Q2 2023 CCL Industries Inc Earnings Call
[music].
Yeah.
Good morning, and welcome to CCL industries second quarter Investor update please.
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. Sean Walsh, Chuck Senior Vice President and Chief Financial Officer. Please go ahead gentlemen.
Good morning, and welcome to our second quarter Conference call.
I'd like to turn everyone's attention to slide number two of the presentation and you can see our disclaimer regarding forward looking.
The information I'll remind everyone that our business faces known and unknown risks and opportunities for further details of these key risks. Please take a look at our 2022 annual report under the section risks and uncertainties.
Our annual and quarterly reports can be found online at the company's website, CCL and dot com or on SEDAR Dot com.
Yeah.
Moving to slide three.
Three our.
Our summary financial information.
The second quarter of 2023 sales increased one 8% with 1% acquisition related growth.
Five 3% positive impact from foreign currency translation, partially.
Partially offset by four 5% organic decline, resulting in sales of $1 64 billion compared to 162 billion in the second quarter of 2022.
Operating income was 242 million for the 2023 second quarter compared to $247 8 million for the second quarter of 2022 and.
An 8% decrease excluding the impact of foreign currency translation.
Jeff will expand on the segmented operating results for our CCL Avery checkpoint.
And there'll be a segments momentarily.
Corporate expenses were up for the quarter due to a higher long term variable compensation versus the prior year quarter.
Consolidated EBITDA for the 2023 second quarter, excluding the impact of foreign currency translation decreased 7% compared to the same period in 2022.
Net finance expense was $19 2 million for the second quarter of 2023 compared to $15 4 million for the 2022 second quarter due to an increase in interest rates on variable rate debt.
The overall effective tax rate was 24% for the 2023 second quarter compared to an effective tax rate of 24, 4% recorded in 2022 second quarter.
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 2023 second quarter was $155 9 million compared to $163 4 million for the 2022 second quarter.
For the six month period sales increased 5% operating income increased 5% and net earnings increased 3% compared to the six months period in 2022.
2023 included the results from six acquisitions completed since January one 2022.
Delivering acquisition related sales goes through the period of one 9%.
Foreign currency translation was a tailwind of four 9% to sales, partially offset by one 7% organic sales decline.
Moving to slide four.
Basic earnings per class B share were 88.
In the second quarter of 2023 compared to <unk> 91.
For the second quarter of 2022.
Adjusted basic earnings per class B share were <unk> 90 for the 2023 second quarter compared to adjusted basic earnings per class B share of <unk> 94 for the second quarter of 2022.
The change in adjusted basic earnings per share to <unk> 90 is principally attributable to an increase or decrease in operating income with nine cents.
Actually offset by <unk> positive foreign currency translation.
All other items netted to zero impact.
Moving to slide five free cash flow for.
For the second quarter of 2023 free cash flow from operations was an inflow of $120 1 million compared to an inflow of $115 1 million in 2022 second quarter.
The increase in cash flow from operations of $5 million is primarily due to improved working capital partially offset by higher net capital expenditures in the second quarter of this year compared to 2022.
For the 12 months ended June 30th 2023 free cash flow from operations increased approximately $21 million compared to the 12 months ended June 32022.
This comparative improvement is primarily attributable to increased earnings.
Better compared to working capital management offset by an increase in net capital expenditures.
Moving to slide six our cash and debt summary.
Net debt as at June 32023 was $1 56 billion, an increase of $38 6 million compared to December 31 2022.
This increase is principally a result of lower cash balances at Q2 2023 versus December 2022.
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. Two four times unchanged from December 31 2022.
Quiddity was robust with $738 million of cash on hand.
In U S 0.9 billion of available Undrawn credit capacity on the company's revolving bank credit facility.
The Companys overall average finance rate was approximately 3% at June 32023.
Third to two 9% at December 31, 2022.
Selecting an increase in variable interest rates on the company's outstanding borrowings under its revolving credit facility.
The company's balance sheet continues to be well positioned as we move through fiscal 2023.
Jeff.
