Good morning, ladies and gentlemen. 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. Thank you, Crystal. This is Sean Washchuk. I'll draw everyone's attention to slide number two, our disclaimer regarding forward-looking statements. This disclaimer has been updated for the first quarter of 2020. I will remind everyone that if you're looking for our risks and uncertainties as they relate to the business, they can be found in our 2019 management discussion and analysis. We also have an updated risk for the coronavirus in our Q1 2020 MD&A. Please check these out. Our annual and quarterly reports can be found online on the company's website at cclind.com or on sedar.com. Geoff?
Thank you, Sean. Good morning, everybody. Just want to make a couple of introductory marks about the situation around COVID-19. If you'd been born in 1900, by the time you got to 1950, there would have been two world wars that killed 125 million people, and the 50 million that were killed in the 1918 Spanish flu epidemic would almost have passed unnoticed. I do not think anyone born in the year 2000 will ever forget the year of 2020 and the impact of COVID when they reach 50 years old in 2050. It's really a momentous event. We first saw the interruption like everybody else in China, and we have 3,500 employees in China out of an employee base of 21,000, so had some impact on our first quarter operations, but all of our plants were back working in full operation by the month of March.
The vast majority of our operations during the lockdown period that's been going on since mid-March, really, in Europe, late March in the U.S., and all of April, pretty much globally. Vast majority of our plants have been operating normally. We have had some interruptions in the Indian subcontinent due to the lockdown there, and a couple of our smaller operations dotted around the world, but nothing that I would describe as particularly material. Many people have been working from home at CCL, particularly in our SG&A office functions. Vast majority of those have been working home globally, but some offices that are connected to our factories have been operating with skeleton staff. All plants are now operating with strict hygiene and social distancing protocols. Out of our 21,000 employee base, I'm pleased to say only about 20 confirmed positive tests have occurred.
No fatalities so far due to the virus. We did have one close call, but I'm very pleased to say everyone is healthy and well. It is our top priority for the business to make sure that our people are safe. I'd like to take the opportunity on the call to thank everyone at CCL, particularly the employees in our plants who've been turning up tirelessly every day, being looked after and being protected, but still doing their jobs and making sure our position in the essential world supply chain is conducted with safety and with good operations. With that, I'd like to hand the call back to Sean, who will take you through the numbers.
Thank you, Geoff. Moving to slide three, our summary of financial results for the period ended March 31st. The first quarter of 2020 sales declined, including the negative impact of currency translation by 3.8%, or 2% excluding currency translation, partially offset by acquisition-related sales growth of 1.1%, resulting in sales of CAD 1.3 billion compared to CAD 1.33 billion in the first quarter of 2019. Operating income was CAD 200.3 million for the 2020 first quarter, compared to CAD 204.8 million for the first quarter of 2019, a 1.2% decline excluding the negative impact of foreign currency translation. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint, and Innovia segments momentarily. Included in the first quarter results was a CAD 3.8 million reduction in corporate expenses due to a decrease in short-term and long-term variable compensation expenses for the comparable periods.
Consolidated EBITDA for the 2020 first quarter, excluding the impact of foreign currency translation, increased 2.6% compared to the same period in 2019. Net finance expense was CAD 17.1 million for the first quarter of 2020, compared to CAD 22 million for the 2019 first quarter. The decrease in net finance cost is attributable to lower average interest rates in the quarter. The overall effective tax rate was 26.7% for the 2020 first quarter, unchanged from the three-month period ended March 31st, 2019. 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 2020 first quarter was CAD 126.6 million, up 3.7%, excluding foreign currency translation, compared to CAD 123.6 million for the 2019 first quarter.
Moving to slide four. Basic earnings per Class B share were CAD 0.71 for the first quarter of 2020 compared to CAD 0.70 for the first quarter of 2019. Adjusted basic earnings per Class B share were CAD 0.72 for the 2020 first quarter compared to adjusted basic earnings per Class B share of CAD 0.71 for the first quarter of 2019. The increase in adjusted basic earnings per share to CAD 0.72 is primarily attributable to a decrease in finance cost and corporate expense, which each was attributable to CAD 0.02 of improvement, partially offset by CAD 0.02 for reduced operating income and CAD 0.01 from foreign currency translation. Moving to slide five. The first quarter of 2020, free cash flow from operations improved to an outflow of CAD 50 million compared to an outflow of CAD 90.2 million in the 2019 first quarter.
