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spk01: 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.
spk05: 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?
spk10: 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.
spk01: 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. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk00: One moment, please, while we poll for questions.
spk01: Your first question for today is coming from Ahmed Abdullah with National Bank of Canada.
spk03: Yes, good morning. Thanks for taking my question. On the CCL segment's volume moderating, are you able at this point to offset some of that volume pressure with some pricing?
spk10: Well, not really. I think we had pricing benefits last year driven by inflation. But if anything, this year things have moved deflationary. So most of our raw material procurement costs have declined this year over last year. So it's pretty unlikely we'll get any price benefit. That's different from our customers' experience at the moment. But they're going to be in the same boat at some point that we're in that's getting more price increases for their goods at Walmart and so on. It's going to get increasingly difficult as we go forward. So I think the answer to that is no.
spk03: Okay, thanks for that. And 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?
spk10: In which business?
spk03: At the CCL segment.
spk10: Yeah, so we're doing a lot of things. When 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. It's a self-correcting system we have here. But you always want volume to come back at some point. And we were quite pleased to see the order intake improve in July versus the prior year. That's the first time we've seen that for four or five months. So that's giving some indication that probably this is beginning to bottom out.
spk03: 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?
spk10: There's a lot of interest in RFID outside of the apparel space, both in general merchandise retailing, food 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 growth.
spk03: Okay. I'll pass the line. Thanks.
spk01: Your next question is coming from Stephen McLeod at BMO Capital Markets.
spk08: Thank you. Good morning, guys.
spk10: Hi, Steve.
spk08: 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 as price versus volume growth from last year?
spk10: Very difficult to do that, Steve, but it's a mixture of both. I can say that. There was certainly some price in there, and there's probably some volume, maybe 60% price, 40% volume. That's just a pure guess on my part, but it's certainly a mix of the two. It wasn't all volume-driven. It was a combination of price and some volume. The business that grew very strongly in volume last year was CCL Container. So that certainly had an impact on the CCL segment last year because the volume increase was well into double digits last year.
spk08: Okay, that's great. And then just thinking about Q2 and with the commentary around slower volumes at the core CCL units, design secure, and then your commentary around July sort of picking up. Do you foresee organic growth potentially returning back into positive territory in Q2?
spk10: Not sure yet. So we've only got July as a short month because of the July the 4th holiday. So you can't really make any predictions in Q2 in the month of July. So August is a bigger month with more work days in it. So we'll have to wait and see how things unfold. But the comps are much easier this quarter than they were for Q2. And that's certainly the case also in Q4, so we'll have to wait and see how things unfold. But currently, I'd be a bit surprised if we would have the same degree of shortfall in Q2, but we'll have to wait and see how things unfold. And it's the summer quarter, so 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 the time we get into Q4, we'd have a different viewpoint of that because in October and November, we would typically expect volume to be quite strong.
spk08: Right. Okay, that's helpful. Thank you. And then just on the, I just wanted to ask about the Falbo, if I'm saying that right, the Falbo acquisition. Yeah. 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 healthcare segment?
spk10: Yeah. Well, we've been in the clinical trials labeling field These are labels that are used by drug companies as they're getting drugs approved in the field for eventual use. It's a very high-margin business, and 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 this company's been the strong market leader in Europe for a long time. We've been trying to buy it for about 15 years, and we've had two or three attempts at it in the past. But bringing the two sides of it together, it really gives us global leadership with the drug industry in Europe and the drug industry in the U.S., and those two continents really drive most of the world's drug use. So if you're not with the R&D labs in AstraZeneca and Hoffman LaRoche in Europe, then you're missing out. So we have those relationships with the U.S. drug companies, and now we'll have it in Europe, too. So we're 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 we're very pleased to have finally got the deal through.
spk08: Great. And then maybe just finally, just along those lines, you've talked in the past about acquisitions and multiples coming down. Sounds like you're seeing some of that. Would you still characterize the landscape as competitive? being quite ripe in terms of your pipeline for acquisitions and multiples being in areas where you'd like to pay?
spk10: Well, I think the multiple situation is better, but of course, if you're a seller, you may not think that time is right at the moment. So this particular situation in Germany, we had a family, a family who had reached, reached a date where the founder of the company was at an age where he simply had to sell. and was just so concerned about that. But there are other sellers who maybe look at the market to sell right now and think it's not so good because the multiples are down. So it's a mixed thought. When multiples come down, sometimes so do opportunities.
spk06: Great. Thanks, Jeff. Appreciate it.
spk01: Your next question for today is coming from Michael Glenn at Raymond James.
