Multi-Color's (LABL) CEO Nigel Vinecombe on Q1 2015 Results - Earnings Call Transcript

Aug.11.14 | About: Multi-Color Corporation (LABL)

Multi-Color Corporation (NASDAQ:LABL)

Q1 2015 Results Earnings Conference Call

August 11, 2014, 10:00 AM ET

Executives

Sharon Birkett – Vice President, Chief Financial and Accounting Officer

Nigel Vinecombe – President and CEO

Analysts

Ghansham Panjabi – Robert W. Baird

Greg Eisen – Singular Research

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Multi-Color Corp. Earnings Conference Call. My name is Lacy, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Sharon Birkett, Chief Financial Officer. Please proceed.

Sharon Birkett

Thank you, Lacy. Welcome to Multi-Color Corporation's fiscal 2014 first quarter conference call and webcast for the period ending June 30, 2014. We're also broadcasting this live over the Internet, accessible through our Multi-Color website at www.mcclabel.com on our Investor Relations page.

I'm Sharon Birkett, Vice President and CFO of Multi-Color and I will be leading today's call, and I'm joined by Nigel Vinecombe, our President and CEO. I will begin with an overview of how our company performed this period and provide a detailed analysis of our financial results. Nigel will conclude with final comments, and then we will take your questions.

Before we discuss our results, I want to call your attention to the Safe Harbor statement that was displayed on the registration page you viewed right after logging on to our webcast, and remind you that in accordance with the Private Securities Litigation Act of 1995, this presentation may contain some forward-looking statements that involve both known and unknown risks that may affect the outcome of our results. This Safe Harbor statement is also included in our earnings release and in our filings with the SEC.

For those of you who are listening and viewing our webcast via the Internet, please take a look at Slide number 2, net revenues. In the first quarter of fiscal 2015, net revenues increased 22% to $203.1 million compared to $166.8 million in the prior year.

Net revenues increased to 20% related to acquisitions occurring after the beginning of fiscal 2014, organic revenues increased 3% in volume, offset by a 1% decrease due to unfavorable impact of sales mix and pricing.

Please take a look at Slide number three, gross profit and margins, gross profit increased $12.4 million or 41% to $42.8 million compared to the prior year quarter. Acquisitions occurring after the beginning of fiscal 2014 contributed to $7.5 million to the increase. Gross margins increased to 21% of sales revenues, primarily due to improved operating efficiencies in North and South America and a strong contribution from acquisitions occurring after the beginning of fiscal 2014.

Prior year gross margins of 18% were impacted by unusually by unusually high cost related to press transfers and charges for inventory write-offs. Please turn to Slide number 4, operating income and margin.

In the first quarter of fiscal 2015, operating income increased to $10 million to $26.1 million compared to the prior year quarter from primarily due to improved operating performance in North America and South America and recent acquisitions. Excluding the impact of non-core items in the quarter, core operating income increased by $8.8 million or 51% to $26.3 million.

Acquisitions occurring after the beginning of fiscal 2014 contributed $5.1 million to the increase in operating income, non-core items related to acquisition and integration expenses. Please turn to Slide number five, net income.

This Slide shows net income for the first quarter of fiscal 2015 and 2014. Core net income increased 71% to $13.5 million in the quarter from $7.9 in the prior year, primarily due to acquisitions occurring after the end of fiscal 2014 and gross margin improvement in our preexisting businesses.

The effective tax rate for the quarter was 34% compared to 37% in the prior year primarily due to geographical mix of worldwide earnings. The projected effective tax rate for fiscal 2015 is 35%.

Please turn to Slide number six, diluted earnings per share. Excluding the impact of non-core items, core earnings per share increased 69% to $0.81 in the first quarter from $0.48 in the prior year.

Please advance to Slide number seven, free cash flow. Free cash flow consisting of cash provided by operating activities less capital expenditures were $15.2 million compared to $5.9 million in the prior year, primarily due to improved core operating earnings and the timing of capital expenditures.

Please turn to Slide number eight, core EBITDA. This slide shows core EBITDA for the quarter, core EBITDA is defined as core operating income, plus depreciation and amortization. The core EBITDA for the current quarter is $36.6 million compared to $26.6 million in the prior year.

Please advance to Slide number nine, capital expenditures. Our first quarter capital expenditures were $10.5 million compared to $12.6 million in the prior year. The projected amount of capital expenditures for fiscal 2015 is $35 million.

Please advance to Slide number 10, depreciation and amortization. The total depreciation and amortization was $10.3 million for the first quarter of fiscal 2015 compared to $9.1 million during the prior year quarter.

Please turn to Slide number 11, debt. The company has $466.7 million of debt as June 30, 2014, compared to $400.9 million at June 30, 2013. During the last four quarters, the company paid down $63.3 million in debt and borrowed including debt acquired $129.1 million in relation to acquisitions. During the last four quarters, Multi-Color has made acquisitions in the United States, Scotland, Switzerland and Mexico.