This improvement can be attributable to strong non-cash working capital and a decline in tax and interest payments for the comparative quarters. Moving to slide six, our cash and debt summary. Net debt as at March 31st, 2020, was CAD 2 billion, an increase of approximately CAD 323 million compared to December 31st, 2019. This increase primarily reflects the impact of foreign currency exchange rates on foreign currency denominated debt as at December 31st, 2019 to March 31st, 2020, increasing total Canadian dollar reported debt on the balance sheet. Cash and cash equivalents declined CAD 158.1 million as the funds were used largely to finance the company's investing activities in the quarter, which included six business acquisitions. The company's balance sheet closed the quarter in a strong position. Our bank leverage ratio was approximately 1.9 times, reflecting an increase in net debt and an increased EBITDA.
Liquidity was robust, with CAD 545 million of cash on hand and $607 million of undrawn available credit capacity in our revolving bank facilities. The company does not have any significant debt maturities until its pre-payable term loan comes due in 2022. The company's overall finance rate was 1.96% at March 31st, 2020, lower than the 2.3% average finance rate at December 31st, 2019. This was due to a decrease in interest rates on the company's variable drawn debt. In the absence of significant acquisitions, management still expects to continue de-leveraging the company's balance sheet through 2020. Jeff, over to you.
Thank you, Sean. I'm on slide seven, highlights of our capital spending in the first quarter. CAD 95 million is usually our highest quarter of the year for capital projects, and it's the same this year as well. We are planning to reduce our 2020 forecast about 30% to approximately CAD 250 million, which will be CAD 50 million below annual depreciation and amortization. Slide eight, results for the CCL segment. Basically flat for the quarter. Small organic sales decline, a little bit of acquisition growth, little bit of negative FX, but basically flat. In Europe and North America, we were also basically flat. Very small decline, less than 1%. Asia Pacific was down mid-single digit, driven by the changes in China in February, and Latin America was up high single digits. In the business segment, CCL Design and Electronics, CCL Secure, and our Healthcare and Specialty businesses all had strong quarters.
We had modest declines in HPC and Food & Beverage. A significant drop, as you might expect, at CCL Design Automotive. Page nine, results of our joint ventures. There are basically two now, one in Russia and one in Middle East, both label businesses. We acquired our Rheinfelden slug plant from our partner in March. That's fully consolidated, with effect from the beginning of March and will be a full quarter in Q2. We had good results in the two label businesses in the first quarter. Page 10, the results of Avery. Very good quarter. Very strong start in January and February in the United States. Slower start in Canada, Australia, and Europe. March sales were down in distributed products. Those are the products that we sell through distributors, mass market retailers, and office supply superstores.
They started to decline in March, and our direct-to-consumer sales declined more rapidly in name badges, wristbands, and kids labels. That impacted growth about 50 basis points for the quarter. Checkpoint. We had strong growth on page 11 now. Strong growth in the Americas in our MAS business on technology rollouts. Europe and Asia were both down, especially in March. We had the February plant close downs in China, which impacted profitability, and then retailer closes happened first in Europe and then in the U.S., and that began to impact profitability. Apparel label sales dropped low double digits on plant shutdowns in China and retail close downs in Europe in March. Our small metal price labeling business in Europe was also down high single digit, most of it in March. Page 12, results for Innovia. A very good quarter, one of the best we've had.
Volume was up low single digit. Revenue was down, largely on mix and pass-through pricing of lower material costs, especially in the U.S., where resin had dropped quite a bit, and the weaker peso in Mexico and its impact on CAD pricing in that part of the world. Profitability increased on productivity, asset utilization, lower input costs, and the strong U.S. dollar impact on exports from Europe out of our Innovia plant in the U.K. We had a modest contribution to both sales and profitability from the Polish acquisitions, which closed mid-March, so we'll get a full quarter from Q2 onwards. Very pleased to see the progress at Innovia. A few comments on page 13 about our outlook, these red, orange, and green dots are really to just give you an indication of where we're seeing strength and where we're seeing difficulties in our business.
I'll start with the strong areas, the green dots. Healthcare and Specialty, focused on over-the-counter medicines, prescription medicines, so not surprising they're having a very good time of it right now. Strong Q1. We'll have an even stronger Q2, so that business is operating on full barrels. Innovia has also continued to be very strong in the month of April. Volume has increased above the levels we saw in Q1. The plants are now solidly booked into June. Raw material cost environment continues to be benign, and in the coming quarter, we'll have the full impact of the quarter in Poland. I'll deal with the orange dots next. Home and Personal Care, it's about a billion-dollar business. The parts of the business that are doing well are things that you would expect. Cleansing soaps, shampoos, anything to do with personal cleansing, those product lines are doing well.