spk09: Hey, good morning. Jeff, can you give an indication about how the pricing mechanisms work if you're thinking about a deflationary environment with label materials, how that works with customers?
spk10: Yeah, well, the label industry is highly transaction intense, so pricing is dynamic all the time. We don't really have any fixed price contracts in labels because the designs and what we're making are changing. in some cases two to three times per year. So there's always repricing opportunities to tenet those things through. And that works in an inflationary environment and also works in a deflationary environment. So I would say, I would characterize the volume drop in the HPC space was not very dramatic in labels in Q2. Most of the volume drop actually was in tubes. And there we certainly saw a lot of people advancing purchases last year to make sure they got what they needed. So the tube business was one of the HPC space was probably the business where we saw the biggest volume drop.
spk09: Okay. And then can you provide some color or thoughts surrounding the CCL secure business and your outlook and view on what's happening in the polymer currency market right now and the longer term outlook for that business.
spk10: Yeah, well, it's still growing. So we still see a lot of opportunities there because we've got a single digit market share globally. So a lot of paper still to convert to polymer. Use of currency may be counterintuitive to a lot of people listening to the call. It's still growing. despite electronic payment systems. So banknotes have survived, credit cards have survived, electronic funds transferred have survived, 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 currency isn't really driven by the retail payment systems. It's driven by broad use of cash in society, and it's still going up. But it's very lumpy. It depends on Whether you've got new issues, the timing of orders is always challenging. So it's a lumpy business. But in total, it's up $200 million for us in revenue. Has premium profitability. So we only have a quarter like we had last quarter. So it's probably six or seven million of the delta difference in profitability in Q2 was driven by the shortfall in CCL security.
spk09: And the inventory dynamics, Can you just hash that out in a little more detail, like how much access inventory is being held?
spk10: A lot of banks, there was a run on cash in the pandemic. So a lot of banks, central banks are the most conservative organizations on earth. So if they see any risk in not being able to have cash when consumers want cash, they always over-order. And particularly in the developed world, the United States, Australia, UK, Canada, all these central banks fill their bolts full to overflowing and then put the brakes on ordering, particularly in the last year or so.
spk09: Okay. Thanks for the information. Thank you.
spk01: Your next question is coming from Walter Spracklin at RBC Capital.
spk07: Yeah, thanks very much. Good morning, everyone. So, I guess going back to, first of all, the container business and the decision, or that's my question, was this an organic process where it just was growing well and is now developed into a larger segment? Or would you say it was on the part of a strategic decision that you made to grow that segment and And through their acquisition and internal expansion efforts, it got to the size that it did.
spk10: Well, there are no acquisitions in the CTO container space. It's all internal growth. And aluminum aerosols have been an area of growth in the consumer goods space, as have aluminum bottles. So the move away from plastic has benefited the aluminum bottle growth. in the food and beverage space, and then in the home and personal care space. So they've been the two main drivers of growth there. And we decided to invest in, particularly in our operations in Mexico, to take advantage of that and grow organically. Historically, it was a business that underperformed in the CCL segment. Today, it's above par compared to the other businesses. So returns on capital in the CCL container are better than in many other parts of that business today.
spk07: That's encouraging. And correct me if I'm wrong, I think in one of our meetings it was mentioned on your team that, in fact, containers is a good leading indicator of how the economy is doing. Am I right in remembering it that way? And if so, are you seeing any evidence?
spk10: Yeah, I think what we said, Walter, containers was historically in the past, if there was a downturn in the economy, The salon business always suffered, and the aerosol containers we make for that segment, typically, like in 2008 and 2009, we saw significant drops in salon demand. So the salons as a percentage of the total of that space has declined quite significantly. So even if that occurred, I think the growth in aluminum bottles is more than enough to offset it.
spk07: And I guess, are you getting any indications from the sales patterns within your container division to suggest, yes, we are going deeper into recession or we are, you know, maybe bottoming coming out? Is there any indication? And it doesn't have to be just container. Anything in your business to suggest? And I think I heard you say a few times that, you know, July is looking a bit better, but it's tough to look at July as a good indicator. But just any indicators from you? Yeah, that might suggest some bottoming here.
spk10: Yeah, I hope so. You know, probably the best indication we saw in July was the pickup in orders relative to July last year. So the first half order intake in 2022 was very strong. We saw it tail off in July last year. So this year it's better than it was in July last year. So we take some encouragement for that. And we know in some categories, our plastic tube business for sure, gained the benefit of supply chain stuffing this time last year, and we're paying the pain for that in the current quarter. So I would say bottoming out, hopefully. But we'll have to wait and see. I think the next couple of quarters, it'll bump along the bottom a bit, and then we'll see what 2024 brings.
