CCL Industries Inc. (CCLB) Earnings Call Transcript & Summary

Good morning, and welcome to the CCL Industries Fourth Quarter Investor Update. [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.

Thanks, Holly. Welcome, everyone, to our fourth quarter call. I'll move everyone 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 and 2023 annual reports, particularly the section risks and uncertainties. Our annual and quarterly reports can be found online on the company's website, cclind.com or on the new sedarplus.ca website. Moving to Slide 3, our summary of financial results. For the fourth quarter of 2023, sales increased 4.7%, with 3% acquisition-related growth, 2.2% positive impact from currency translation, partially offset by 0.5% organic decline, resulting in sales of $1.66 billion compared to $1.59 billion in the fourth quarter of 2022. Operating income was $254.8 million, up 18%, excluding foreign currency translation, compared to $211.2 million for the 2022 4th quarter. Geoff will expand on our segmented operating results of our CCL, Avery, Checkpoint and Innovia segments momentarily. Corporate expenses were up for the fourth quarter due to an increase and associated expenses for long-term variable compensation. Consolidated EBITDA for the 2023 4th quarter, excluding the impact of foreign currency translation, increased 14% compared to the same period in 2022. Net finance expense was $19.1 million for the fourth quarter of 2023 compared to $17.6 million in the 2022 4th quarter, due to an increase in interest rates on our variable rate debt. In line with our December '23 press release, CCL recorded an impairment of goodwill associated with our Innovia segment of $95 million, this impairment was a result of our closure of our Belgian production facility and continued demand challenges in the label material industry post pandemic. We also recorded a restructuring charge of $37.2 million, largely for the closure of our Belgian operation. The overall effective tax rate was 57% for the 2023 4th quarter compared to an effective tax rate of 21.2% recorded in the fourth quarter of 2022. This was due to the fact that the goodwill impairment charge and the associated restructuring costs for our Belgian operation were not tax deductible. The effective tax rate may change in future periods depending on the proportion of taxable income earned in different tax jurisdictions at different rates. Therefore, net earnings for the 2023 fourth quarter were $38.8 million, compared to $145.2 million for the 2022 fourth quarter. With the year-ended 2023 sales and operating income, excluding foreign currency translation, were flat and increased 3%, respectively. Net earnings decreased 20% compared to 2022, principally driven by the goodwill impairment charges and restructuring events that were recorded in the fourth quarter for the Innovia segment. Moving to the next slide, earnings per share. Basic earnings per Class B share were $0.22 for the fourth quarter of 2023 compared to $0.82 for the fourth quarter of 2022. However, adjusted basic earnings per Class B share were $0.97 for the 2023 fourth quarter, an improvement of 16.9% compared to $0.83 for the fourth quarter of 2022. The change in adjusted basic earnings per share of $0.14 is principally attributable to an improvement in operating income accounting for $0.18, foreign currency translation adding $0.01, partly offset by an increase in corporate costs for $0.02, increased tax expense costing $0.01, increased net interest expense costing another $0.01, and reduced earnings from our joint ventures costing us another $0.01. Moving to the next slide, Slide 5, free cash flow from operations. For the fourth quarter of 2023, free cash flow from operations was an inflow of $273.8 million, almost equal to the $271.6 million posted in the 2022 fourth quarter. For the 12 months ended December 31, 2023, free cash flow from operations was $559.6 million compared to $573.4 million at the end of December 2022. This change is primarily attributable to an increase in net capital expenditures, offset by an increase in cash provided by operating activities generated by improved adjusted earnings. Moving to the next slide, the cash and debt summary. Net debt as at December 31, 2023, was $1.51 billion, a slight decrease compared to $1.52 billion of net debt at December 31, 2022. The decrease is principally a result of higher debt repayments in the fourth quarter of 2023. Although the company's net debt decreased only slightly, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.13x, down from 1.24x at December 31, 2022. Liquidity was robust with $774 million of cash on hand, and USD 0.97 billion, almost USD 1 billion of available undrawn credit capacity on the company's revolving bank credit facility. The company's overall finance rate at December 31 was 2.8% compared to 2.9% at December 31, 2022, reflecting a strong reduction in syndicated revolving variable interest rate during the fourth quarter of 2023. The company's balance sheet continues to be well positioned as we move through fiscal 2024. Geoff, over to you.

