Good morning and welcome to 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.
Good morning, everyone. Welcome to our First Quarter Call for 2024. I'll draw everyone's attention to slide number two, our disclaimer regarding forward-looking information. I'll remind everyone that our business faces known and unknown risks and opportunities. For further information on these key risks, please take a look at our 2023 annual report, particularly the section Risks and Uncertainties. Our annual and quarterly reports can be found on the company's website, cclind.com, or on sedarplus.ca. Moving to slide three, our summary of financial information. For the first quarter of 2024, sales increased 5.2% with 2% organic growth, 3% acquisition growth, and 0.2% positive impact from currency translation, resulting in sales of $1.74 billion compared to $1.65 billion in the first quarter of 2023.
Operating income was CAD 282 million for the 2024 first quarter compared to CAD 257.7 million for the first quarter of 2023, a 9.1% increase excluding the impact of foreign currency translation. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint, and Innovia segments momentarily. Corporate expenses were down slightly, CAD 0.1 million for the quarter versus the prior year quarter. Consolidated EBITDA for the 2024 first quarter, excluding the impact of foreign currency translation, increased 9.8% compared to the same period in 2023.
Net finance expense was CAD 18 million for the first quarter of 2024 compared to CAD 19.4 million in the 2023 first quarter due to a decrease in total debt outstanding and increased finance income on the company's deposits. The overall effective tax rate was 24.7% for the 2024 first quarter compared to an effective tax rate of 24.9% recorded in the first quarter of 2023.
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 first quarter was CAD 192.1 million, up 15.4% excluding foreign currency translation compared to the 2023 first quarter. Next slide. Basic and adjusted basic earnings per Class B share were a record, CAD 8 for the 2024 first quarter, an improvement of 14.9% compared to CAD 0.94 for the first quarter of 2023. The change in adjusted basic earnings of CAD 0.14 is principally attributable to an improvement in operating income accounting for CAD 0.09, higher contribution from the label joint ventures of CAD 0.04, and a CAD 0.01 reduction in net interest expense compared to the 2023 first quarter. Moving to slide 5.
For the first quarter of 2024, free cash flow from operations was an outflow of $7 million, an improvement compared to the $6.5 million outflow recorded in the first quarter of 2023. For the trailing 12 months ended March 31, 2024, free cash flow from operations was $569.1 million compared to $518.8 million for the last 12 months ended March 31, 2023. The improvement is primarily attributable to an improved adjusted earnings and working capital partially offset by cash taxes paid and an increase in net capital expenditures. Moving to our cash and debt summary slide. Net debt as of March 31, 2024 was $1.61 billion, an increase of $101 million compared to December 31, 2023. This increase is principally a result of lower cash balance at Q1 2024 versus December 2023, an increase in debt drawn on the company's syndicated credit facility as well.
The company's net debt increased, yet the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was 1.18x , slightly higher than the 1.13 x reported at the end of December 2023. Liquidity was robust with CAD 748 million of cash on hand and almost CAD 1 billion of available capacity in the company's revolving credit facility. The company's overall average finance rate was 2.8% at March 31, 2024, unchanged from December 31, 2023. The company's balance sheet continues to be well positioned for the balance of 2024 and beyond. Geoff, over to you.
Thank you, Sean. Good morning, everybody. I'm on slide 7, highlights of capital spending. So far for the year, CAD 178 million in Q1. We're planning to spend CAD 455 million for the year ahead. Slide 8, a few highlights about where we're putting some of that money. When I thought it would be interesting this quarter to highlight, we're still investing in emerging markets. So in 2023, we acquired land to build a large new campus for Checkpoint and CCL Label outside of Istanbul. We'll be doing the planning for that in 2024. Most of the CapEx will occur in 2025. In Vietnam, we're completing construction of a new Checkpoint ALS plant in Vietnam, including RFID encoding and insertion. We should complete that factory this year in 2024. In Singapore, a few maybe 18 months or so ago, we acquired a label business in Singapore.