Now I'd like to turn the presentation over to Nigel.

Nigel Vinecombe

Thank you, Sharon, and good morning, all. It's good for us to see the positive momentum from the March quarter continue in this June quarter. We did benefit from some strong [down] (ph) acquisitions sales following pent-up demand from the March quarter, which drove sales to over $200 million for the quarter, which still see as a run rate $800 million as a reasonable estimate, plus another $5 million for the nine months of island sales that we expect from July, subject to foreign exchange of course.

So we feel that as if we're on track in the first quarter from a revenue point of view. However, we also did feel that organic revenue growth of 2% net is still somewhat weak and need to continue via strong focus for us.

So it wasn’t growth, it was more earnings improvement led by higher gross margins of 21% primarily due to better performance from our underperforming plants for the last six months now compared to calendar 2013 have driven better result in the quarter and we would see that from a core gross margin point of view, the 20% to 22% range, excluding any future impact from future acquisitions is a sustainable range for us going forward.

In the quarter, the better earnings generated free cash flow of $15 million, which was largely used to reduce debt and so our leverage is now down from high threes to mid threes when taking into account full acquisition earnings for a 12-month period.

Our most recent acquisitions, affectively 10 acquisitions in the last 10 quarters, have taken longer to integrate than originally planned, plus one was a lemon as in Chili and one was a start-up losses as in China, plus weaknesses in Europe in calendar '13 meant we did not get good value in fiscal '14, we do believe we are starting to show good value now in fiscal '15.

However, we would recommend caution in terms of how quickly we can get to $3 core EPS, just as we did not throw the baby as of the bath water after the December quarter results, we are going to get carried away by couple of good quarters.

Firstly we would suggest caution because if there are any two good quarter post the integration noise then we need to continue to post more of those and secondly, the loss of September quarter is typically a failed high quarter for us and should lead to a good result. The December quarter is typically fells low, so we would not recommend simply extrapolating the March, June and September three quarter for an annual run rate.

Going forward from a future point of view forward-looking aspects, from organic point of view, we still feel as if our cost base is not optimal and there are still further opportunities for us to improve our cost base and we will continue to focus on that in the second of calendar '14 and into next year and secondly we feel as if providing we can continue to consolidate better performance in our existing businesses in the second half of the year, we feel as if we are well placed for future expansion as we get into fiscal '16 next year.

With that I’ll open up the questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Ghansham Panjabi with Baird. Please proceed.

Ghansham Panjabi - Robert W. Baird

Hey guys good morning.

Nigel Vinecombe

Good morning.

Sharon Birkett

Good morning.

Ghansham Panjabi - Robert W. Baird

Just given the negative call outs of last few quarters and given the scale of the margin improvement year-over-year, was there anything unusually positive in the quarter that we should think about as we kind of think about modeling the rest of the year and into 2016.

Nigel Vinecombe

No we think it's a pretty clean quarter. We feel that we are on track for that $800 million run rate in sales plus a little bit of kick-in from Ireland, acquisition from July and we still feel as if that GP in that 21% range is 20% to 22% range is a sustainable outcome.

Ghansham Panjabi - Robert W. Baird

And the DI-NA-CAL profitability, how does that compare to legacy label if you will?

Nigel Vinecombe

The legacy DI-NA-CAL profitability was pretty similar to multicolor last year in that 16% and 17% EBITDA range. And we are seeing stronger results this year and faster integration in this year than we had originally anticipated. Some of that is driven by a stronger June sales quarter up into the peak that we would not see continuing, but some of it is due to the fact that we are seeing faster synergy benefit than we had originally planned.

Ghansham Panjabi - Robert W. Baird

Okay. And then just in terms of your core sales, it's been pretty consistent in the last couple of quarters, but if you look at your competitor's results out of Canada, their sales on a core basis are almost 2X or between 2X and 3X times year level.

Can you just share some color as to why that is? Is it a function of different end markets you are exposed to? What would explain the difference because it seems like you guys both have a pretty strong presence across your core markets.

Nigel Vinecombe

Certainly from our market's point of view, we would see that we are seeing strong growth in our home personal care market. Reasonable growth in Wine and Spirits and that’s probably a very different market segment in terms of level of concentration for us compared to others and soft in terms of food and beverage. So we are seeing that it is varying per segment and that our segments are -- have some overlapped, but also some distinct differences to others.

Ghansham Panjabi - Robert W. Baird

And then just one last one, just given some of your customers particularly in packaged food or slightly through some very lousy comparisons from a volume perspective, how would you qualify the new product activity at their level right now?

Nigel Vinecombe

I think there is a lot of refresh work typically at this time of year, which is also happening this year. So we would see it is for us on the label side of things as a normal top of level of activity in terms of some new skews but certainly a reasonable amount of activity around refreshing skews.