Anything to do with specialty retail, hair salons, or cosmetics, not doing so well. Some of our large customers in that space are companies like Bath & Body Works in the U.S., The Body Shop in the U.K., Yves Rocher in France, the Aveda salon chain in the United States, and so on. That's about around 25% of our Home and Personal Care business that's clearly in a pretty difficult situation. The remaining 75% is doing slightly better than it otherwise would, so it's a bit of a mixed story. In the food and beverage business, we had very tough comps in Q1. Q1 2019, food and beverage was up 16%, so we found that very difficult to overcome given the challenges of COVID. We'll have much easier Q2 comps.
In the current quarter, we're seeing quite a difficult situation with the decline of on-premise volume, which is affecting many of the large global companies that sell beverage brands into restaurants, and cafes, and bars, and so on. At CCL Design, it's another mixed story. Our electronics demand was very strong in Q1 and continues to be so in April. As you might suspect, automotive is the complete reverse, extremely weak, and sales down very significantly in the month of April. CCL Secure had a very strong first quarter, had a decent April, but we know a couple of our customers have closed their currency printing operations temporarily as part of COVID-19 lockdown procedures. That may well impact demand in Q2. I'll turn now to Avery and Checkpoint, which are the two segments of the company that are most affected.
Avery certainly began to see a decline in its direct-to-consumer product lines outside of WePrint. Those are the labels that we sell directly to small businesses for product labeling. That business has continued to grow quite significantly. Event and name badge demand has more or less collapsed, as you might suspect, and the kids labels programs are down pretty significantly. Distributed products, so printable media, binders, and indexes that we sell to distributors in the U.S. are down significantly. To give you a reference point for that, the cut sheet office paper market is down 40% in the month of April. We're kind of in there with them. Pretty much same story. Turning to Checkpoint. Let me just mention briefly about back to school before I do that. The back-to-school business, we've got a good order backlog for back to school.
When it happens is very unclear. Retailer focus is not on that subject right now. They're more focused on disinfectants and sanitizers and toilet rolls than they are ring binders and indexes. Timing is really unclear. We do have a good order book. When it will occur relative to June and July and how successful it will be, given the constraints on retailers with social distancing and what have you, remains to be seen. We are planning to see a back to school this year that hopefully is at least in line with the one we had last year, but time will tell. Checkpoint, as you might imagine, with non-essential retailing completely closed down, has been significantly impacted. It was especially weak in Europe in the month of April. Its sales are down pretty significantly in our MAS business.
It's much worse in the apparel segment because apparel manufacturing in the Indian subcontinent, which is the second most important region of the world outside of China, was completely shut in the month of April. Nothing happening at all. Of course, on top of that, you've got retail stores globally. That part of the company is pretty significantly affected. That's a colorful view of our outlook. On page 14, I've tried to summarize that. Avery, Checkpoint, and CCL Design Automotive, all soft in April. Rest of CCL and Innovia are pretty solid. We do expect to see some recovery from April in May and June in some of these businesses. The quarter will be impacted really depending on the subject of when back to school actually starts, and will it be in June or will it be in July this year? Only time will tell.
Summarizing all that, we would estimate at this point Q2 sales will be down something in the 15%-20% zone. We hope nearer the lower end of that range than the higher, time will tell. We're just trying to give you a rough indication of how we think it'll eventually unfold, time will tell. FX has moved to a modest headwind based on the strong U.S. dollar, we will be providing you an update in early June. We're planning to have a hosted investor event to update how the quarter's going in June, we'll be doing that. There'll be a press release about that, the May, the event will be held in the first week in June. We'll get back to that in due course. What are we doing about all of that? page 15.
A lot of focus on working capital, especially receivables at Avery and Checkpoint. We have made no variable compensation accruals for annual incentive plans, which are suspended for corporate employees. We are making accruals in divisions that have merited the incentive payments being accrued for, but at the corporate level, we haven't made any. We suspended accruals for our long-term incentive plan because at the current time, it's too difficult to say whether any further accruals are merited. We are advancing vacation time for employees in businesses that are impacted. We have furloughed employees in some locations and short-time working at others, and we're using all the government support programs that are available. The tone at the top, our board has agreed to forgo its fees for our May and June meetings, and both Donald Lang and myself will be working for zero cash compensation during this same period.
