Earnings call: CCL Industries reports strong Q2 growth, cautious outlook

CCL Industries Inc. (CCL), a global leader in specialty label and packaging solutions, has reported a robust performance for the second quarter of 2024, with a notable 12.2% increase in sales, reaching $1.85 billion. This growth was attributed to organic expansion, strategic acquisitions, and favorable currency translations.

Operating income saw a substantial rise of 25% to $303.5 million, excluding currency impacts. The quarter’s net earnings were positively influenced by a significant revaluation gain, totaling $279.5 million. The company’s financial health remains solid, with a leverage ratio of 1.23x and substantial liquidity, including cash on hand and available credit facilities.

Key Takeaways

• CCL Industries’ Q2 sales rose to $1.85 billion, a 12.2% increase year-over-year.
• Organic growth contributed 8.5%, acquisitions 3%, and foreign currency translation had a positive impact.
• Operating income increased by 25% to $303.5 million, excluding foreign currency translation effects.
• Net earnings were boosted by a revaluation gain, reaching $279.5 million.
• The six-month performance also showed strong growth in sales, operating income, and net income.
• The balance sheet remains healthy with a net debt of $1.76 billion and a leverage ratio of about 1.23x.
• The company has $666 million in cash and $907 million in undrawn credit capacity.

Company Outlook

• CEO Geoff Martin expressed uncertainty about the performance in August and September due to unpredictable market conditions.
• Strong growth is expected in the Asia Pacific and Latin America regions, driven by the recovery of the CCL Design business and the strength of the CPG industry in Latin America.
• The company plans to continue its share buyback program as the net debt-to-EBITDA ratio decreases.
• CCL Industries is focused on bolt-on acquisitions as part of its M&A strategy.

Bearish Highlights

• The company is cautious about the upcoming months, acknowledging the unpredictability of market conditions.
• The China plant completion did not significantly contribute to the quarter’s results.
• The Avery segment’s performance for the back-to-school season is difficult to forecast due to volatility and short duration.

Bullish Highlights

• The Checkpoint business saw a 40% growth, mainly driven by RFID sales, and the company has added capacity to support this rapid industry growth.
• The CCL segment reported better margins due to strong volume, and positive growth is expected in Q3.
• The recovery of the CCL Design segment is contributing to the overall performance.

Misses

• Specific details about total RFID sales for the quarter were not provided.
• The impact of the Pacman integration or market share in the label business was not detailed.

Q&A Highlights

• The CEO could not quantify the contribution of CCL Secure to organic growth in the last quarter.
• The flow-through timing from CPG orders and promotional activity is tactical and customer-dependent, making it challenging to predict.
• New client wins in the RFID business were both from competitors and new adopters, but specific details were withheld.

In conclusion, CCL Industries’ second quarter of 2024 showcased strong sales growth and a significant increase in operating income, with the company maintaining a solid balance sheet. Despite the positive performance, the CEO conveyed a cautious outlook for the latter part of the year due to market volatility. The company’s strategic focus on organic growth, acquisitions, and capacity expansion in high-growth areas like RFID technology positions it for future success, while it continues to monitor market conditions closely.

Full transcript – None (CCDBF) Q2 2024:

Operator: Good morning, and welcome to the CCL Industries second quarter investor update call. [Operator Instructions]. 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.

Geoff Martin: Good morning, everybody, and welcome to our second quarter call. I’m going to hand the call over to Sean Washchuk.