We moved all the business that was being conducted at that site to our plant in Thailand, and we renovated the site as a pharmaceutical-grade operation. We now have label and insert equipment in there, making products for a couple of very important strategic global customers and trading commenced in the first quarter of 2024. Slide 9, highlights of CCL for the quarter. Organic growth returned, continues to make progress. High single digit in Asia Pacific, a lot about the recovery in CCL Design. Mid single digits in Latin America, low single digit in North America, and pretty much flat in Europe. We had strong results in home and personal care and food and beverages. Consumer products industry continues to make progress towards retrieving volume growth. Modestly down at healthcare and specialty and slower at CCL Secure.
CCL Design posted strong gains in electronics markets, partly offset by a decline in automotive. Slide 10 highlights for the joint ventures. Story here is all about what happened in Egypt. So those of you who were on the Q4 call might recall we booked some foreign exchange losses in Egypt in Q4, which we reversed in 2024. So that's the reason for the strong improvement in the joint ventures, although the underlying progress was also very good indeed. Moving to slide 11, highlights for Avery. Direct to consumer growth in the U.S. and Europe offset slower performance in the distribution-based product lines. I hasten to add compared to a strong prior year. Latin America and Australia were both a little soft, but we had strong recovery in horticulture markets in both the United States and Europe. Slide 12, highlights for Checkpoint.
Certainly, the best performing business we had in the company in terms of sales growth. The MAS business had a solid quarter on strong results in Asia Pacific, but actually offset slower results in Europe and North America. So the gains this quarter all came now out of apparel label business. It substantially improved, more than 25% organic growth driven by RFID. But there were some signs of European retailers forward ordering to avoid Red Sea supply disruption with all the supply chain issues through the Suez Canal. Page 13, highlights for Innovia. Sales declined on the lowest Belgian shipments post-closure. So we're moving the operations for that plant to our site in the U.K. And there was also some associated mixed impact. So overall volume increased only slightly.
But label industry volume improved very significantly as a long period of destocking came to an end in both North America and Europe. Early benefits from the transition out of Belgium drove the increase in profitability. So outlook for the coming quarter. Consumer products industry, as I said, showing early signs of a return to volume growth. It's not stunning, but it's certainly better than it was for most of the last five or six quarters and back end of 2022 and all of 2023. But healthcare is a little bit slower. Some destocking elements there. Vaccines coming to an end. GLP-1 aside, the industry is a bit slower than it was. CCL Design recovery should accelerate this quarter in electronics with automotive repeating what happened in Q1. CCL Secure comps are much easier this quarter and the passport component business is still very strong.
Avery has tough Q2 comps and the usual timing uncertainty when back-to-school starts, whether that's in June or July. But horticultural should be a significant offset. Checkpoint growth continues driven by RFID. Apparel inventories remain low, but there still are some signs, as I mentioned earlier, about this forward ordering from particularly European retailers. Innovia, we'll see the Belgian transition complete this quarter. It's gone extremely smoothly and label industry volume continues to strengthen. So we're continuing to expect good things at Innovia. And overall, in the quarter so far, we've closed the month of April, which is extremely strong. So we're quite optimistic about the quarter ahead. FX is still a modest tailwind at current exchange rates. So with that, operator, we'd like to open up the call for questions.
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. One moment, please, while we pull for questions. Your first question for today is from Hamir Patel with CIBC Capital Markets.
Hi. Good morning. Geoff, in your outlook, when you talked about momentum continuing into Q2, does that suggest you would expect a sequential improvement in profitability in the second quarter?
Yeah, for sure. Sequential or year over year?
I guess asking on both. Yeah.
Well, we had a very strong April.
Strong April. Okay. Sorry, when you say that, do you mean on both a year-over-year and sequential basis?
Correct.
Okay. Thanks. That's helpful. Geoff, at Checkpoint, how much of the 25% ALS organic growth do you think reflected that call forward of orders by European retailers?
Very hard to say. Very hard to say. It's a factor. We've got a number of things at play there. Apparel inventories are still low. So we definitely know there's been some forward ordering. As you might imagine, if you're a European retailer and you're sourcing from places like Bangladesh and Vietnam and those goods coming through the Suez Canal, there's some concern about disruption there. So we see some signs of forward ordering there. But we also see very low apparel inventory. So it's very hard to say what it'll mean in the coming quarter. In April, it was still very strong. So I can't say more than I've already commented.