We are renegotiating rental contracts on major facilities at Avery and Checkpoint where we can, and we're taking advantage of all cash tax payment deferral programs offered by governments in all businesses globally. Our capital expenditures, as I already mentioned, will be down by over CAD 100 million to 2020, CAD 50 million below depreciation and amortization. On page 16, I know many of you have asked about, well, what happened to you in the last crisis. On page 16, I've shown you the reported numbers in sales, organic growth, and EBITDA from 2007 to 2010. As you can see, we started to see a problem in 2008, had negative growth in 2009, and then bounced back in 2010. We're a very different company today. We have CCL Design, which we didn't have back then. We have Innovia, which we didn't have back then.
CCL Secure, we didn't have back then. Avery and Checkpoint, which we didn't have back then. The company is now CAD 5.3 billion, CAD 5.4 billion in sales, not CAD 1.2 billion, very different situation. We are focused on delivering approximately CAD 450 million adjusted free cash flow for the year. The 2021 hangover is unknown, we are assuming we will be able to plan solid earning improvements over 2020. At this juncture, we think it'll be 2022 before our performance is likely to get back to where we were in 2019. With that, operator, I'd like to open the call for questions.
Ladies and gentlemen, if you have a question at this time, please press star, then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Stephen MacLeod with BMO Capital Markets.
Thank you. Good morning, guys.
Morning, Stephen.
Morning. Thanks for all that incremental color on the COVID-19 impact. I think it's very helpful. I just wanted to circle around very quickly on the CCL segment.
Yeah.
Just curious, you saw strength in the Home and Personal Care business. Has that continued into April? Was that a pull forward of demand as people were sort of pantry loading and short of supplies?
Yeah. I think what we saw, Steve, was in the branded goods stuff that goes into Walmart and Target and the normal retail, CVS stores, drug stores, things like that. Hand sanitizers, hand cleansers, things like that, we saw pretty robust demand. What we also saw, though, was a significant change in the higher end stuff. Cosmetic-type products, skincare-type products, sun care-type products, things that might sell in travel retail. Victoria's Secret's beauty store, a Bath & Body Works store, an Yves Rocher store in France, a hairdressing salon. This part of the business has gone into a very, well, more or less a lockdown. It's a bit of a mixed story in HPC.
Okay. I understand. Thank you. Then maybe just turning to Innovia, off to certainly a solid quarter and off to a very good start. Can you talk a little bit about what's driving the demand into Q2?
Well, the customers there are basically in the label industry, prime label business, and in the flexible packaging industry. The demand for consumer packaged goods is what's driving that. In the month of March, you had some of these retailers reporting CPG sales up 40%, 50%. There was a definite COVID-19 effect in the month of March. Not in January and February, but in the month of March, we certainly saw that, and we certainly saw it even more in the month of April. That's what's driving it.
Okay. Thank you. Maybe just in terms of Checkpoint, when you think about, obviously, some near-term pressure. Are you beginning to see order levels improve a little bit as retailers begin to open back up, or is that not falling into place yet?
Not really. Not yet. I think what's closed is largely still closed. My office here overlooks Natick Mall, which is one of the first malls in the U.S. It's shut. Totally. The Walmart store has been open, which is right outside my window here. That's been open all the way through the crisis. I think things that were open, have been open all the way through, and things that are shut are, by and large, still shut. I think that'll be a long, slow grind before that comes back. Apparel manufacturing is running in China, and it's beginning to start back up on the Indian subcontinent. It's never stopped in Europe, because they source from North Africa and Turkey, but it was at a very, very low ebb. I think the apparel industry is probably down 60%, 70%, something like that.
Okay. Thank you. Then maybe just finally for Sean, could you just give a little bit of color around what you expect corporate costs to be for the year, given some of the cost-savings moves that you made?
I think the corporate costs will be quite similar to what you saw in Q1 in the subsequent quarters.
Okay. That's great. Thank you very much.
Thank you, Stephen.
Your next question comes from the line of Faraz Ahmad with Laurentian Bank.
Morning.
Mr. Ahmad, your line is open. Please go ahead with your question.
Hi. Good morning. Sorry about that.
Good morning.
Sean and Geoff, could you maybe speak to what you're seeing from a demand perspective in China as they start to open up their economy?