Sean Washchuk: Thanks, Geoff. I’ll draw everyone’s 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 2023 annual report, particularly the section risks and opportunities. Our annual and quarterly reports can be found online at the company’s website cclind.com or on sedarplus.ca. Moving to slide 3, our summary of financial information. For the second quarter of 2024, sales increased 12.2% with 8.5% organic growth, 3% acquisition-related growth, and 0.7% positive impact from foreign currency translation, resulting in sales of $1.85 billion compared to $1.64 billion in the second quarter of 2023. Operating income was $303.5 million for the 2024 second quarter, compared to $242 million for the second quarter of 2023, a 25% increase excluding the impact of foreign currency translation. Geoff will expand on our segmented operating results for our CCL, Avery, Checkpoint, and Innovia segments momentarily. Corporate expenses were up for the quarter due to higher discretionary expenses and short-term variable compensation versus the prior year quarter. Consolidated EBITDA through the 2024 second quarter excluding the impact of foreign currency translation increased 21% compared to the same period in 2023. Net finance expense was $18.6 million for the second quarter of 2024, compared to $19.2 million in the 2023 second quarter, primarily due to an increase in interest rates on the company’s cash balances, partially offset by quarterly interest expense. The overall effective tax rate was 18.8% for the 2024 second quarter, compared to an effective tax rate of 24% recorded in the second quarter of 2023. The decline in the effective tax rate is due to the noncash, nontaxable $78.1 million in valuation gain we recorded on the legacy 50% interest in the Pacman joint venture acquisition. Excluding the gain, the effective tax rate was 24.5%, comparable to the 2023 second quarter. The effective tax rate may change in future periods depending on the proportion of taxable income earned in different tax jurisdictions at different rates. Net earnings for the 2024 second quarter were $279.5 million compared to $155.9 million for the 2023 second quarter, albeit these net earnings included the $78.1 million revaluation gain. For the six-month period, sales, operating income and net income increased 8%, 17% and 47%, respectively, compared to the same six-month period in 2023. 2024 included results from nine acquisitions completed since January 1, 2023, delivering acquisition-related sales growth for the period of 3%. Organic growth was 5.3% and foreign currency translation was a tailwind of 0.4% to sales. Moving to the next slide, earnings per share. Basic earnings per Class B share were $1.56 for the 2024 second quarter, compared to $0.88 for the 2023 second quarter. Adjusted for $0.01 of restructuring and other expenses and $0.44 for noncash revaluation gain, adjusted earnings per Class B share were $1.13 a record, an improvement of 25.6% compared to $0.90 for the second quarter of 2024. The change in adjusted basic earnings per share of $0.23 is principally attributable to improvements in operating income accounting for $0.24, partly offset by an increase in corporate costs of $0.01. Moving to the next slide. Free cash flow from operations. For the second quarter of 2024, free cash flow from operations was an inflow of $118.8 million almost equal to $120.1 million posted in the 2023 second quarter. For the trailing 12 months ended June 30, 2024, free cash flow from operations was $567.8 million compared to $523.8 million for the comparable period of 2023. This change is primarily attributable to an increase in net capital expenditures offset by an increase in cash provided by operating activities, which was generated by improved adjusted earnings. Next slide. Net debt as of June 30, 2024, was $1.76 billion, an increase of $252 million compared to December 31, 2023. The increase is principally a result of funds used for capital expenditures, business acquisitions, and our share buyback. The total share buyback for the second quarter of 2024 was shares for $40.6 million. Although the company’s debt increased, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.23x, up from 1.13x reported at the end of December 31, 2023. Liquidity was robust, was $666 million of cash on hand and USD907 million of available undrawn credit capacity on the company’s revolving bank credit facility. The company’s overall finance rate was 2.8% at June 30, 2024, same as December 31, 2023. The company’s balance sheet continues to be well positioned as we move through fiscal 2024. Geoff, over to you.