spk07: That's great. And last question here on CapEx. The number you quoted, is there anything I know we're 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 anything that suggests that that would be larger or smaller than what we'd expect going forward?
spk10: Certainly not larger.
spk07: Okay. Okay. Excellent. Thank you very much. That's all my questions.
spk01: Thank you. Your next question is coming from David McFadden at Cormark.
spk04: Yeah, a couple of questions. Hi, how's everybody doing? Doing good. Just on the CCL segment, in the past release you called out significantly lower demand for labels and tubes in North America. I was just wondering, is that the primary driver for the organic decline at CCL, or are there some other big factors?
spk10: The two big drivers in the CCL space was the decline at CCL design. So they were down organically about in the high single-digit zone. The declines in the home and personal care and food and beverage space were very small, you know, very low single digits. Healthcare and specialty was up low single digits, and CCL Secure was down in the mid-teens.
spk04: Okay. And do you know when the banknote inventory will normalize, so CCL Secure would?
spk10: It's very, very difficult to pull out that. They make their own decisions, so we just have to be ready when they're ready.
spk04: Okay. And then just on Avery, am I correct to understand that Q2 benefited from the back-to-school ordering? It was like last year, what took place earlier?
spk10: No, I think it was just a repeat of last year. So we had the same experience in 2023 that we had, so they're like-for-like. We thought this year the order pattern would go back to the normal pattern, which is more in the July-August timeframe. But the retailers were 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 basically a repeat of what happened in 2022, which was a surprise to us, but a pleasant one. So the question really is about what happens in August with replenishments. That's the unknown. Last year we got no replenishment orders. We're waiting to see what happens this year. There's no point in asking the retailers. They simply don't know. So we'll find out the answer to that when we close the month of August.
spk04: Okay. And then on Inovia, you know, obviously tough quarter. Do you expect that repeat in Q3 or is it improving at all so far in Q3?
spk10: Well, we're very pleased with the sequential improvements at Inovia. It's better than we thought it might have been going into it, particularly in the American space. So we're really waiting to see what happens in the pressure-sensitive label materials industry. There's a couple of public companies that have released drops in the 30% magnitude in that industry, and that's our largest customer segment at Inovia. So Until they improve, we can't improve. So I think that's really all about pressure-sensitive materials that are in the label converter channel in inventory. Until that gets used up and the replenishment orders come in on a more normal basis, we'll be suffering along with them. But they're all calling out that they expect that to gradually improve in the second half of the year, and that seems to resonate with us.
spk04: Okay. All right. Thank you.
spk10: Thank you, David.
spk01: Your next question is coming from Ben Jekic at PI Financial.
spk06: Good morning. Most of the questions have been answered. I do have two, and the first one is just unfoulable. Is there any growth angle to that story, or is it sort of a more presence, market presence for you?
spk10: Yeah. Well, clinical trials labeling is an area of growth in that industry because obviously the pharmaceutical industry grows by inventing and innovating new drugs. And so the billions of dollars spent every year on R&D, and that eventually translates into clinical trials processes that fuel growth. So we get better growth rates in the clinical trials area than we do over time in the core business. It can be slightly volatile driven by the number of studies. So if you have big studies going on one year, they don't repeat every year. So a little bit of volatility. So you can have 15% growth one year and 3% the next. So it's a bit more volatile in that respect. But if you look at it over a five-year timeframe, it's typically growing faster than the core healthcare industry is growing at. And more importantly, it's very profitable.
spk06: Yes, that was indeed a great multiple for such a profitable operation. And then the second one is much smaller, and the question is, the last couple of quarters I've noticed that depreciation for Avery is probably twice as high as the CapEx. Now, that is an asset-like business, but is there anything sort of to read into that, or?
spk10: You sure that's the right number, Ben?
spk06: I think I'm reading from the capital spending on the slide. Yeah. That's okay. I can call after the call. Go ahead. We'll give you an answer to that. Exactly. Exactly. Thank you. Thank you so much. Yeah.
spk01: Once again, if there are any questions or comments, please press star 1. We have reached the end of the question and answer session, and I will now turn the call over to Jeff Martin for closing remarks.
spk10: Okay, thanks for joining the call so early this morning, and we'll look forward to talking to you again in November when we'll be calling you in from our board meeting, which will be taking place in Europe, so we'll look forward to that. Thank you very much.
spk01: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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