Yeah, I think in China, all of our plants are operating normally and did so for the month of March, really. I would say, you have to understand what our operations do there. The two biggest arms of our business in China is Checkpoint manufacturing, which is sold globally. That's still in a fairly depressed state. CCL Design and Electronics, which has had record months and quarters in recent times driven by the demand for IT peripherals and people working at home. The business we have in China that's domestic-focused is CCL Label, which is the smallest arm of our business in China. That's also running quite well, but at levels still below what we saw in Q4 2019. We would still say consumer spending in China is not where it was in the fourth quarter of last year.
Okay. I guess it's picked up April versus March, I guess?
I wouldn't say so, no. I would say March and April look pretty similar.
Okay.
You have to bear in mind, you see our label business in China is focused on soaps and hand cleansers, and we have a food and beverage business there as well. That suffered more than our soap and cleansing business. It's the same thing I mentioned to Stephen, the higher end products. People are buying hand sanitizers, but they're not buying cosmetics. Anything cosmetic.
Okay, got it. I just wanted to turn to Innovia. I know in the past with the resin price fluctuations, you enacted some changes to the contract to put in tighter resin pass-throughs.
Given the recent decline in prices, just curious, what percentage of the business now has pass-throughs in place?
We put in quite a lot of changes. A significant portion of the business now has price pass-through. That's why you see the revenue dropping because the volume went up. You can see there roughly what happened. There's a significant portion of the business has price through passing.
Okay, some of that is.
It's a lag, though. When you're in a declining market, there's always a lag. We're benefiting from the lag, and you suffer when it's going the other way.
Yeah. I guess in Q2, you would see probably some sort of a decline in revenue because of that?
Volume in Q2 has so far been strong, and then you'll also see the impact of the plant in Poland. We'd expect to have higher revenues in the coming quarter.
Okay. Then, just with regards to the new plant in Mexico, just wondering if you could give an update on how that's coming along, the base loading?
It's going well.
How it's progressing.
It's going well. That's where most of the growth came from in Q1.
Okay. Just lastly, if I may. On the M&A front, I know you have a fair bit of capital available. Are there any areas where you're looking to focus on, and what have you seen in terms of multiples?
Not a priority right now.
Okay. Got it. Thank you.
Thank you.
Your next question comes from the line of Mark Neville with Scotiabank.
Hey, good morning, guys.
Morning, Mark.
Can you hear me? Okay. If I could just start with the Q2 sort of revenue guide. The Q1 was, all things considered, I think pretty strong. When I sort of read through the qualitative outlook, obviously there's pockets of weakness, but the core business sounds like it's doing fairly well. Maybe I'm just underappreciating the weakness in Checkp oint and Avery, but can you maybe sort of in loose numbers, maybe talk about what you're expecting out of the core label?
Well, Mark, we never gave guidance for the coming quarter when we're in the normal world, so I'm certainly not going to do it now.
Right.
I can say that they're materially impacted, Avery, Checkpoint, and CCL Design Automotive.
Those three businesses between them are about CAD 1.8 billion in revenue.
Right.
They are severely impacted. Cut sheet paper in the U.S. that's sold into the office environment, down 40%. Draw your own conclusion from that.
All non-essential retailing is by and large worldwide still shut. That's Checkpoint's core business. You can imagine what kind of impact that's having on them. Do I need to say anything about automotive?
I cover the space, so I understand.
Yeah.
Okay. I guess that math makes a little more sense when I size it up and think about what those businesses are doing. Again.
Yeah. I mean, it's just the thing they're CAD 1.8 billion out of CAD 5 billion. If they're down-
Yeah
if they're down significantly, that's where the revenue decline comes from. It's all in those businesses.
Yeah.
If you look at companies like 3M and ITW, other industrial companies that sell into the broad economy, you're getting the same kind of commentary from companies who have the same diversity that we do.
Okay. Maybe just on the free cash, the CAD 450 million. I'm just curious first, what exactly is adjusted free cash flow? Is there anything in there that I need to know?
No, there isn't anything there material.
Okay.
Nothing material. Yeah.
Okay. I sort of hate to try to put you on the spot here, but if I work backwards from CAD 450, I think probably an EBITDA in around CAD 1 billion plus or minus. Again, I hate to try to put you on the spot with a number, but would anything be wrong with my math?
Well, regarding to free cash flow, I think what you have to bear in mind-
Yeah
I think we will have some working capital benefit this year in free cash flow. That's having an impact. We're also cutting capital expenditure by CAD 100 million. That's having an impact.
