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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good 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. Geoff Martin, President and Chief Executive Officer; and joining him is Mr. Sean Washchuk, Senior Vice President and Chief Financial Officer. Please go ahead, gentlemen.
Thank you, Holly, and good morning, everyone. Thanks for joining us on our first quarter investor update. We will begin right away. I'll turn your attention to Slide #2, 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, particularly the section Risks and Uncertainties. Our annual and quarterly reports can be found online on the company's website, cclind.com or sedar.com.
Moving to Slide 3, our summary of first quarter. For the first quarter of 2023, sales increased 8.6%, with 1.4% organic growth, 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.
Operating income was $257.7 million for the 2023 first quarter compared to $228.6 million for the first quarter of 2022, an 8% increase, excluding the impact of foreign currency translation. Geoff will expand on the segmented operating results of the CCL, Avery, Checkpoint and Innovia 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 first quarter, excluding the impact of foreign currency translation, increased 6% compared to the same period in 2022. 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. 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.
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 first quarter was $166.4 million, up 5%, excluding foreign currency translation compared to the first quarter of 2022.
Moving to our earnings per share slide. Basic earnings per Class B share were $0.94 for the first quarter of 2023 compared to $0.84 in the first quarter of 2022. Adjusted basic earnings per Class B share were $0.94 for the 2023 first quarter compared to adjusted basic earnings per Class B share of $0.85 for the first quarter of '22. The change in adjusted basic earnings per share to $0.94 is primarily attributable to an increase in operating income of $0.08, $0.05 due to foreign currency translation, offset by a $0.02 impact from higher finance costs, $0.01 from higher tax rate and $0.01 from increased corporate expenses.
Moving to our free cash flow slide. 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. The decrease in cash flow from operations of $54.6 million is primarily due to increased working capital and capital spending in the first quarter of the year compared to 2022. For the 12 months ended March 31, 2023, free cash flow from operations increased $36.5 million compared to the 12 months ended March 31, 2022. This comparative improvement is primarily attributable to an increased earnings, better competitive working capital management, offsetting an increase in net capital expenditures.
Moving to our cash and debt summary slide. Net debt as of March 31, 2023 was $1.59 billion, an increase of $62.9 million compared to December 31, 2022. This increase is principally a result of lower cash balances at Q1 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 1.25x, virtually unchanged from 1.24x reported at December 31, 2022.
Liquidity was robust with $787 million of cash on hand, $0.9 billion of available undrawn credit capacity in our company's revolving credit facility. The company's overall average finance rate was 3% at March 31, 2023 compared to 2.9% at December 31, 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. Geoff?
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 Innovia and the new German films plant and at Checkpoint, where we're building a new apparel label supply plant in Turkey.
On to Slide 8, highlights for CCL. Mixed organic growth picture, double-digit gains in Europe, but against the 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 CCL Design business, which I'll come to in a minute. Strong results in the Healthcare & Specialty and CCL Secure business, solid in Home & Personal Care and Food & Beverage. And the CCL Design, we had gains in the Automotive space, is more than offset by very weak markets in electronics, especially in China, and particularly in the PC and server categories of the electronics space.
Page 9 has the highlights for joint ventures, flattish quarters and foreign exchange challenges in some of the jurisdictions.
Slide 10, results for Avery. 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 destocking in a few of our larger distribution channel-based customers in North America. And during the first quarter, they've been probably cut back a bit too much of been rebuilding inventory. So that really fueled growth in North America on top of continuing strong growth in the direct-to-consumer space. International results were solid, and we have good acquisition contributions, first time from Floramedia in Europe and Adelbras in Brazil for the Q1 period.
Turning to Page 11, results for Checkpoint. MAS business was strong on new business wins. We got the benefit of some price increases. And I'm very pleased to say that supply inflation that was about from most of last year, including freight costs from China where we made most of these products and shipment to our DCs around the world at ease quite considerably. Apparel labels results were pretty good, but we did see some supply chain focused on managing excess inventory, so that softened sales a bit, but RFID growth continues unabated.
Slide 12, results for Innovia. Volume decline on double-digit drops in the label materials industry, which a number of companies in that space have made public announcements about 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. 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 resin inventory we had in the Americas, which helped Q4. So Q1 was much better in the Americas.