Thank you, Sean, and good morning, everybody. I'm on Slide 7, highlights of capital spending for the year, $444 million, just about net of disposals, and we're planning about the same amount in the current year of 2024. On Slide 8, a few highlights of a few of the projects that are in those numbers. We're completing, as we speak, a start-up plant in Raleigh, North Carolina, which will make special folded literature labels for the GLP-1 blockbuster drugs you're reading about in the newspapers [indiscernible] to come on in the middle of the current year. We're engaging in a major expansion of Guanajuato, Mexico, plant for CCL Container to handle the growth in alumina balls and aerosols. That plant will now -- can now house 9 high-speed lines in the state-of-the-art campus. And in Italy, we're building near Turin, a new pressure sensitive label production site for some major global spirits brands switching from wet glue bottle decoration to pressure sensitive. That plant will start up also in the first half of 2024. Slide 9 highlights for the CCL segment returned to organic growth, 1.8%, which is nice to see, all driven by high-teens growth in Latin America. Very modest declines in North America and Europe and Asia Pacific. Profit gains in all sectors, led by food and beverage and particularly CCL Container, a notable turn at CCL Design as electronics demand improve from the recent trough we've seen over the last 12 months or so. FX tailwinds reduced quite considerably in the quarter and will probably turn negative in the current quarter. Slide 10, highlights for our joint ventures. You see some numbers here on the negative side, that's all due to the devaluation in Egypt, which caused -- really take a big write-down on our balance sheet in the fourth quarter around that. So that's the reason for the change in the numbers for the 2 joint ventures. Slide 11, results for Avery. Solid quarter to end a record year outstanding free cash flow, all of that EBITDA and a little bit converted into free cash. So a very good year and a good improvement in the Horticulture business, especially in the United States. Slide 12. Another very good quarter for Checkpoint. The MAS business improved internationally on productivity gains and easing supply inflation. Business is stable in North America compared to a very strong prior year. But the star was really the apparel label business delivered 20% organic sales growth in the quarter driven by robust RFID wins and a record year overall for Checkpoint, too. Slide 13. To note, results for Innovia, a much better quarter than the poor quarter last year. And we saw late in the quarter the first demands of the demand trough that we've seen really for 5 quarters in a row in the fourth quarter of 2022, all the way through last year, we saw the final turn in the pressure-sensitive legal material space of demand accelerating also quite rapidly in the first 6 weeks, and in 2 months now of 2024. The Belgian plant closure has been agreed with the people over there quite smoothly, and we expect to complete that sometime between the end of Q1 and the end of Q2, all is going quite nicely. I mean we had a good Q4 and a very good 2023 in the Americas. Slide 14, some comments on the outlook. I'd say we feel better about the outlook than we felt for a number of years. Consumer products industry are certainly seeing signs of a return to volume growth with, of course, easier comps than they've had in the recent years. The only business, we see some -- a little bit of weakness in health care, where the inventory build and the supply crisis last year is also being to show some effect, but that's somewhat offset by the growth in the GLP-1 space. CCL Design recoveries continue in this quarter and continuing so far in the year-to-date. We have fairly easy comps for all of next year, and especially in the electronics space. So we're quite encouraged by that. CCL Secure comps are a little more difficult, but the passport-related business is strong. Avery results are expected to be stable. Let me move now into the Horticulture busy production season, where we make most of our money. Checkpoint growth will continue to be driven by RFID and the recovery in apparel volumes as we're also beginning to see. But most of all, the Innovia starts to 2024 much improved, very good order intake compared to a weak prior year. As I mentioned earlier, the FX tailwinds that we've enjoyed will probably flatten out or even terms -- in terms to a modest headwind at the current exchange rate at some point in the first quarter. So with that, operator, we'd like to over the call for questions.

[Operator Instructions] Your first question for today is coming from Hamir Patel with CIBC Capital Markets.

Geoff, which of your business units would you call out as joining the recovery cycle this year?

CCL Design, Electronics and Innovia.

And just on CCL Design, your outlook point to the next cycle in tech being upwardly long as buyers look for AI-compatible devices. Do you have the -- do you think you have the right customer mix there to fully benefit from that? Or is that an area where we could see more M&A to capture that demand growth?