You have to factor that into your math.
Okay. Yeah, no, it still sounds like a pretty robust number.
Yeah. That's what we're focused on at the moment.
Right
As you would expect, we're responsible corporate citizens, and we're trying to protect the company's position for the future. That's what counts in situations like this. We're protecting the company's balance sheet and focusing on free cash flow. That's management's main focus right now for the remainder of the year.
Okay. Maybe, Jeff, I'm going to just ask one more for you. I think last time we were together, last time we spoke, you were probably a bit more conservative than I think most people were, but obviously rightfully so. I'm just sort of curious, as we sit here two months later, just generally how you're feeling. Obviously, it's been a tough couple of months, but just sort of generally how you're feeling about the outlook at this time.
Yeah. I think what we are pleased about, Mark, is having a diverse company with multiple end markets protects you in situations like this.
We're not overexposed to any one part of the economy. We've got our broad tentacles all over the world. We're very glad that we have done that and broadened the focus of the company. We're confident about the future, but we know the short term is not going to be easy, and I don't think 2021 will be easier either. I think we're in for six to eight quarters of the kind of things that hopefully won't be as bad as April and May are currently looking. I expect the recovery will take some time, and I think that will dawn on the rest of the world over time. We're very pleased to see the automotive industry restarting now. Our customers are opening up their plants in Germany and the U.S., and they're already open in China.
At this point, nobody knows how many cars they're going to sell.
Right.
That's the big unknown. We're just being prudent about that, and I think we called this right early on and took actions early on, and we're doing actions now to save cost.
Great.
Are we confident about the future? Absolutely. Will this eventually come to an end? Absolutely. Will the world recover? Absolutely. We just want to be there when it does.
All right. Sure. Appreciate that, Jeff. Thanks, guys.
No problem.
taking the questions.
Yeah.
Your next question comes from the line of Adam Josephson with KeyBanc.
Jeff and Sean, good morning.
Morning, Adam.
Morning.
Morning. Geoff, starting with CapEx, obviously many companies are reducing their CapEx plans for the year. I'm just wondering from your perspective, how you arrived at this number, the 250-ish number. Was it a top-down, bottom-up?
Last year we spent CAD 350 million, Adam, or thereabout. We did have the big project in Mexico at the Treofan plant.
Yep
was a pretty big number. If you pull that out, sort of normal business running's around CAD 300 million. We went in with a budget this year of CAD 350, and we're just being prudent. I think in the next couple of quarters, I think the prudent thing to do is to not stop anything that's important to the longer term, but just press the pause button. That's really all we're doing. If the world suddenly starts to recover and this magic V-shaped recovery some people are talking about actually happens, we'll open the spigot. I suspect that probably won't happen, and a bit of caution around that. CAD 250 million is still 5%-6%, I think 5% of sales or 5.5% of sales. It's not a small number. I think we're certainly not disinvesting in the business or not proceeding with projects.
Sure.
We're just being more cautious than we otherwise might have been.
Sure. You're a company that generally refrains from giving guidance of any sort. I was struck by your comments on slide 16 about your 2021 is unknown, but you expect it'll be better than this year, and then you expect your 2022 earnings to exceed your 2019 earnings. Can you just talk to me a little bit about why you included that in your presentation?
Well, we've been asked a lot about it, Adam.
how you're thinking about those issues?
Yeah. A lot of investors have asked us about that. People in, particularly our Canadian investors, who've known the company a long time, a lot of them have compared the situation back in 2009 and asked us questions about what happened back in 2009. How did you do? How did you fare in the last recession? We just put in the facts as we see them. That's actually what happened, and so everybody could see it. I think we've always said we tend to be first into these things and first out, and I think that slide demonstrates that. We had 9% organic growth rate in the year of 2010. Not many companies were able to do that, but we did. I would expect the same here.
When things begin to recover, we'll be one of the first companies to feel it, and that's why we put that slide in.
Yeah
The forward view is really to demonstrate we think this difficulty will last, I don't know, six quarters, eight quarters, maybe even a lot longer. We're not believers in a V-shaped recovery. That's not on our planning horizon.
Yes, no
a U-shape, and we don't know how deep the U is.
Yep
our best guess at the moment. Pretty unlikely we'll get back to where we were in 2019 before 2022.
Yeah, no. Totally understood on all accounts. In terms of the sales progression in the quarter, organic sales were down 2.8%, CCL was down a little less than 1%. Can you just talk about how sales trends progressed during the quarter and then into April as well?
