 5: The issues around strength kind of went on the back burner. Now the retail environment's getting more challenging and then margins are getting more pressurized.
Speaker 5: reducing shrink in the stores become gone up into the minds of most retail as much in a much higher place than it would have been in the last two years.
Speaker 5: years of 20 through 2022. Okay. All right. And then just on an Ovia, at what point in time will you have worked on up for the high cost in mentoring? I think we got through most of that in the early part of Q1. So we're kind of through that now. That was really impacting us in the Americas where we saw big drops in resin, coughs and that seems to have stabilized actually gone up a little bit in the first quarter. So that's allowed us to get work that issue through in the Americas where it typically has the most impact. Okay. So soon as volume.
Speaker 5: improves and we should see return back to sort of normal profitability there and give high cost to the military services. Now, the America has had a pretty decent quarter actually in Q1 and that's continued in the months of April . The challenge has all been in Europe where the label industry, where we're more exposed to the label industry.
Speaker 3: from the inventory rebuild, but is the inventory rebuilt done then? I think I think you said that right? I just want to clarify that. Yeah.
Speaker 5: We're a small category in these multi tens of billions of dollars retailers, so the amount of inventory of our stuff they have is financially immaterial to them. So it's not untypical to have some volatility.
Speaker 5: have general de-stocking programs we get impacted. If they cut too much, they rebuild it. So we have, we track the POS data. So our POS data was much better than our real level of sales in the second half of last year and the real POS data was much worse than our level of sales in Q1, so that's.
Speaker 10: I'm probably the best way I can answer it for you. All right. OK. Thank you so much. Well, problem. Your next question is coming from Ben Yekik at PI Financial.
Speaker 11: Good morning. I have one question and that is with...
Speaker 11: It says Europe is up high single digits in the CCL segment. And in the past, Jeff, you would always sort of kind of put a little bit of extra color on how is central and maybe northern Europe doing versus the southern Europe . Can you give a little bit of a breakdown regionally within Europe ? How certain parts are doing? I can't do that, but what I can tell it was up double digits.
Speaker 8: Thank you.
Speaker 11: Your next question is a follow-up question coming from Steven McLeod at BMO Capital Markets. Thank you. I just had two follow-ups. One is just on a novia, you know, putting together the Europe and the Americas, would you expect to see potentially some like volumes maybe more flatter Q2 and into the bounds of the year he's still expect to see declines in Q2.
Speaker 5: Yeah, we would expect a volume situation in the label materials industry. I mean the players, two of which are public in that space. Very common on that is that they expect that to continue through much of the second quarter and that certainly seems to be how it's tracking so far.
But that's more marked in Europe than it is in North America. That's certainly what we see. We'll see what really transpires as Q2 unfolds. But the label materials industry we're not holding out too much hope for.
a great deal of improvement there but we've got the packaging space, security films and our own internal sales and all that stuff going on too so we'll have to wait and see how things pan out.
hopefully won't face that challenger this summer and will have a much easier situation on the cost side than we had this fun last year.
Right. Okay, that's helpful. Thanks Jeff. And then maybe just finally, you mentioned in your comments, RFID continues to grow unabated. So just wondering if you can give a little bit of color around maybe what growth you saw and if you were able to put a dollar or a number on where that RFID business sits.
No, I wouldn't not really ready to do that, but we certainly continue to grow double digits, and we see quite some new applications appearing outside of a peril. So we've taken some of our first orders in...
industries outside of the power in that space and lots of interest in other areas of the economy. Our inlay business is just firing at all films. We expect that to continue in the coming months.
Great. Thanks, Jack. Thanks Sean. Yes. Once again, if there are any questions or comments, please press star one on your telephone keypad.
There are no further questions in queue. I will now turn the call over to Jeff for closing remarks.
Thank you very much Holly and thank you everybody for joining the call today we'll look forward to seeing you this summer and telling you about how things unfold in the coming call Thank you very much
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.