Slide 13, some comments on the outlook. Core CCL business as mentioned in the press release, we have seen some slowing. We described the outlook is kind of stable, but it has certainly slowed in the last couple of quarters in the core Home & Personal Care, Food & Beverage and Healthcare & Specialty space.
With CCL Design, we expect some recovery in Q2 as China has a full quarter. So Q1, we had still had some impact of the lockdowns then the Chinese New Year. So Q1 was a particularly low quarter for them, and we will have a normalized quarter in Q2. So we will see some sequential recovery from the results we saw in Q1. We believe CCL Secure, although profitable will be below the prior year quarter in 2022. And at Avery, the back-to-school season started very early in the second quarter last year, actually in May due to many retailers being concerned about supply chain there is. We do not think that will repeat in 2023. So that will create tough comps for us in Q2 and easier ones in Q3.
At 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 MAS outlook continues to be good. And also with easier comps than this time last year, we were struggling with inflation and transportation costs.
I don't believe the Innovia volume picture will change much in the coming quarter. Label materials industry demand is still very low, a lot of inflation in the system, but we will benefit from inflationary pressures and inventory cost squeezes which are both easing. And like Q1, if exchange rates stay as they are, we would expect a modest FX tailwind in the coming quarter.
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. [Operator Instructions] Your first question for today is coming from Ahmed Abdullah at National Bank of Canada.
Yes, thank you for taking my question. At the CCL segment, overall, very solid results. But you highlighted some customers working through inventories at Home & Personal Care in North America, specifically in labels and tubes. Can you elaborate further on that? And overall, for the segment, how are inventory levels at your customers' position for the year?
Well, we don't have that much visibility on that, to be frank. We don't pay too much attention to inventory of label because it doesn't take up a lot of space. And economically, it's pretty trivial to most of the customers we have in that space. But as you've probably seen from most of the results from the CPG sector, everyone's been reporting revenue rises and volume declines.
So 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 was more difficult. 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 is not going to be easy for the next couple of quarters in our opinion.
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?
Well, they cut them back probably too much and there was a bit a huge cutback last year. There are a couple of very large distributors in the United States and they probably cut back too far and then rebuild. We have -- we do have good visibility into that situation, but the -- 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 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. 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?
Well, the seasonality in Q1 is positive because it's in the horticultural space, you ship 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 Floramedia last year when we were going through that peak period. We did have them this year, so that's the main driver for that. And they make most of their profits for the year in that sort of November through March time frame.
All right, thank you for the color. That's it for me.
Thank you.
Your next question for today is coming from Stephen MacLeod at BMO Capital Markets.
Thank you, good morning guys.
Good morning, Steve.
Good morning. 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, but there are lots of puts and takes in there. So I couldn't really give you much more insight than that, Steve. But January and February were comparatively stronger than March.
Yes. 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?
Well, we expect there to be some output recovery. So we know in Q1, some of the players in that space have their output constrained by the COVID challenges in China that were particularly prevalent in the month of January, and we went into Chinese New Year.
So we had a COVID January and then 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% for everybody. Apple, Dell, HP, all the players in that space are reporting 25% to 30% drop. So that was the big factor. And then the impact of service for cloud computing, so there's been also an area that's quite difficult. Cellphones are kind of flattish. But we do expect -- we do believe there's some need to get inventory rebuild and get supply chains working better again. So we do expect to see some sequential improvements in Q2 driven by just the need to produce.
Okay. That's helpful. Thank you. And then maybe just finally, on the last call 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?
No, I would say I wouldn't have changed my comments any more than we said at this time last quarter, Steve.
Okay, that's great. Thanks, Geoff.
Your next question is coming from Walter Spracklin at RBC Capital Markets.
Yes, thanks so much operator and good morning everyone.
Good morning, Walter.
Yes. Maybe, Geoff, 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 on transportation was easing. And is that fair extraction from your commentary? And also, could you -- go ahead.
[Indiscernible].
Yes, I was just going to say and also within your product segments, you have a few leading indicator segments 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, from things we source from China, 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 inventories that we were this time last year.