The big impact was all in March.
Yeah.
Largely China-driven.
I'm sorry. Go ahead, Jeff.
Yeah. Really, as COVID happened in China in February, and the plants got shut down, we had a pretty much a month off in China in the month of February. In the second half of March, most of Europe went into the same predicament. That's really where it all came from.
I guess the gist of my question was, on the last call, you thought earnings would be down year-over-year in the quarter, and they were actually up. I know incentive comp came down.
Yeah
CAD 3 million or so. I'm just wondering, was there a pantry loading that, electronics buying and all that stuff? Yeah.
Yeah. We had two good businesses that did really well. Healthcare and specialty did well. CCL Design Electronics recovered very well in March, much better than we thought, driven by demand for IT peripherals. We had the close down in February, but in March, because of demand around the world for laptops, for printers, all kinds of computer peripherals, we saw a pretty heavy demand in March, and have seen it again in April.
Yeah. Just one last one, Geoff. I know you were asked earlier about China, I want to ask again. China was the first into this, and they were the first out. Well, kind of the first out. I know Wuhan has had a reoccurrence. What are you seeing in China that informs you about what you expect to happen elsewhere with respect to how quickly or slowly you would expect these other regions-
Yeah
to come out of this?
Well, first of all of our plants are running. We have no supply chain interruptions of any shape, way, or form in China today. Everything is operating normally. That's the first comment I'd make. Our CCL Design Electronics business that operates there, our customers there sell a portion of their product in China. 80%-90% of what they make there gets exported around the world, you have to sort of think about that.
Right.
The domestic business we really have is our Home and Personal Care and food and beverage label businesses. They are still both running below where they were in the second half of last year. It's recovered, but it hasn't recovered to where it was. It's particularly at the premium end. Of course, people are still buying shampoos, of course, they're still buying deodorants, but sales of luxury skincare products, not what they were. If you look at the results of LVMH and Estée Lauder and these kinds of companies, and you think about the products at L'Oréal and P&G, which they call masstige, product lines that compete with those.
Yeah
sales in those areas are not doing too well.
Thanks. Last, do you expect that to change anytime soon, just based on whatever it is you're hearing from your customers, seeing in terms of traffic patterns? Anything along those lines?
I don't hear many of our customers wildly optimistic about things reacting like an elastic band, and most of them are saying this is going to go on for quite a while. Is it improving?
Yeah.
Yes. How quickly is it improving? Very slowly is the answer.
Thanks so much, Jeff.
Yeah, no problem.
Your next question comes from the line of Michael Glen with Raymond James.
Good morning. Jeff, just in terms of reading about a lot of the shift in consumer business to online, can you talk about how that may impact the various segments you're selling?
Well, I don't think it has a lot of impact, to be frank. I think what the world has realized is how important retail stores are. Yes, buying online is something that you can do. Yes, there will be more of it. Yes, there's been more of it in the crisis. Of course, there is. Does it replace the need to have retail stores? No, it doesn't. I think what we've seen by this crisis, it reinforces the concept of omni-channel retailing. We have seen some companies attempt to recover their business by moving from the brick-and-mortar world to the online world. I haven't seen any of them able to replace the volumes they had in the online world from their brick-and-mortar stores. Yes, they're selling more online than they did before, but the brick-and-mortar stores are still very important.
We haven't seen a huge impact from that, to be honest with you.
And that would-
Nothing strategic.
Any specific commentaries related to that large HPC Home and Personal Care business that are worth highlighting?
In what respect?
Well, you talked about some of those soap or shampoo-type products.
Yeah. People aren't getting their shampoo from Amazon, Michael. They go into a store and buy it. That's what we're seeing. What we're seeing in Home and Personal Care that's changing is about 25% of our business is sold in travel retail stores, mall stores, hair salons, stuff like that. You have to remember, our HPC business includes our aerosol can business and our SKU business, which is around 40% of the segment. That 25% of it that's focused on those sort of specialty retail channels is materially impacted. The other 75%, we're seeing some growth from more hand sanitizers, more hand cleansing soaps and things of that. I think sales of shampoos and deodorants are just sort of steady Eddie.
Okay. Can you remind us, back to school within Avery, how much that represents of the actual business?
We don't ever disclose that. The Avery business is CAD 750 million. If you look at the last few years, it should be pretty obvious how much back to school is.