I think we have a very good cross-section of all the players in that space. It's the PC industry, the server industry, mobile cell phone industry, I mean all the devices, we're present with all the major OEMs around the world. So we're in a good place. Probably the ones in the Far East, the Koreans and the Japanese OEMs are the ones where we're weaker. But the ones in North America and Europe, we're in very good positions with also some of the bigger OEMs in China.

Great. And just last question I had was on Innovia. I think your release highlighted that industry demand in Europe, there was off 35% last year. Are you able to quantify the demand rebound that you're seeing so far in 2024?

Well, it's up double digits.

Double digits. Right.

Our next question is coming from Ahmed Abdullah with National Bank of Canada.

In the Avery segment, seasonality has definitely been reduced after the horticultural M&A that has been done there. And margins seem to be moving back towards previous level. Do you see 2024 margins returning to the levels we had seen prior to horticultural business acquisitions? Or is there more work to be done that you can elaborate on?

Yes. There's some more work still to be done. So the 2 businesses, one in the U.S., one in Europe. I would say we've seen the business return to the pre-pandemic levels in North America had a big boom in the stay-at-home period. And then companies -- all the resellers in that space, the Home Depots and Lowe's, and all those people have seen their business begin to come back after a pretty difficult 2023. So I would say in Europe, that's still a little bit a bit behind there, but it's coming along quite nicely.

Okay. And a record year for Checkpoint. Would you say RFID in that segment has reached critical mass that it could drive a bulk of the growth here?

I would say so. It's becoming a ubiquitous technology in most retail channels and expanding beyond its space in apparel, and we're involved in both spaces. So we're quite excited about the potential for growth in RFID.

Okay. And just a final one for me on Innovia's restructuring efforts, do you expect to immediately see the benefits of the incremental operating income you referenced in H2 of this year? Or is there a ramp-up period for that...

H2, we should see it. So we'll have a transition to go through. So the extrusion operations will stop in the first quarter. The finishing operations will stop a little bit later than that, and the business will all be moved by the spring or early summer this year and then the benefit should kick in.

Your next question for today is coming from Stephen MacLeod with BMO Capital Markets.

I just wanted to ask a question about the new capacity you have coming online. You highlighted sort of 3 major projects, CCL Label, U.S.A. container in Italy. And I'm just curious if you can give a little bit of color around what kind of revenues those plants may be able to support?

Well, the one in Italy is not huge. It's -- so that's -- if all goes well down there, that could turn into a $20 million operation. The GLP-1 plant, that will have to scale up, so it's size, so one day it could probably manage for the -- $50 million in revenue, but how long it takes to build that up remains to be seen. The operation -- the expansions in Mexico are a little bit more than that. They're up in the sort of high -- not $100 million but between $50 million and $100 million, in terms of the additional capacity and revenues we're expecting there. And CCL Container as a business, we used to report that segment publicly. It's now well over CAD 300 million and with EBITDA margins well above the corporate average.

Okay. That's great. That's good color. And then maybe just secondly, in terms of the Innovia restructuring, I assume would we expect to see any kind of sales impact from the closure of the Belgium plant? Or is it really just [ Guanajuato ] plant?

The customers for that operations are not really in Western Europe, but they're all over the world. So it was an export-driven plant. It's hardly any local business. And most of the orders were actually placed in the Innovia operation in the U.K. So it was really a production plan for largely non-European-based business that we exported to. That's why we made the decision because it's an easy transition to do without any difficulties with the customers. So we make the same product already today in the U.K., so the transition is an easy one.

Right. Okay. And then maybe just along those lines with respect to Innovia, just with -- on the back of the closure of the Belgium plant? I mean are there any other major restructurings that you would consider for that business? Or do you feel like -- when's that?

The Belgium plant is always the one we've been thinking about ever since we bought the company because it's an older plant. Then you had 2 lines in it. And it has always made money. It was also a successful operation, but all the technology, and we have to face a decision whether to invest in the operation or to close it and integrate it into the other ones we have. But I would say now, plant footprint wise, we're in good shape. Totally.

Your next question is from Michael Glen with Raymond James.

Geoff, going back to the Investor Day, I recall you described kind of a mid-single-digit type earnings hurdle for the business. If you look at the past couple of years, you described a tougher environment, but you've still been able to grow earnings in that environment. And now you're saying, hey, things are looking better finally. So -- like how do we think about what earnings growth should look like in '24 versus '23 with that type of backdrop?