So that's definitely helping. And -- but it's hurting -- that factor is also hurting some businesses like at Innovia, the label converting channel has been stuffed with label materials for most of last year. Now the capacity challenge in that industry has eased. That means that Innovia has got match demand for its base films than it had last year. So there's a double-edged sort that most of these situations we're in.
I think economically, no question. I think the consumer is challenged right now. So I think most of the CPG companies we do business with have found it relatively easy to get the 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. And -- but our plastic tube business has been quite weak. So quite why there would be those differences between those two categories that are servicing the same customers as although it was clear to us and we definitely noticed some categories weaker than others.
On the point of easing inflation, are you getting pressure then to bring your pricing down in accordance? Or can you hold pricing a little bit and get some margin as a result of that lower inflation?
Yes, it depends on the industry, Walter. Some industries, for example, our aluminum can business at Innovia, where we have pass through pricing. So there just flows right through. Other spaces like the pharmaceutical sector, it's more possible to keep some of it. So kind of a mix picture 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 back-to-school having happened earlier. Just curious, though, I mean, you've always had a much larger second quarter than your first quarter seasonally, even notwithstanding the back-to-school comp. 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?
Comparing it to Q2 last year. So Q2, if you look at the results of Avery for Q2 and Q3 last year, you'll see we had a bump up in Q2, and then a disappointing Q3. So we'd expect those situations to kind of reverse this year.
Okay. Actually, one more question on the margin seasonality as well in your CCL Core business. This is the reverse, you normally have a very strong first quarter margin, and it tails off in second and third. Again, is there any reason why that seasonal pattern wouldn't apply here? Or should we consider some other factors?
Yes, I would say, CCL space should be not the normal pattern.
Okay. Perfect. Okay. That's all my question. Thanks very much for the time.
You're welcome.
Your next question for today is coming from Daryl Young at TD Cowen.
Good morning everyone. Maybe just following on Walter's train of thought on the macro and potential areas of weakness. I'm just wondering if some of maybe your premium or nice to have products and maybe even the EcoFloat product, if you're seeing any weakness there or signs of customers maybe trading down or being more price conscious?
No, I wouldn't say that. We haven't seen -- the interest in premiumization is still rampant, I would say. But because I think all the CPG companies still see the premium consumers is the easiest way to get revenue growth. So we're not seeing any lack of interest in that at all. It's really more about the volume in the middle tier. That's probably where we would see some -- we see more signs of weakness, but not at the premium end.
Okay. 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 the healthy market.
The Printable Media business, which is the highest margin business, we have an area of any category had double-digit growth in the quarter, which is pretty unusual. And it's the highest margin business we have. So that was a big factor. The second one is the Floramedia acquisition. So we didn't have that in our comps last year. We had it this year, and it's the highest margin quarter for the year. So those were the two big drivers in the quarter at Avery.
Right. And then on Innovia, you gave some good color in terms of the inventory levels in the system and the destocking that needs to happen. But is -- would you see it being an end market demand softening? Is that partly...
It's not end market demand, Daryl. It's the label converter channels. So Avery Dennison and UPM, who are the two largest suppliers to the label converting channel, 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. 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 buildups in the year of 2021 when there was a release line at [indiscernible] in the industry, which compounded things, and then when things normalize as they have done so far this year, and everyone's eating the inventory they bought over the last year, 18 months. And so until that cycle ends, it has nothing to do with the consumer packaged goods industry to do with the raw materials that we use in our factories and the labor converted channel in general.
Got it. That's great color. I'll get back in the queue. Thanks very much.
Your next question for today is coming from Michael Glen at Raymond James.
Hey, good morning. Geoff, sorry to make you repeat things, but I just want to make sure I understand completely. Like for labels, I'm thinking about operating margins through the balance of '23 on a year-over-year comp basis. Should it -- is it likely to be down through the balance of the year? Is that the communication?
No, we're not saying that. But just -- I think what we're saying is that we see some signs of slowness in the level of order intake, not in all categories, in some categories. What the impact of that will be on our operating margin is yet to be determined. So we're not giving guidance on that. We're just letting you know it shouldn't be a surprise to anybody the CPG space volume in certain categories is weaker than it was this time last year. And that's -- I don't think that would surprise anybody, and that's what we're seeing. But what impact that has on us financially in the next few quarters remains to be seen.