Geoff Martin: Thank you, Sean, and good afternoon or good morning, everybody. Good afternoon because I’m calling you into the call today from France. On slide 7, highlights of our capital spending for the quarter and the year so far, $304 million, a little bit front-loaded this year, but we expect the year to come out in the $450 million range. Moving on to slide 8. If we highlight the things we’ve been investing in recently, we exited our partner in our Middle East JV as Sean mentioned during earlier in the call, partly successful venture over the last 12 years, sales up 2.5x, earnings up 4x, a very important reason for many of our customers. In China, we completed an investment in solvent adhesive and top coating and special film bringing key material science capability to CCL design, I’ll answer questions on that during the Q&A. And in Montreal, we bought the second building up there to significantly expand our Canadian healthcare operations. Slide 9 highlights the CCL segment, very strong quarter, 9% organic growth, but compared to a 3% decline in the prior year period, in single-digit growth in North America and Europe, double digit in Asia Pacific and Latin America. Improved profitability in all end markets, most notably at CCL Design, food and beverage, and home and personal care. Moving on to slide 10, the numbers for our joint venture. This now excludes one month in the second quarter of the Pacman-CCL joint venture as when the numbers look slightly squiffy, but results continue to be strong for the year-to-date numbers. Moving on to slide 11, results for Avery. With an early start to the back-to-school season that helped in the organizational products category and our direct-to-consumer badges and cards also drove performance in North America, we had very solid progress in Europe and Latin America, Australia was a little bit soft and horticultural markets continue to improve in the US and in Europe. Slide 12 highlights for Checkpoint, very strong quarter, very strong growth. Most of the growth came in the apparel labeling systems business, which was up 40%. And aided by RFID wins and retailers rebuilding inventories driving significant profit improvement, too, but the MAS business was also very solid. Slide 13 highlights for Innovia. Our sales growth this quarter was entirely driven by the label materials industry recovery, especially in Europe. So we did have the operational transition from Belgium to the UK, and Australia. It went very smoothly, but we did reduce production temporarily pending customer qualification. But that’s now all complete and the Belgium operation is pretty much closed. Ecofloat is now profitable in Poland, and our sales there continue to build. Some comments on the outlook. Our CCL comps will harden in Q4 for and HPC and food and beverage, but they ease a little bit in the second half overall for health care. We do expect CCL Design recovery to remain strong. CCL Secure will slow in Q3, but we hope will improve a little bit in Q4. Steady Avery progress and checkpoint RFID growth is expected to continue. And of course, we’ll have the benefit in the second half of the operational savings from the Innovia transition. Foreign exchange, which will as it was in the current quarter, will be benign for the second half of the year. So with that, operator, we’d like to open the call for questions.

Operator: [Operator Instructions]. Your first question for today is coming from Walter Spracklin with RBC Capital Markets.

Unidentified Analyst: Hey, good morning. It’s [indiscernible] on for Walter. On Checkpoint, you noted solid organic growth trends in ALS from RFID and retailers for ordering. So does that continue in the back half? Or have we kind of seen a peak here in terms of managing supply chain disruptions?

Geoff Martin: Not sure yet. We’ll have to wait and see how the current quarter unfolds. It was strong again in the month of July, I will tell you that. But we’ll have to wait and see. It’s not transparent to us how much the forward ordering impact might be from the Red Sea impact. But we know there is some, exactly how much is hard to quantify.

Unidentified Analyst: Okay. That’s fair. And then switching to Avery, solid profitability growth this quarter. Given the back-to-school season was a bit earlier this year, do you expect a large sequential decline in margin in Q3, kind of similar to what we saw in ’22 and then kind of move to a more normalized margin in Q4?

Geoff Martin: Hard to say because back-to-school is always very uncertain when the replenishment orders come in. Again, we had a good July, I can tell you that. And we’ll hope to see what August and September brings.

Operator: Your next question is from Hamir Patel with CIBC.

Hamir Patel: Hi, good morning. Geoff, the CCL segment organic growth of 9% looked very strong even when you factor in, I think, the year ago was off 3%. Do you think you could sustain that high single organic growth for the CCL segment in Q3? I know you pointed out to a steady sequential demand because the year-over-year comps for Q3 look pretty similar as Q2?

Geoff Martin: Well, July was — the cadence for Q2 was a very strong April, and we had a quite strong May and then June was somewhat in between. What I can tell you is July was started like Q2, did very strong. We’ll have to wait and see what August and September bring and so they’re in an uncertain world. And it’s hard to comment beyond that. But we be surprised we didn’t have solid organic growth, but whether it’s 3%, 5%, 7%, 8% — very hard to say at this junction.

Hamir Patel: Fair enough. And Geoff, in the Checkpoint business, the 40% growth in ALS, how much of that was RFID?

Geoff Martin: Most of it.

Hamir Patel: That’s good. And Geoff, are you able to clarify what your total RFID linked sales are currently how they kind of grew in the quarter because I know you’ve got –?