Thank you Sean good morning, everybody I'm on slide seven highlights our capital spending for the year $252 million net of disposals at the halfway point.
Excluding right of use assets and planning to spend about $440 million for the year.
As a whole.
Slide eight so I wanted to give you a bit of a tolerable.
Some investment highlights of late so pardon me on Capex and partly on acquisitions.
I wanted to just talk briefly at a little bit about CCL container.
Which has been flat in Slidell seashells segment for number of years now it used to be a separate reportable part of the business.
Revenue in that part of the company has now passed $300 million.
With 20% EBITDA margins.
We spent $30 million in capex in that business and with close to half of 2023 and are planning further expansion in 2024, and especially in Mexico. So I thought that was supposed to have interesting adjunct to give you a bit of color on what's been going on inside the business and the most capex numbers.
And the two acquisitions, we announced just before earnings pop out in Germany, The largest acquisition we've ever made in the health care space.
<unk> global leadership in clinical trials labeling we've always been in my business in quite a big way in the United States.
And this really gives us a clear leadership position of this company the clear market leader in Europe .
Energy is a technology company.
We acquired and are out in Silicon Valley.
<unk> developed some interesting battery technology, it's printed vouchers using the technologies, we have in our converting businesses.
Tonight labels, who would send signals without the need for the scanner, so like an RFID label, but that.
Acting more like as a self funded without the need for any.
Any kind of scanning device, it's very important to track and trace applications behind body will sensitive goods.
And just to point out the last 12 months, we've completed 12 acquisitions for approximately $317 million.
Page nine highlights the CCL business.
That was followed by saying comps for this quarter, who is going to be difficult for I was 10, 9% growth reported in Q2 2022 in the middle of the supply chain crisis mobile customers ordering excess inventory and.
And we certainly are faced up to in this current quarter three point.
3% organic sales decline low single digit gains in Europe , and Latin America was offset by a low single digit decline in North America, and a double digit decline in Asia Pacific.
Pretty much driven by the situation in the <unk> design and CCL skill.
We had flat reported profitability in home and personal care and food and beverage spaces. This little decline in health care and specialty versus the very strong prior year sales were up in H N S. Colder on a slow quarter in currency puzzled by strengths impossible components is heat sealed SKU, let's.
The CCL does hanmi had gains in automotive, but they were more than offset by the weak end markets that have been reported by many electronics, Oems and especially impacting our business and John .
Moving onto slide 10, there's good good.
Coltrane, our joint ventures, let's say anymore than that.
Slide 11 results savory.
Beyond a repeat of the early back to school season in 'twenty to 'twenty three we enjoyed in 2022 to the comps with sort of like for like in that regard.
How do we continue to see strong growth in direct to consumer channels solid results internationally I hold to cultural business is seasonally loss, making in this quarter.
Last year, we only had one month of one of the acquisitions, we made in that space and this year, we had a full quarter of losses. So that's the reason why you see some margin erosion to that Adrian.
Slide 12 results checkpoint good very good call Jos M. A S business.
Strong new business wins, especially in Europe price increases, we implemented last year to cover the supply inflation definitely kicked in and we have seen some easing of that this year, particularly in intermodal trade calls from China, which is more or less back to normal large now competitive challenges, we face as part of last year.
And the power of labeling business our profitability improved.
<unk> retail supply chain.
Customers are not focused on managing excess inventory video driven by growth of RFID.
Yeah.
Slide 13 about the culture the navy than we expected.
Volume was still down in the in the pressure sensitive label materials industry, There's a number of public companies in that space.
Holding 25%, 30% drops in volume and we certainly saw that during.
During the during the quarter. We also had some price driven deflation, particularly in North America, not so much in Europe , but particularly in North America, where where residents have been dropping falls, but there was some price impact in the sales dropped by the profitability improved sequentially, while easy inflation, particularly energy inflation and very good cost controls.
Right across the business. So we were quite pleased to see the improvement.
Slide 14, the outlook commentary.
Core Ccs business, you didn't say slow volume still many consumer package goods customers. We did see some pick up in orders in July .