Okay. Then just one clarification. In the presentation, you described FX as a headwind. In the press release, it was described as a tailwind. Just wanted to get a clarification there.
Yeah, headwind in Q1, tailwind in Q2.
Tailwind in Q2. Do you guys have any sort of currency
It's immaterial. It's CAD 0.01. You know what I mean? You saw what it was in Q1. It's not material.
Do you have any sort of currency sensitivity to U.S. dollar moves?
It's not material.
Okay.
CAD 0.01 in the first quarter. I don't think it'd be much different. In the quarter coming ahead, it's going to be on the margin. It's not material. It's just moved slightly the other way. We own so many currencies, it's difficult to see it move one way or another. If there was a collapse in the U.S. dollar, that would have a material impact on us because I think we're over half our revenues in the company worldwide are in U.S. dollars. That's the currency that changes the needle.
Got it. Thanks for taking the question.
Thank you.
Your next question comes from the line of Scott Fromson from CIBC.
Morning. Most of the ground's been covered. I'll just ask a couple questions on acquisitions. Are you going to look for bargains, do you have your eye on any particular targets?
Well, I think you have to bear in mind, if you're a company like us who's already always talking to people who want to sell their companies, and some of those discussions were at an advanced stage in, say, December or January, and then the COVID happened, you could imagine what then happens to that process. The pause button tends to get hit. We've certainly seen most of the projects we were working on hit the pause button, because if you're the seller, why would you want to deal with us turning up and saying, "Well, if COVID's happened now, so guess what's happened to the valuation," and so on. I think things that were in process are difficult to continue due to that factor. Are we now a more active buyer than we otherwise would have been? Absolutely.
I think people are also very conscious in the current environment that it's also a difficult time to sell. Are we looking at things? Do we have a couple of things on the go right now? Yes, we do. I'd be very surprised if anything would move the needle in the coming quarters.
Okay, thanks. I'll leave it at that.
Yep.
Your next question comes from the line of Walter Spracklin with RBC Capital Markets.
Hi, good morning. This is Ryall Stroud calling in for Walter. Thank you for taking my questions today. Just had a quick question on decremental margins. Just wondering, maybe you can provide some color on what those look like for Checkpoint and Avery, and maybe how flexible is the cost structure in those segments?
Well, we're not going to give you any indication about decremental margins. We don't do that. We certainly are taking cost-cutting measures at the moment to improve the P&L short term. We've got a few thousand people affected in furloughs and short-term working programs. They are generating short-term savings in the five, six, CAD 7 million a month range, something like that.
Okay.
We're in too many businesses to be able to do that, quantify that in any meaningful way for you.
Okay. Yeah, no, that's helpful. One last quick one for me. I noticed a slightly more negative tone in food and beverage this quarter. Is this because the initial surge in grocery purchases has started to fall away and now maybe you're feeling a little bit more of the restaurant closure impact more intensely?
Yeah, I think you might want to have a look at the investor releases from Heineken and Coca-Cola and companies like that, who are all complaining about double-digit drops in their volumes. I mean, significant double-digit drops in their volumes due to the on-premise demand disappearing. Bars, cafes, restaurants. If you're selling beer or soft drinks into that environment, demand there is zero. The increased demand that happens at the grocery chains is nowhere near enough to make that up.
Okay, that's great. Thanks. I'll pass the line.
No problem.
Your next question comes from the line of David McFadgen with Cormark Securities.
Oh, hi. Yeah, a couple of questions. I was just looking at your Q2 sort of guide on revenue. To get to that number, I'm just kind of doing back of the envelope calculations here. It would seem to me that, obviously you're going to have a big decline at Checkpoint and Avery, it would seem to me that CCL is probably also going to be down a little bit as well. I was wondering if you could comment on that.
No comment.
Okay. When you talk about a U-shaped recovery, I don't know what's guiding your thinking, but I would imagine that probably just your outlook on Checkpoint and Avery would probably indicate a U, or is there some other factors that you're thinking about that would lead you to believe that?
Read the newspapers.
Okay. All right. That's it from me. Thanks.
Okay. Thank you.
I am showing no further questions at this time. I would now like to turn the conference back to Mr. Geoff Martin, President and Chief Executive Officer.
Okay, everybody. Thank you very much for joining the call today. It's a momentous one for sure, and we'll look forward to updating you in June at that investor event I mentioned. You'll get a press release on that in due course. We'll talk to you again in August at our Q2 review. Thank you very much. Bye-bye.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.