Ghansham Panjabi - Robert W. Baird

Okay. Thanks so much.

Nigel Vinecombe

Thank you.

Operator

(Operator instruction) And our next question comes from the line of Greg Eisen. Please proceed.

Greg Eisen – Singular Research

Thanks. Good morning. You mentioned you called out in the presentation the growth in the DI-NA-CAL this quarter. The total revenues that you achieved from the acquisitions came in greater than I was expecting by a significant amount based upon the previously announced run rate revenue of those businesses.

Was DI-NA-CAL the only prior acquisition, which outperformed may be the expectations that you may have had for when you bought it -- of the acquisitions this quarter?

Nigel Vinecombe

Not the only one, but certainly the main one. We announced when we booked DI-NA-CAL annual revenues of $64 million, which you could say roughly 16 a quarter. We actually did 20 with DI-NA-CAL in the June quarter. So they were significantly up year on year and we saw that as a result of pent-up demand where very long lead times when we took the business over in February.

Those lead times took some time to work through the system and work through in the June quarter. So we would see it DI-NA-CAL revenues returning to a more negative run rate going forward, but that certainly contributed to the number in the June quarter than we expected.

Greg Eisen – Singular Research

Okay. Pent-up demand I understand.

Nigel Vinecombe

If you look at our March quarter, we also had some severance cost and some expenses in our March quarter, which weighed a little bit heavily on the March quarter. So if you take March and June together, roughly at $1.50 and average them, I think you would have a fair run rate for the six months.

Greg Eisen – Singular Research

Got it. Got it. A couple other questions, you didn’t mention any effect from foreign exchange this quarter. Was it not material?

Sharon Birkett

Yes. It's less than 1%.

Greg Eisen – Singular Research

Good. Good. Were there any one-time cost that you would want to call out this quarter in SG&A from the accounting issues you’ve previously disclosed and that you might want to tell us about the coming quarter in SG&A to help us model what's going to be happening?

Nigel Vinecombe

I think that SG&A picked up over 8%, 8.1% I think for the quarter, which in my view is something of a blemish, but primarily that's due to the fact that we are gearing up our organization structure for hopefully further expansion from fiscal '16. So I would like to think that we will see a significant change, but it will be a little cramped a little higher this fiscal year than last.

Greg Eisen – Singular Research

Another question. A lot of people have commented in such businesses still primarily domestic North America. Lot of people have commented about the second quarter GDP growth in the United States a lot of it was from inventory building.

Do you see any signs of that in your customer's behaviors and how that effected your sales or given the volume of 3%which seem not, but just probably the essence it was an obvious point this quarter?

Nigel Vinecombe

We don’t see any unusual levels of inventory building depending on who the customer is and when that fiscal year ends

There are times when certain customers are inventory building, but we don’t see any different levels of inventory building to normal for this time of the year and certainly we would expect to see a strong organic growth rate in North America in the second half of the calendar year.

Greg Eisen – Singular Research

Okay. I'll let some else call. Thank you very much.

Operator

Our next question comes from the line of Joel Tiss with BMO Capital Markets. Please proceed.

Unidentified Analyst

Hi. Good morning guys. This is actual [Richard] (ph) in for Joel Tiss.

Nigel Vinecombe

Good morning.

Unidentified Analyst

Congrats on the quarter, definitely a much stronger than we expected and it looks like very clean and just a pick-up where you just left off, you mentioned that you expect that organic growth rate in North America to pick up in the back half.

Just wondering what are some of the end markets that are driving that and can we expect again to the mid single digit level by year end and for the full year?

Nigel Vinecombe

The markets that are driving are great for the home personal care firstly and secondly supported by wine and spirits and we see those continuing to contribute in the second half of the year, but we would love to post a mid-single-digit organic growth, but we would suggest caution in terms of modeling, continuing to model at a low-single-digit 3% sort of organic growth rate from that and let's see how we go over the next few quarters.

Unidentified Analyst

Great. And then just a last one from us. You dismissed KPMG about a month ago and just wonder if there is any additional comments you can add on anything around what drove that decision?

Nigel Vinecombe

We feel as if Graham Thorpe a better fit for us in the hind side. So yes we chose to fire KPMG. In my 30 years dealing with auditors, normally it's been a very clear and clean process. In this case, I think KPMG is poor project management and people management, manage to reflect on the fact that weren’t a good fit and that GP were a much better fit for us. So lesson learnt.

Unidentified Analyst

Great. Thank you very much. Good luck with the quarter.

Nigel Vinecombe

Thank you.

Operator

At this time, we have no further questions in queue. I would like to the call -- the call over to Nigel Vinecombe for any closing remarks.

Nigel Vinecombe

Thanks again for your attendance this morning. We look forward to talking to you after our September quarter results and we will continue to stay focused on making the most of our current book of business in the next few months. Look forward to talking to you same. Thank you.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day everyone.

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