Geoff Martin: We can’t get into that kind of color on the quarter, I’m sorry.

Hamir Patel: Okay. And maybe —

Geoff Martin: The 40% is strong. It’s on a relatively low base. So I think you have to keep that in mind. We’re not on a $1 billion business or anything like that. So it’s total company RFID sales are in — I think we’ve said publicly in the $200 million, so that gives you a frame of reference.

Hamir Patel: Okay. Fair enough. And Geoff, with the new capacity, how much additional runway does that give you to fill out?

Geoff Martin: Well, the industry is growing pretty rapidly. I think it’s growing in the 15% to 20% zone. So we’re adding capacity that will allow us to at least grow in that space, maybe take a bit of share here and there. So that’s currently our plan. So we currently have capacity in place to make in place or about to be in place to make $5 billion in lease, and we expect to expand on that again in the year 2025.

Operator: Your next question for today is from Ahmed Abdullah with National Bank of Canada (OTC:).

Ahmed Abdullah: Thanks for taking my questions. And congrats on a solid quarter. Looking at the CCL segment results, how much of the better margin was driven by mix? And is there perhaps any onetime orders such as those seen in CCL Secure that we’ve seen in the past, bumping up margins?

Geoff Martin: No, I wouldn’t say there was any unusual orders in that regard. I think the volume was strong. So that’s probably the main driver. I wouldn’t say there’s anything particularly unusual in the mix. So I think it’s more a function of the strong volume.

Ahmed Abdullah: Okay. That’s great. And in the outlook of last quarter, automotive was like expected to face some pressure in Q2. The general auto segment is facing that pressure. But from these results, it seems that you’re doing a bit better than the general auto industry. Is that a fair assessment? And —

Geoff Martin: We’re a very small player in the automotive industry. Our automotive business is barely $300 million. So you have to keep that in context. So I don’t think it can be compared with part suppliers of scale in the auto industry. So if we get an order for something new and unique that can bump up our organic growth and the reversal also applies, the business was only modestly up there in the second quarter.

Ahmed Abdullah: Okay. And is there any inventory concerns that you have in terms of the inventory levels at customers for any buildup?

Geoff Martin: In automotive?

Ahmed Abdullah: Yeah.

Geoff Martin: No.

Ahmed Abdullah: Okay. And on the China plant that you called out, was that something that got completed in the quarter?

Geoff Martin: Correct.

Ahmed Abdullah: Did that contribute anything into the quarter or —

Geoff Martin: No, no. Nothing in the quarter. And it would be very nominal in the second half of the year. It’ll be starting from — it’ll be 2025 when it will start to contribute.

Operator: Next question is from Michael Glen with Raymond James.

Michael Glen: Hey, good morning. So Geoff, can you talk about the impact of the Pacman integration on your business, like top line and EBITDA. Are you able to give any information on how that plays out?

Geoff Martin: It’s only 3 weeks — barely 3.5 weeks in the quarter. So I don’t think we should really talk about it relative to this quarter. And I think if you read the press release, it’s fully disclosed the results of the operation, and you can do the math yourself.

Michael Glen: Okay. And just can you characterize market share in label when you look across CPG companies and some peer results, it looks like you’re gaining market share. Are you able to give an assessment on that?

Geoff Martin: I wouldn’t say that’s necessarily likely. I think we may have picked up a bit here and there. We probably lost a bit here and there, too. So we don’t really worry too much about what our competitors are doing. In our share position, we focus more on our customers and how well they’re doing and how well we’re doing, that’s how we run the business. But I wouldn’t have said there was any material gains or losses in the numbers. Yes, you have to bear in mind the CPG is now focused on volume increases, so more than they are price and mix. So that tends to drive more label volume than typically when you’re promoting and doing new things to packages that tends to drive some label volumes.

Michael Glen: Okay. And just circling in on China, Geoff, can you just remind us of the rough size of your China business now, the segments and how the customer base lines up?