In Q2, we saw some softening in all those sort of progressively through the Kohl's and it did sort of reverse a bit in July and not not not everywhere, but it has been in a number of places, but it still results in many of our customers in that space are reporting low to mid single unit volume declines and once you can see that that obviously.
At some point translates back to us.
Does he feel design, we do expect to see some modest improvement by Q4 comps ease and computer industry demand suddenly recover then we had some new business wins the kick in so we again see two show design, we saw in the electronics space first.
Proven and order intake and in July versus the prior years, So that's quite encouraging.
C C O secured demand picture remains unchanged so that second half, although again, we have seen some pick up in orders in the month of July So maybe that will change by the time, we get into Q4, we'll have to wait and see.
We expect to be solid with any unknown really is the back to school replenishment. All that's all those are something we wait on every year. We go non loss share, but waiting to see if we get any of this year, we find out during the month of August .
The checkpoint favorable inflation recovery will still be our friends for the balance of the year and we expect RFID strength to continue.
At some point, we expect to know abuse volume fixed stooge.
Change is the label materials industry.
<unk> has its own volume.
Is it publicly announcing their time to do the second half rolled through so we hope to be participating in that and inflation in that space remains very benign.
Yeah. Thanks, Tim Wizard is expected to continue at current exchange rates should also be a trend in the second half.
So with that operator, we'd like to open up the call 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.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for.
A pinch using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question for today is coming from Ahmed Abdullah with National Bank of Canada.
Yes. Good morning, Thanks for taking my question on the CCL segments volume moderating are you able at this point to offset some of that volume pressure with some pricing.
Well I'm not ready yet.
We had pricing benefits last year driven by inflation.
If anything this year things that deflation rates than most of our raw material procurement costs have declined this year over last year. So it's pretty unlikely we will get any price benefit that's different for my customers experience at the moment, but theyre going to be in the same boat at some point the wherein the getting more price increases for the cause.
Well no.
And so there is going to get increasingly difficult as we go forward, but so I think the answer to that is not.
Okay. Thanks for that and India in the release you highlighted that you had some productivity initiatives and cost cutting efforts that would still deliver strong results can you just give us some color around what those initiatives and efforts entail.
In which business and does he see all segment.
Yeah. So we've been doing a lot of things to win win win win win business slows up we do a lot of things internally to reduce labor costs.
Focus on raw material input costs and do all the things you do a self correcting system we have here.
But you always want volume to come back at some point in the we were quite pleased to see the older intake in improved in July versus the prior year that's fair.
First time, we've seen that for four or five months.
So that's a given some indication that probably this is beginning to bottom out.
Okay. Thanks, and just lastly on the RFID business segment outside of apparel have you received any other orders following the first one you highlighted on the last conference call.
There's a lot of there's a lot of interest in RFID outside of the apparel space both in general merchant merchandise retailing food food at the industry retailing.
Freight and logistics pharmaceuticals.
So we've got a lot of interest across the board in that space. So RFID is an area of encouraging drug.
Okay I'll pass the line thanks.
Yes.
Your next question is coming from Steven.
At BMO capital markets.
Thank you good morning, guys.
Alright.
Just wondering if you could give a little bit of color on last year's CCL segment growth of 10.9% how much of that are you able to quantify is price versus volume growth last year.
It's difficult to do that Steve, but it's it's it's a mixture of both I can say that there was certainly some price in that.
And there's probably some volume, maybe maybe 60% price, 40% volume and that's just a pure gas on my part, but it's certainly it makes it a mix of the two wasn't it wasn't all volume driven it is combination of.
A combination of price and volume.
The business grew very strongly volume last year with CCL container.
So that certainly had an impact on the solvency field segment lost share because of that.
The volume increase was well into double digits last year.
Okay, that's great.
And then just thinking about a Q2 and with the commentary around slower volumes up of course, you see all units.
<unk> secure and then your commentary around July sort of picking up.
Do you foresee organic growth essentially returning back into positive territory in Q2.
Not sure yet so it's we've already got July was a short month because of the July 4th holiday. So it's very you can't really make any predictions in Q2 in the month of July .