Okay. Great. And just the last question I had, Geoff, was your outlook also referenced new business wins in China driving significant gains for CCL Design in the quarter. Are you able to quantify just sort of how significant those gains were? And would you expect that to continue to build in Q2?
Well, we're very optimistic about the CCL Design electronics space. So a number of things are going on there. So the market's definitely bounced back from its inventory correction issue. So we're seeing in all sectors of the electronics space improved demand for production. And then you've got the AI factor, so the number of new PCs that will need upgraded chips. So that's another factor. And then we've got some new business wins in some other sectors. But I can't talk about customer by customer, but they're very good. So that's a business we see considerable upside for the remainder of the year.
Fair enough. Thanks, Geoff. That's all I had. I'll get back in the queue.
Your next question is from Ahmed Abdullah with National Bank of Canada.
Yeah. Good morning. Thanks for taking my question. In the CCL segment, it seems that most of the trends across your subsectors are going in your favor, which is translating into better EBITDA margins. Can you give us some color around how much of these margin improvements are purely driven by better market conditions? And are there any levers you're pulling to further boost margins?
I think it's just a function of better mix and recovering sales. I don't think it's more complicated than that.
So there's no cost-cutting or cost-adjusting on your side?
It's a function of better mix and improving revenues. There's probably some benefit in the CCL Design space. We did quite a bit of restructuring in China last year. There's a little bit of margin benefit in the electronics industry and CCL Design. But for the company, it's immaterial.
Perfect. And on Checkpoint, another solid quarter for this segment with RFID continuing the trend higher and margins also moving higher. Is there a new EBITDA margin goal as RFID picks up for this segment?
No.
Finally, just versus your comments from the last quarter of earnings growth, has that changed in any way given the current outlook?
I think we see the outlook the same way we saw Q4, the same way we saw Q1, we see in Q2. I think that's how we're doing relative to the prior year. That's how we see it. When we get into the back half of the year, we've got to worry more about the back-to-school season at Avery and how that will be this year. Then when we get into Q4, obviously, the comps situation changes pretty dramatically.
But the expectation is still for better earnings growth for the year?
For sure.
Perfect. Thank you. That's it for me.
Your next question for today is from Walter Spracklin with RBC Capital.
Hey. It's Louis Savalle on for Walter. So just continuing on Checkpoint and driven by RFID growth, just given what we saw in ALS and the Mexico plant coming online mid-year, how should we think about revenue growth this year? Is high single-digit organic growth rate we saw in Q1, is that a good run rate going forward?
Well, time will tell. The plants in Mexico will come on stream in the second half of the year. That will have a positive impact. It also has some benefits in some of the products we import today into the U.S. directly from China have tariffs on them. They'll start to go away. There's some P&L benefits as well as sales benefits. Time will tell how it affects Checkpoint. We're very pleased with the current performance, and we're expecting things to continue in good shape. When you get into the second half of the year, that's the busiest season for the Checkpoint business just in general.
Thanks. And these plants in Vietnam and Turkey, do you have any idea of the kind of revenue contribution they can be expected to provide?
Our Turkey business in total is about $50 million. They'll have a lot of capacity to grow that pretty significantly beyond that. It's a long-term investment based on our belief that Turkey is going to continue to be a very important sourcing country for the fast fashion industry in Europe. We want to be the leader in that space.
And one more, if I could. Can you remind us what percentage of Checkpoint's revenue is driven by RFID currently versus RF?
Well, I think at our investor conference, we said our RFID business company-wide, including Checkpoint's business, which is by far the majority of it, it's about CAD 200 million last year.
Okay. Great. Thanks. I'll turn it over.
Your next question is from Stephen MacLeod with BMO.
Thank you. Good morning, guys. Morning.
Morning, Stephen. How are you?
Good, thanks. How are you?
Good.
Great. Well, thanks for the color so far. Just a couple of follow-up questions. Just on the Checkpoint business, you had some very strong margin growth in the quarter. And I'm just curious if you can give a little bit of color around sort of what the key drivers are around that margin growth and if that's kind of a new run rate that you expect in that business going forward.