Geoff Martin: Well, CCL Design is the biggest business in China. And then we make all of our — the vast majority of our Checkpoint products are made in China, a very, very significant portion of it. But those sales are recorded a lot of them are recorded outside of China. And then you’ve got CCL Label. So I think our direct sales build to customers in China are of the order of $600 million or thereabouts. If you think about it in terms of the value of what we produce there and ultimately sell all over the world, it’s a much bigger number than that.

Operator: Your next question is from Jonathan Goldman with Scotiabank.

Jonathan Goldman: Geoff, some of the commentary from the large CPG companies is around consumers trading down to private label or non-branded products. Would you see any impact from that trend on your label business? Could it possibly be a headwind?

Geoff Martin: I would say it’s limited. We tend to be focused more on premium priced brands, so they may be losing some share, not for me to say whether that’s true or not, that’s up to the CPGs to have their own views about that. I think maybe some are, some aren’t. I think there’s some parts of the CPG business, which are notably soft, the spirits industry is one we would call out as being notably soft, which has a lot of high-end brands positioned in it. But I wouldn’t say that the impact of — also this in any prior slowdowns has ever been particularly noticed relative to the switch from premium brands to private label.

Jonathan Goldman: Well, thanks for that. And then maybe switching to the RFID business. You said most of the growth — the organic growth in ALS, the 40% was the RFID, I think the market is growing somewhere more around 18%. So that does imply you’re gaining share. I guess two questions —

Geoff Martin: Just — sorry to interrupt you, but you need to keep in context with the size of our business. We’re a small player in this space. So when you’re small, one customer can make your share, make it look like you’re gaining a lot of shares when you gain one customer. But when your sales are $50 million to $60 million a quarter versus $300 million or $400 million a quarter, the number is going to be very different. So just think about that as you’re wondering 40% number.

Jonathan Goldman: No, that’s fair. And then I guess maybe a corollary to that is as competitive intensity does increase and people do bring on capacity, could you see pressure to ASPs?

Geoff Martin: Well, it’s been a curve where adoption has been followed lower cost over time as the industry has grown. That’s typical to the kinds of progress we make in our industry as volume grows, costs go down, prices go down. I wouldn’t say if there’s anything more or less different about that in RFID to other businesses we’re in.

Operator: Your next question is from Sean Steuart with TD Cowen.

Sean Steuart: Thanks. Good morning, everyone. A couple of questions. I wanted to follow up on the 9% organic growth in the CCL segment. Can you hear me?

Geoff Martin: Yes, we can hear you fine.

Sean Steuart: Okay. You referenced double-digit sales growth in Asia Pacific and Latin America in CCL. With broader slowdown indications in China, can you speak to how that factors in the sustainability of that growth rate in Asia Pacific going forward?

Geoff Martin: Well, it’s already a function of the recovery of our CCL Design business, which is largely reduced in China. So it’s a recovery of demand in the computer industry and the device industry that’s compared to a trough last year. So that’s what that’s about. And in Latin America, I would say, Latin America for most of the CPG companies is the strongest region in the world, and that’s what we see, too.

Sean Steuart: Okay. Second question, just general M&A environment. You closed the acquisition of the JV buyout. Broader thoughts on if the M&A environment has changed at all with rates moving as they have? Has the opportunity set widened at all? Or should we still be thinking of just bolt-on acquisitions as the likely program?

Geoff Martin: No change — no change.

Sean Steuart: Okay. And then — and lastly, on the buyback. Your prior commentary was as net debt-to-EBITDA gets down towards 1x, you’d be an indiscriminate buyer of the stock, you were active or started to get active in the second quarter, same narrative for that capital allocation piece as well?

Geoff Martin: Right.

Operator: Your next question is from Stephen MacLeod with BMO Capital Markets.

Stephen MacLeod: Thank you. Good morning, guys. Good afternoon, Geoff. Just a couple of follow-up questions. Just on the Avery outlook, you talked about steady progress. There’s lots of moving parts within that segment. So just wondering if you can parse out sort of how those components are moving around for — within Avery?