So August is a big amount of more work days in it.
So we'll have to wait and see how things unfold, but the comps are much easier This school, who they work for Q2.
And and that's certainly the case also in Q4, so we'll have to wait and see how things unfold.
But currently we've been surprised if we would have the same the same degree of shortfall in Q2 that we'll have to wait and see how things unfold and it's the summer cool.
I certainly wouldn't be making any decisions on the long term health of the business based on what happens in that quarter, but by.
By the time, we get into Q Q4.
We'd have a different viewpoint it back because it was in October and November we would activities volume to be quite strong.
Right. Okay. That's that's helpful.
Thank you and then just on the I just wanted to ask about the bubble if I'd say that really the Saba acquisition.
Can you just talk a little bit about what the sort of how that's complementary to your business and what that does for you strategically in the health care segment.
Yeah, well, we've been in the clinical trials labeling field ease of labels that are used by drug companies as they're getting drugs approved and the you know the in the in the field.
The eventual use the very high margin business I mean, we've been in it in the U S for a number of years.
Never found a way to get into it in Europe , because these companies you know.
Being a strong market leader in Europe with Ford law for a long time, we've been trying to buy it for about 15 years.
I had two or three attempts to do the path, but bringing the two sides of it together it really gives us global leadership with.
We had the drug industry in Europe in the drug industry in the U S and those two continents really really drive most of the world's drug use.
If you're if you're not with the the R&D labs and in.
And Astrazeneca and often the Rosh in Europe than you you'd missing out. So we have those relationships with the U S drug companies in that and that will have it in Europe too. So good we're very pleased with it we think we paid a good multiple for it it was a competitive situation so indication of multiples coming down a little bit.
But.
Very pleased to finally finally finally got the deal through.
Right and then maybe just finally, just along those lines you talked you've talked in the past about acquisitions in multiples coming down it sounds like you're seeing some of that.
Would you still characterize the.
The landscape as being quite a ripe in terms of the pipeline.
For acquisitions in multiples being in areas, we'd like to pay.
Well I think the multiple situations better than that but of course, if you're a seller.
You May know think the time is right at the moment. So this particular.
The situation in Germany, we had a family affair.
Do you reached reached today with the founder of the company was at an age where you simply have to sell.
And.
Just to be so concerned about that but but there are other fellows, who maybe look at the market to sell right now I think it's not so good because multiples are down.
So so that's if it make sure it's a win win.
Articles come down sometimes very big opportunities.
Great. Thanks, Jeff.
Yeah.
Your next question for today is coming from Michael Glen at Raymond James.
Hey, good morning, Hi, Jeff.
Jeff can you give any indication about how the pricing mechanisms work, if you're thinking about it deflationary environment with labor materials, how that works with customers.
Yeah, well, it's a label indices Hardy transaction intend so.
So pricing is dynamic all the time, we don't really have any fixed price contracts and labels because the designs and what we're making are changing in some cases two to three times per year. So there's always there's always repricing opportunities.
So it's going through and that's that works in an inflationary environment. It also works in a deflationary environment.
So I would I would say I would characterize our.
The volume drop in the H P. C space was not very dramatic and in.
In in labels and in Q2, most of the volume drove actually was in tubes.
And we certainly saw a lot of people advancing purchases last year to make sure. They go well they needed.
So the <unk> business was one of them in the <unk> space was probably the business that well.
Well, we really saw the biggest volume drop.
Okay, and then can you provide some color or thoughts about it and I'll take care of business and your outlook and view on what's happening in the polymer currency market right now and in the longer term outlook for that business.
Well, it's still growing.
So we still see a lot of opportunities the cause is.
Got it.
<unk> digit market share globally.
So a lot of pay there's still to convert the polymer use of currency, maybe counter intuitive to a lot of people listening to the call is still growing.
Despite electronic payment systems banknotes survived credit card they survive electronic funds transfer survive checkbooks check cards.
The iPhone was launched in 2007 and since 2007 currency in circulation in the U S has almost doubled.