Well, the mix was good. So the customer mix was very good. RFID was strong, which is good. And the consumer business in MAS was stronger than the hardware business. So that's another mixed thing running in our favor. So that's the main underlying reasons behind why Checkpoint was good. And then, of course, strong sales. So add all that together, lots of levers going in our direction. The only slight offset was return of some higher freight expense due to the Suez situation coming around the south of Africa. So that increased freight rates for some of our intermodal shipments coming out of China to our sales companies dotted around the world, particularly to Europe.
That's great. Then maybe just turning to the CCL segment. In the outlook, it sounds like things are continuing to trend positively. Last year, you had a bit of margin pressure in Q2. Would you expect that to sort of fully reverse this year?
Yes.
Great.
I think mainly, Steve, because of the situation of CCL Design. And I think we also had a very slow Q2 in CCL Secure last year. We don't expect that to be the case this year.
Great. And then you gave lots of interesting color about those plant investments you're making in emerging markets. I know that's been an important market for you over the years. Just curious if you can give a little bit of color on in aggregate, what does emerging markets represent in terms of your overall revenues now?
Well, I think we disclosed that on the slide, Steve. You've got the percentages there on all the slides for each of the segments. So it's already fully disclosed.
That's great. T hanks, Geoff. Thanks, Sean. Appreciate it.
No problem.
Your next question is from Michael Glen with Raymond James.
Good morning. Geoff, maybe to start, it's, I guess, a little bit surprising. The last transaction, the M&A last M&A transaction you guys have made was in July of 2023, was that healthcare deal. Can you give some thoughts surrounding M&A? I guess I would have given where the balance sheet is. I guess I would have thought you guys would have been more acquisitive on the tuck-in side.
No comment. I mean, I think we said I had no idea what the situation is. I mean, the focus is both on M&A and what's the space.
And then can you also speak to capital allocation and maybe give some thoughts on the internal view or the board-level view on share repurchases?
No change. I mean, M&A is the priority. If leverage gets below 1, we'll get very nervous about the situation on the balance sheet if leverage gets below 1. And buybacks might be on the table, might not be. It just depends on the circumstances. We're certainly planning to renew the normal course issuer bid. So we'll wait and see what happens.
Okay. Just on back-to-school, is this a timing situation? If we think about the business in aggregate over Q2 and Q3, is it stable? Is it up? Is it down this year versus last year?
I think back-to-school is a secular decline. Business has declined consistently year after year. So it sometimes has positive bumps in the road driven by retailer confidence in sourcing from China. And that was obviously a big problem last year. It's a much less of a problem this year. So it's partly driven in the next quarter about how much will get shipped in June versus how much goes in July. That's always a factor. But the long-term situation is that's a business that's in long-term secular decline. It's profitable while we have it. And so we're still very much focused on it. But as I said in the outlook comments, we'll probably see that offset this year by stronger results in the horticultural space. So I wouldn't say these comments are particularly material for Avery. It's just the fact that they're certainly not material for the company overall.
Okay. Thanks for taking the questions.
No problem.
Your next question is from Darryl Young with Stifel.
Hey. Good morning, everyone. Just one for me with regards to a lot of we got a lot of businesses that are recovering off the bottom and a bit of a restocking trade that seems to be happening in several segments. Is there a way to, just at a very high level, speak to demand in some of the products that are maybe a little more stable and, I guess, just trying to get a picture of how much of this is sort of the whipsaw from pandemic versus just really strong end-market demands?
Well, I think the most volatile business we've had in that regard over the last recent time is CCL Design's electronics business. So I think you have a lot going on there. So we definitely had a boom in the pandemic and a bust that followed it. So that's for sure what happened. And then that's bottomed out, and now we're recovering from that. You've got the impact of new technology on devices, which is for sure a factor. And then we've got some new business wins. So CCL Design has been the most volatile electronics element of it.
But to give that context, it's CAD 300 million to CAD 400 million out of the CAD 4 billion segments. So it's 10% of the segment. When you get into the consumer products business, if you look at the results of most of our consumer packaged goods customers, they're beginning to turn the corner.
Most companies this year began to report, albeit low, but at least some return to low-volume growth and less reliance on price and mix. That'll be a good thing for us in the longer run.