Better.

Better than the 5?

Better.

Okay. And then in the MD&A, you have these -- you do publish these return on equity, return on total capital metrics, and how do you think about those -- are those troughing now? And like what are going to be the big drivers to get those moving in the other direction from this point forward?

Well, return on equity is always a funny measure because it depends on your retail earnings balance. And so I think return on capital is by far the more important to see measures and earnings growth is really the driver of that. So if we see recovery in the businesses that have been [ lagging ] during the COVID era, we feel normalize and we see recovery and we get increased earnings. That's going be the driver of improvement in return on capital.

Okay. And could you give a corporate expense, what should be the right number for corporate expense in '24?

I think if you take Q1 2023 number and multiply it by 4. So I think Q4 was a bit overweight, and Q1 2023 was the right number.

The next question for today is coming from Walter Spracklin with RBC.

So on the -- yes, the growth that you're seeing in apparel, that was a big number. You mentioned it was driven by RFID. Is that a number that we can now say, okay, there's an inflection here, we can start modeling that going forward? Or was there anything in that this quarter that was seasonally high or onetime in nature that we should consider when we start to model that type of growth within the Checkpoint division?

Well, I would say anything to bear in mind in the fourth quarter last year was the beginning of the apparel supply contraction. So it's a fairly easy comp. But that's only one thing to bear in mind. But we do think the RFID ramp-up is going to be good. And we do see some recovery now in the contraction has been in the apparel supply chain. And that's a worldwide phenomenon. So that's a good thing to see.

That's great. That's fantastic. I guess just to clarify on Michael's question in terms of when you said better. Did you mean a better growth rate or just better than last year in a dollar number? Just to clarify that.

About the growth rate.

Okay. Perfect. And then on the M&A side, just incrementally, do you see more opportunity, less opportunity or fairly consistent with what we've seen over the last couple of quarters in terms of M&A opportunities that might be surfacing?

Consistent with what you've seen in the last couple of years.

Yes. So private equity is still alive and well in that?

We bought that company, Faubel in the last half of last year. That would have been a very difficult business for us to buy if PE financing had been more easy. So we were able to do that or the multiple we were willing to pay because of that. So we have seen some examples, and that was $150 million transaction. So we have seen some easing around situations like that, but larger transactions still -- valuation expectations are still pretty frothy. We've seen quite a few failed auctions in our space. So people taking businesses to auction failing because they couldn't get the valuations they wanted. So that's the good initial signs. But memories are still long and everyone is hoping that interest rates come down, that valuations will get frothy again and public markets also point to that.

Okay. And last question for me, Geoff, is that if that is and remains the case on the acquisition front. I know you've increased nicely the dividend. Just curious your shareholder return strategy in 2024, anything that would be different from how you've seen in the past? Your stock is at trough multiples, hopefully up off trough multiples today, which would be great. But still, is this an opportunity for you to buyback stock a little bit more significantly or just keep the powder dry with a balance sheet where it is and opportunistic for any deals that might come up?

We can probably do a bit of both, Walter. So I think buying back stock, certainly it's on the agenda depending on the price of the stock. And -- but so is M&A. M&A remains our top priority. But in the event it doesn't materialize, then buying our own stock back at multiples we consider to be reasonable, then we'll definitely be doing that. I mean we're in the market doing that very late last year, in the last few days of the year. So that's an indication of what's likely to happen in the future.

Okay. That sounds good to me. Congrats on the great quarter.

Your next question is from Ben Jekic with PI Financial.

I have 2 questions, sort of similar logic to Walter, but on the CCL segment. Geoff, I see -- so 1.8% organic sales growth, high teens in Latin America, modest declines everywhere else. Is there any sort of macro explanation and how do we extend that through 2024?

Well, I think what you see in our growth rates is very much a reflection of what you see in the consumer products industry, Ben. So volume growth in North America and Europe is nonexistent for most of our CPG customers and has been all of last year. So we're moving -- the comps now are much easier. So -- and the ability of CPGs to pass on price increases is much harder. So I think we're going to see a lot more promotional activity because the only way they can now grow is through unit volume increases. And I expect we'll see some of that as the year unfolds. So that's why we're making commentary about we expect to see a return to growth this year. Latin America has been strong for all of our CPG customers. If you look at all of the big CPGs, we've got big operations in Latin America. That's the strongest region in the world right now. Probably the only region of the world where there's some uncertainty is China. So a lot of the big CPGs are pretty down still on China. But long term, they're pretty bullish on it. And so are we.

