CCL Industries Inc.

Good morning and welcome to CCL Industries second 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. Sean Waschuk, 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 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, CCLIND.com, or on CDAR.com. Moving to slide three, our summary financial information. For the second quarter of 2023, sales increased 1.8% with 1% acquisition-related growth, 5.3% positive impact from foreign currency translation, partially offset by 4.5% organic decline, resulting in sales of $1.64 billion. compared to $1.62 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, an 8% decrease excluding the impact of foreign currency translation. Jeff will expand on the segmented operating results for our CCL Avery checkpoint and Anovia segments momentarily. Corporate expenses were up for the quarter due to 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 in 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 the 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-month period in 2022. 2023 included the results from six acquisitions completed since January 1st, 2022, delivering acquisition-related sales growth through the period of 1.9%. Foreign currency translation was a tailwind of 4.9% to sales, partially offset by 1.7% organic sales decline. Moving to slide four. Basic earnings per Class B share were $0.88 for the second quarter of 2023 compared to $0.91 for the second quarter of 2022. Adjusted basic earnings per Class B share were $0.90 for the 2023 second quarter compared to adjusted basic earnings per Class B share of $0.94 for the second quarter of 2022. The change in adjusted basic earnings per share to $0.90 is principally attributable to an increase or decrease in operating income of $0.09, partially offset by $0.05 positive foreign currency translation. All other items netted to zero impact. Moving to slide five, free cash flow. 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 the 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 30, 2023, free cash flow from operations increased approximately $21 million compared to the 12 months ended June 30, 2022. 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 six, our cash and debt summary. Net debt as at June 30th, 2023 was $1.56 billion, an increase of $38.6 million compared to December 31st, 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 1.24 times unchanged from December 31st, 2022. Liquidity was robust with $738 million of cash on hand and US $0.9 billion of available undrawn credit capacity on the company's revolving bank credit facility. The company's overall average finance rate was approximately 3% at June 30th, 2023 compared to 2.9% at December 31st, 2022. reflecting 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 of capital spending for the year, $252 million net of disposals at the halfway point. excluding right-of-use assets, and we are planning to spend about $440 million for the year as a whole. Slide 8, I wanted to give you a bit of color on some investment highlights of late, partly on CapEx and partly on acquisitions. I wanted to just talk briefly a little bit about CCL Container, which has been sat inside our CCL segment for a number of years now. It used to be a separate reportable part of the business, revenue in that part of the company is now past $300 million with 20% EBITDA margins. We spent $30 million in CapEx in that business in the first half of 2023 and are planning further expansion in 2024, especially in Mexico. So I thought that was just an interesting adjunct to give you a bit of color on what's been going on inside the business in those CapEx numbers. And the two acquisitions we announced just before the earnings, Faubel in Germany and It's the largest acquisition we've ever made in the healthcare space. It creates global leadership in clinical trials labeling. We've always been in that business in quite a big way in the United States, and this really gives us a clear leadership position as this company is the clear market leader in Europe. Imprint Energy is a technology company that we acquired out in Silicon Valley that's developed some interesting battery technology. It's printed batteries using the technologies we have in our converting businesses. that allows us to make labels that would send signals without the need for a scanner. So like an RFID label, but acting more like it's a cell phone without the need for any kind of scanning device. Very important to track and trace applications for high-value or sensitive goods. And just to point out, the last 12 months we've completed eight acquisitions for approximately $370 million. Page nine highlights the CCL business. Start off by saying that comps for this quarter were always going to be difficult for us. 10.9% growth reported in Q2 2022. In the middle of the supply chain crisis, a lot of customers ordering excess inventories. And we certainly faced that in this current quarter. 3.3% organic sales decline. Low single-digit gains in Europe and Latin America, but offset by a low single-digit decline in North America. and a double-digit decline in Asia-Pacific, very much driven by the situation in CCL Design and CCL Secure. We had flat reported profitability in home and personal care and food and beverage spaces, a small decline in healthcare and specialty versus a very strong tri-year, although sales were up in H&S for the quarter, and a slow quarter in currency, part offset by strength in passport components and CCL Secure. At CCL Design, we had gains in automotive, but they were more than offset by the weekend markets that have been reported by many electronics OEMs, and it especially impacts our business in China. Moving on to slide 10, there's a good quarter in our joint ventures. I won't say any more than that. Slide 11, results for Avery. We had a repeat of the early back-to-school season in 2023. We enjoyed it in 2022, so the comps were sort of like-for-like in that regard, and we continue to see strong growth in direct-to-consumer channels, solid results internationally. Horticultural business is seasonally loss-making in this quarter. And 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 at Avery. Slide 12, results for Checkpoint. Very good quarter. It was MAS business. was strong on new business winds, especially in Europe. Price increases we implemented last year to cover the supply inflation definitely kicked in, and we've seen some easing of that this year, particularly in intermodal freight costs from China, which is more or less back to normal life now compared to the challenges we faced this time last year. In the apparel labeling business, our profitability improved. That's despite retail supply chains. customers in that space focused on managing excess inventory, really all driven by growth of RFID. Slide 13, better quarter at Inovia than we expected. Volume was still down in the pressure-sensitive labor materials industry. There's a number of public companies in that space been reporting 25% to 30% drops in their volume, and we certainly saw that during the quarter. And we also had some price-driven deflation particularly in North America. Not so much in Europe, but particularly in North America, where residents have been dropping faster. There was some price impact in the sales drop there. But profitability improved sequentially on easing inflation, particularly energy inflation, and very good cost controls right across the business. So we're quite pleased to see the improvement in the area. Slide 14, the outlook commentary. Our core CCL business units face slower volumes still than many consumer packaged goods customers. We did see some pickup in orders in July. So in Q2, we saw some softening of orders sort of progressively through the quarter. That did sort of reverse a bit in July. Not everywhere, but in a number of places. But we're still results of many of our customers in that space reporting low to mid single unit volume declines. And once we see that, that obviously at some point translates back to us. For CCO design, we do expect to see some modest improvement by Q4 as the comp sees, and computer industry demand slowly recovers, and we had some new business wins to kick in. So again, at CCO design, we saw in the electronic space our first improvement in order intake in July versus the prior year, so that's quite encouraging. CCO secure demand picture remains unchanged for the second half, although again, we have seen some pickup in orders in the month of July. So maybe that'll change by the time we get into Q4. We'll have to wait and see. Aries, we expect to be solid. The only unknown really is the back-to-school replenishment. That's always something we wait on every year. We got none last year. We're waiting to see if we get any 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 Inovia's volume picture to extend to change as the labor materials industry recovers its own volume as they're publicly announcing they plan to do as the second half rolls through. So we hope to be participating in that. And inflation in that space remains very benign. The FX tailwind is expected to continue at current exchange rates, so that should also be our friend in the second half. So with that, operator, we'd like to open up the call for questions.