Got it. Okay. And then maybe just one more on just some of the commodities and input deflation that is popping up in some other industries. Are you seeing anything there? Is there any benefits in your margins today from deflationary conditions that might normalize in the next couple of quarters?
I wouldn't say so. We saw a little uptick driven by the price of oil and resins. So we've seen a little uptick. It's still pretty small, and we're still seeing year-over-year gains. So I would describe inflation as still reasonably benign. But the dramatic drops we saw at the back end of last year and even into Q1, I wouldn't say it stopped, but it certainly paused a bit. And we'll see what happens for the balance of the year. We still expect it to continue to head down rather than return to going up. That's our thesis on looking at the business going forward.
Okay. That's great. Thanks very much, and congrats on a good result, guys.
Thank you.
Your next question for today is from Sean Steuart with TD Cowen.
Thanks. Good morning, everyone.
Hi, Sean. A couple of questions on Innovia. Pronounced deceleration in organic sales declines this quarter, which, I guess, reflects an easier comp. I suppose we're at a position where we're going to start to see strong year-over-year growth in that business as you continue to lap easier comps. With the restructurings at Belgium, etc., can you give us a sense of the cadence of sales growth expectations organically for Innovia the next few quarters?
Well, we had low-volume growth this quarter. So the problem with Innovia is the pass-through industry. So the dollar signs at the top are not as important as tracking operating income and EBITDA because revenue moves up and down driven by resin pass-throughs. So looking at the absolute dollar numbers at the top line isn't terribly important. It's more important to focus on operating income and EBITDA. And we're certainly expecting to see the kinds of improvements that we saw in Q1 continue and even accelerate as the year progresses as we get the full benefit of the closure of Belgium.
I guess that's the follow-on question, Geoff, the CAD 17 million-CAD 20 million of annual profitability improvements tied to that restructuring. How should we think about the cadence there? I was under the impression it was a back half, weighted.
We're starting to get the full benefit from the second half of the year.
That should happen.
Q1, we had some benefit, but we were still operating the plant. Q2, we got the transition to the UK, but by the summer of this year, Belgium will be long gone, and we'll be operating out of the UK. So we should see the full benefit kick in from this summer.
Thanks for that detail. The rest of my questions have been answered. Thanks.
Good.
Your next question for today is from David McFadgen with Cormark Securities.
Okay. Great. Yeah. A couple of questions. First of all, on Avery, it seems like the legacy business, legacy products decline sort of accelerated in Q1. I'm just wondering, is this a new trend, or is this just a bit of an anomaly for Q1?
No. I think it's really driven by the prior year comp, David. So if you go back to Q1 last year, we commented that we'd had destocking in the back end of 2022 and then some restocking in Q1 of 2023. So the comps were difficult in the legacy business in Q1. That's really what the issue was in Q1.
Okay. And then on CCL Secure.
But the fact of the top line didn't have much impact on the bottom line.
Okay. Okay. Then just moving on to CCL Secure. So you noted that the passport business was a bit soft in Q1, but it seems like it's going to be back to normal in Q2.
Passport business was strong in Q1. Passport business was strong in Q1. It was the currency business that was slow in Q1.
Oh. Okay. So is that expected to pick up again in Q2?
Right.
Yeah. Okay. And then just on Checkpoint, you talked about how retail inventory is low. So wouldn't that be a good thing because eventually, these people will restock to a more normal level, right?
Right. Yeah. That's why we said you've got two dynamics going on here. You've got some forward ordering. We've also got low inventory. So when we get into the summer high season, this forward ordering may not even get noticed if orders come in strong because of low inventory.
Okay. All right. Okay. That's it. Thank you.
No problem.
You have a follow-up question coming from Ahmed Abdullah. Ahmed, your line is live.
Yeah. Thank you. Given where leverage is and absent M&A that could be happening, is there consideration for higher activity on the NCIB regardless of where the stock price is?
That's such a question we'll be discussing at the board meeting later today.
Okay. Perfect.
Once again, if there are any questions or comments, please press star 1. There are no further questions in queue. I would now like to hand the call over to management for closing remarks.
Okay, everybody. Thank you for joining us on the call today. Wish you a good summer, and we'll talk to you again in August. Thanks a lot. Bye-bye.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.