Okay. And my second question is on Checkpoint. If I recall, when you were acquiring -- and this is sort of big picture. If I recall, when you were acquiring the business, I think you said down the road in some time, operating margin of this business is going to basically, you saw no reason why it shouldn't look similar to CCL segment. And we are approaching those levels. I think my question is basically, are you expecting positive growth through 2024, 2025?

Yes. Well, the operating margin was 15.1% for last year at Checkpoint and the operating margin for the CCL segment was 15.4%.

Okay. So we are there basically.

Correct. You have to remember, on the EBITDA line because Checkpoint is not as capital intensive as the CCL space, the EBITDA [ goal ] is slightly less.

Your next question is a follow-up question from Ahmed Abdullah.

Just a question on some of the EU regulations that have been going on. With regards to ban on misleading environmental claims or greenwashing, regulation is passing outlying certain terms that can be used on label by companies. Do you see this providing you with any near-term catalyst for your European business?

Not really. I think it's well overdue. So I think greenwashing is an issue, but that's to be addressed. So I think to make claims reasonable and real and not marketing to the sentiment, the environmental sentiment and misleading people. So I think it's entirely reasonable legislation, but I'm not sure it's going to change the direction of travel for most of those CPG customers.

Your next question is from David McFadgen with Cormark.

Great. Yes, a couple of questions. First of all, Geoff, when you talked about -- you haven't seen a better outlook than what you're seeing right now. Were you referring specifically to CCL? Or were you referring to most of the business overall?

I think the whole company, I think, probably the best outlook year we've seen since 2017, 2018, because we've got so many things now that are sort of coming out of that sort of COVID volatility and settling down. Probably the one space that still got a bit of runway to go is health care. In the health care space, we've got a couple of large drug companies that demerge their consumer arms into new entities and some noise around that. And I think there was a lot of inventory bought in the last year or 2 that's closing up the supply chain a bit. And the same way we saw it in the CPGs earlier. So I think health care is probably going to have a year like the CPGs had last year. And -- but we've got GLP-1 to sort above that. But no, the commentary is really about the whole company, not just any segment in particular.

Okay. So if you just look at the CCL segment for a second. It seems like when you look at the various components, everything looks like it's doing well or expected to do well, at least in Q1, with the exception of, say, CCL Secure and Healthcare, would that be an accurate characterization?

Correct.

Okay. And then just on Checkpoint, clearly, ALS delivered strong growth in the quarter. Is that primarily a function of greater sell-through and retail? Or is that primarily a function of just greater RFID adoption?

Greater RFID adoption.

Okay. But are we still really in the early stages here, like we are, right?

It's somewhat penetrated. It's the biggest RFID market still by far, I mean, it trumps everything else by a long chalk. And some of the RFID adoption that was done in the early days was done with RFID hard tags. And now moving into some of these companies switching from hard tags to soft tags, then there was disposable tags. And that's also a growth driver. So it's partly increased adoption. It's partially transformations from a hard tag environment to a soft tag environment. And we're just in a good place. We're one of the players in the game and the players in it are also in the same spot we're in, forecasting strong growth and we're an industry player and the industry is growing.

Okay. And then just on Avery, revenue was down 1% in the quarter. Can you sort of characterize what happened in the quarter? What was the primary driver for that revenue to be down?

Hang on, I'll tell you. It was mainly driven by a soft quarter in Canada and Australia.

I meant more on the product line not geographically.

Yes. So it's really driven by -- that is the countries, North America was fine. Europe was fine. So we had the 2 locations, the 2 countries I mentioned, had multiple soft quarters and they are more dependent on 1 or 2 very large distributors. So the inventory move can switch a quarter off and then switch it back on the next quarter. So we don't pay too much attention to those when they occur.

Okay. So it's more of a geographic issue versus a product issue?

Correct.

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

Okay. Well, thank you very much, everybody, for joining the call. We look forward to talking to you again in May when the sun is shining. Thank you very much. Bye-bye.

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