So.
The use of currencies and really driven by the retail payment systems was driven by broad use of cash in society, and it's still going up so.
So we still but it's but it's very lumpy it depends on.
Whether you've got new issues you know the timing of all this is always challenging so it's a it's a lumpy business, but in total it sub $200 million for us in revenue has premium profitability because a lot of you had last quarter.
So there's probably six to 7 million of the Delta difference in profitability.
In a in Q2 was driven by the shortfall in CCM executed.
Okay.
The inventory dynamic right.
So there's a little more can you tell us how much excess inventories being held back a lot of banks. So there was a run on cash and they are in the pandemic. So a lot of the banks.
Thankfully most concerning the central banks are the most conservative organizations.
So if they ever see any risk and not being able to have cash when when consumers want cash.
They always overall drug and particularly in the developed world, The United States, Australia, and U K, Canada. All these all the central banks fill their builds full to overflowing and then.
Then.
The putting the brakes on the ordering and.
Particularly in the last year or so.
Okay. Thanks for the information.
Thank you.
Your next question is coming from welfare Spracklen at RBC capital.
Yeah, Thanks, very much good morning, everyone.
So I guess going back to first of all that the container business and the decision or that's my question was this a.
And organic a process, where it just it just was growing well and has now developed into a a larger segment or would you say it was a on the part of a a strategic decision that you made to grow that segment, and that's where either acquisition, then and and expand internal expansion efforts at it it got to the size of it.
Is that that it did.
No acquisitions in the CTO containers space, that's all internal growth.
So and aluminum aerosols of beta.
Growth in.
In the consumer goods space.
I just have the aluminum bottle. So the move away from plastic has benefited the aluminum bottle growth in.
In the food and beverage space downtown in the home and home and personal care space. So they've been the two main drivers of growth there.
And we decided to invest in it particularly in our operations in Mexico to take advantage of that.
And grow and grow organically and historically the business underperformed in the Ccs segment today, it's above par compared to the other businesses. So returns on capital and the CCR container of the basketball and many other parts of the business.
Business today.
So that's encouraging and correct me if I'm wrong I think in one of our meetings. It was mentioned by on your team that that in fact containers as a good leading indicator of how the economy is doing am I right in remembering it that way and if so.
Are you where are you seeing any evidence.
Yeah, I think what we said Walt who container was it historically in the past.
If if there was a downturn in the economy.
<unk> business all of the software and the Arizona.
Containers, we make for that segment typically like you know right now and we saw significant drops in selling them. All so the salaries as a percentage of the total of the spaces.
Decline quite significantly so even if that occurred I think the growth in aluminum Balkans has more than enough to offset it.
Yeah.
And I guess it or are you getting any indications from the sales patterns within your container division because of just yes, we are going deeper into recession or we are you know maybe bottoming coming out is there and it can't work. It doesn't have to be just container anything in your business to suggest that I think I heard you say a few times that you know July is looking a bit better but it's tough.
Look at July is a good indicator, but just any indicators from here yeah, yeah that might suggest some bottoming here.
Yeah.
I hope so you know we probably the best indication we saw in July was a pick up in orders relative to July last year.
So the first half order intake in 2022 was very strong.
It would be so it tailed off in July of last year.
So this year, it's been it's better than it was in July of last year. So that we take some encouragement for that I mean, we know we know in some categories plastic tube business for sure.
It's getting the benefit of the supply chain stuffing this time last year and with paying the paints a lot.
And the current cold so I would say both bottoming bottoming out hopefully.
So we'll have to wait and see I think in the next couple of quarters and it'll bump along the bottom a bit.
And then we'll see what 2020 fold ring.
That's great and last question here on Capex I know the number you quoted is there anything.
I know we're in it in a different environment now that we're still looking at the path toward normalization is that a good number as a normalized number to look at going forward or is there is there anything to suggest that that that would be you know larger or smaller than what we'd expect going forward.
Uh huh.
Okay.
Excellent. Thank you very much that's all my questions.
Yeah.
Your next question is coming from David Mcfadden at core Mark.