Geoff Martin: Well, not more than I have done in the commentary really, Steve, and it’s very difficult to forecast how back-to-school will that actually end up, we’re still in the middle of it. It’s a very short season. It’s very volatile. But I don’t want to get into any commentary about that. We have seen the recovery in the horticultural space, which we’ve commented about. In some — but I think getting into anything more specific than the comments we’ve made would be a bit difficult for us to do.

Stephen MacLeod: Okay. no problem. That makes sense. And then just sticking on Avery. You’ve had a couple of quarters in a row with very strong above 20% margin growth. Is there anything seasonal in that versus — H1 versus H2? Or is 20% now a new good quarterly run rate for that business?

Geoff Martin: Well, the seasonality that’s changed is Q1, which used to be a slow quarter when horticulture was normal, that’s the horticultural high season. So that tends to boost profitability in the — in both the fourth quarter and the first quarter prior to us owning that business. So that’s a seasonal impact. And I think some of the acquisitions are performing pretty well. So that’s also a factor. But yes, the business has been pretty good.

Stephen MacLeod: Okay. That’s great. And then just finally, with respect to the CCL segment outlook. You talked about comps hardening in Q4, but I’m just wondering if you have any commentary around the comps for the CCL kind of core label business in Q3?

Geoff Martin: We expect — we expect to have positive growth in Q3, given what’s having recently — and the comps are easy again in Q3 as they were in Q2. So that’s also a factor in the words we’ve used. That changes in Q4. So in Q4, we had positive growth last year. So we’ll be comparing a positive to positive in Q4, though positive and negative in Q2 and Q3. And the recovery of CCL Design is a factor. So that was weak for the lion’s share of last year did improve a bit in Q4 last year than not very much. The recovery we’re seeing in the CCL Design space is a factor — so that’s what I can say.

Operator: Your next question for today is from Daryl Young with Stifel.

Daryl Young: With regards to the CCL segment, can you just remind me of the sort of the flow-through timing around the CPG orders? And I guess context being promotional activity looks like it’s starting to ramp up. So those volume trends that we would start to see in the back half of the year from CPG volume — pricing activity. Are you seeing that in this quarter? Or is that still yet to come?

Geoff Martin: Well, it’s very tactical. So it depends is promoting and who gets which brands and which customers are promoting more than other customers. So we’re very dependent on what happens with which customers and brands within each customers whether we’re involved or not. But I don’t want to get into trying to predict what may happen in the second half of the year. I think that would be a bit foolish. And I think we would expect to see good solid gains in Q3. We’ll definitely get more difficult when we get into Q4.

Daryl Young: Okay. And then with regards to CCL Secure, are you able to quantify how much of a contribution to the organic growth that was in the last quarter?

Geoff Martin: No.

Operator: Your next question is from David McFadgen with Cormark.

David McFadgen: A couple of questions. So when I look at the organic growth, it seems to me that maybe you’ve pulled forward some revenue from Q3 into Q2. I was just wondering if that was the case. And if so, can you quantify it?

Geoff Martin: I don’t think so, no. I think it’s much more about the ease of the comps more than it’s about any pull forward. If any business whether there would be any pull forward would have been in the ALS business at Checkpoint, and that’s really around the Red Sea phenomenon. We know that’s a factor affecting supply chain to garments from suppliers in North Africa and the Asian subcontinents into Europe. So we know that’s the fact with the traffic going in there that may have inflated or somewhat hard to quantify that, but that’s the only business or outside or anything that would resemble forward order.

David McFadgen: Okay. So you stated that for Checkpoint in terms of your RFID business, you had some new client wins. Do you know if you took that from a competitor or that’s just new people adopting RFID?

Geoff Martin: Both.

David McFadgen: Okay. I guess you probably couldn’t quantify what you actually took from them or from competitors?

Geoff Martin: No, no. I cannot disclose it.

Operator: [Operator Instructions]. We have reached the end of the question-and-answer session. And I will now turn the call over to Geoff Martin for closing remarks.

Geoff Martin: Okay. Well, thank you for calling in, everybody. Thank you for your interest in the company. It’s great to have a good quarter and we look forward to talking to you in November when we announce our Q3 results. Thanks for your time today. Goodbye.

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.

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