Okay. And then in CCL Secure, can you give some information around the volume outlook for that business?
I can tell you, we expect it to be profitable, but not as profitable as last year in the coming quarter.
Okay. On Innovia segment, is there any way to -- the margins bounce around a fair amount. Like are you able to give sort of a target margin where you think that business should ultimately rest out?
No.
Okay. And then any guidance that you can provide on the corporate expense line for this year?
Sean?
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 my question.
You're welcome.
Your next question is coming from David McFadgen at Cormark.
Hi, everyone. A couple of questions.
Good morning, David.
Good morning. First of all, just on Checkpoint, if the retail environment doesn't start to improve, is there anything that would start to maybe drag down MAS and potentially RFID as well?
Well, I think one of the things you have to bear in mind about MAS, its core mission in life is to improve shrink at retailers. And in the last two years, retailers have been so buoyant with demand through the pandemic. The issues around shrink kind of went on the back burner. Now the retail environment is getting more challenging, and their margins are getting more pressurized, reducing shrink in the stores become -- gone up into the minds of most retailers much -- in a much higher place than it would have been in the last two years. So that's been the pleasant surprise from the retail market. Tough thing we've seen some more interest globally actually in all regions of the world in taking more care of inventory in store than they were in the years of '20 through 2022.
Okay. All right. And then just on Innovia, at what point in time will you have worked off of the high cost inventory?
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 costs 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 as soon as volume improves, then we should see return back to sort of normal profitability there, given the high cost of return to sustain...
The Americas had a pretty decent quarter actually in Q1, and that's continued in the month of April. The challenges have all been in Europe, where the label industry -- where we're more exposed to the labor industry than we are in North America. So we're more deeply exposed to the label industry and where the drops have been the most stark in the label materials space.
Okay. And then just a clarification on Avery. So obviously, you benefited in Q1 from the inventory rebuild. But is the inventory rebuild done then? I think you said that, right? I just wanted to clarify that.
Yes. It's -- we're a small category in these multi tens of billions of dollars of retailers. So the amount of inventory of our stock they have is financially immaterial to them. So it's not untypical to have some volatility. And I have general destocking programs we get impacted. If they cut to 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 probably the best way I can answer it for you.
All right. Okay. Thank you so much.
No problem.
Your next question is coming from Ben Jekic at PI Financial.
Good morning. I have one question. And that is with -- it says Europe is up high single-digits in the CCL segment. And in the past, Geoff, 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 you it was up double-digits, not single-digits, but it also had a soft prior year. So the Q1 numbers in 2022 were pretty soft. So the comps were pretty easy. That's really why we saw the double-digit gain this year.
Okay. Thank you.
No problem.
Your next question is a follow-up question coming from Stephen MacLeod at BMO Capital Markets.
Thank you. I just have two follow-ups. One is just on Innovia, putting together the Europe and the Americas, would you expect to see potentially some like volumes maybe more flattish in Q2 and into the balance of the year? Or do you still expect to see declines in Q2?
Yes. We would expect the volume situation, the label materials industry, I mean the players -- two of which are public in that space, great commentary 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 -- and it's more marked in Europe than it is in North America. That's certainly what we see. And so that's -- we'll see what really transpires as Q2 unfolds. But the labor 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.
The one thing I would say on the profitability side, Stephen, when we get into the summer months of this year, you remember this time last year, in Q3, we had those huge spikes in energy in Europe. We hopefully won't face that challenge this summer, and we'll have a much easier situation on the cost side than we had this time last year.
Right. Okay. That's helpful. Thanks Geoff. 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 number on where that RFID business fits?
No, we're not really ready to do that. Certainly continue to grow double-digits, I can tell you that. And we see quite some new applications appearing outside of apparel. So we've taken some of our first orders in industries outside of apparel in that space and lots of interest in other areas of the economy. So -- and our inlay business is just firing on all cylinders. So -- and we expect that to continue in the coming months.
Great. Thanks Geoff. Thanks Sean.
Okay.
[Operator Instructions]. There are no further questions in queue. I will now turn the call over to Geoff for closing remarks.
Thank you very much, Holly, and thank you, everybody, for joining the call today. We look forward to seeing you this summer and telling you about how things unfold in the coming quarter. Thank you very much.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.