[laughter].
Hi, Yeah, a couple of questions David.
Hi, how is it how does everybody doing.
It's done the Cts segment them in the press release, you called out significantly lower demand for labor and teams in North America. I was just wondering is that the primary driver for the organic decline in CCL or there's some other big factors are there.
The two big drivers and the CCL space with the decline in sea field design.
So so they were down organically about about this.
High single digit zone.
The declines in the home and personal care and food and beverage space with very small you know a very low single digits health care and specialty was up low single digits and CCI secured was down in the mid teens.
Okay.
And you know and then see the bankrupt inventory levels will normalize so TCE unsecured but it's.
Very difficult to pull out that it's.
Make their own decision. So we just thought we'd just have to be ready when they're ready.
Okay.
And then just on Avery.
I am I correct to understand that Q2 benefited from the back to school ordering and I think last year, what took place earlier.
I think it's just a repeat of last year. So we had the same experience in 2023 that we added to the like for like we pulled the result, which is the older patent would go back to the normal pattern, which is more in the July August timeframe.
But the retailers are taking a lot of stuff in the month of June as they did last year and even started at the back end of May So it was there.
Basically a repeat of.
But what happened in 2022, which was a surprise to us.
One.
Okay.
<unk> really is about what happens in August replenishment. That's that's the unknown last year, we got no replenishment orders, we're waiting to see what happens this year. It's there's no point in asking the retarded today simply don't know we'll find out.
Find out the answer that when we closed the month of August .
Knockdown and then on I know that.
The tough quarter do you expect that repeat in Q3.
Moving at all so far in Q3.
Well play it very pleased with the sequential improvements in their neighborhood.
I've called it was better than we thought it might have been going into it.
And particularly in the Americas space.
So we're really waiting to see what happens in the in the pressure sensitive label materials industry. There's a couple of public companies that are released.
Drops of you know that.
And in the 30% magnitude in that industry, and that's our largest customer segment and who didn't know it until they improve we call them improve so I think that's really all about.
Pressure sensitive materials that are in the label converting channel.
And then here until that gets used up and they replenish and orders come in in a more normal basis will be will be suffering along with them.
But are there, they're all calling out that they expect that to gradually improve in the second half of the year and where they're not and it seems to make sense resonates with us.
Mhm.
Hey.
Right.
Thank you David.
Your next question is coming from and Jack cake.
Financial.
Okay.
Well good morning, most of the questions have been answered.
And the first one is just a solvable.
Is there any gross angle to that story or is it sort of a more more presence.
Market presence for Ya.
Well clinical trials labeling is it's an area of growth in that industry, because obviously, the pharmaceutical industry grows by inventing and innovating new drugs.
And Uh huh.
Billions of dollars of spend every year on R&D and that eventually translates into clinical trials processes. The fewer group. So we get better growth rates in the clinical trials area than we do over time is in the coal business.
It can be slightly volatile driven by the start number of studies. If you have big Big studies going on one year. They didn't repeat every year. So you.
A little bit of volatility. So you could have 15% growth one year and 3% in the next.
It's a bit more volatile in that respect, but if you look at it over a five year time frame is typically growing faster than the core health care industry is growing up.
And more importantly, it's very profitable.
Yes, there was indeed, a great multiple for such a profitable operation.
And then second one is much smaller.
And the question is last couple of quarters I've noticed that deep.
Depreciation for were able he has probably twice as high as the Capex now that is an asset light business, but is there anything sort of to read into that or.
You sure that's right number then.
I E.
I'm reading some of the capital spending.
On the slide.
Yeah.
That's okay I can I can call a after that he.
He will give you an answer.
Exactly exactly thank you. Thank you so much.
Yeah.
Once again, if there are any questions or comments. Please press star one.
We have reached the end of our question and answer session and I will now turn the call over to Jeff Martin for closing remarks.
Okay. Thanks for joining the call. This morning, and look forward to talking to you again in November when will be calling you and from a board meeting would you be taking place in Europe . So we look forward to that.
Thank you very much.
Yeah.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.