CCL Industries' (CCDBF) CEO Geoffrey Martin on Q2 2016 Results - Earnings Call Transcript

| About: CCL Industries (CCDBF)

CCL Industries Inc. (OTC:CCDBF) Q2 2016 Results Earnings Conference Call August 4, 2016 8:00 AM ET

Executives

Donald Lang - Executive Chairman

Geoffrey Martin - President and Chief Executive Officer

Sean Washchuk - Senior Vice President and Chief Financial Officer

Analysts

Mark Neville - Scotia Capital Inc.

Stephen MacLeod - BMO Capital Markets

Michael Glen - Macquarie Capital Markets

Ben Jekic - GMP Securities

Operator

Good morning, ladies and gentlemen. Welcome to CCL Industries’ Second Quarter Investor Update. Please note that there will be a question-and-answer session after this call. The moderator for today is Mr. Donald Lang, the Executive Chairman; and joining him are Mr. Geoff Martin, President and Chief Executive Officer; and Mr. Sean Washchuk, Senior Vice President and Chief Financial Officer. Please go ahead gentlemen.

Donald Lang

Thank you, operator, and good morning everyone. The operator mentioned we have a good crowd on the line today, so thank you for joining us for our investor update for the second quarter.

As you know, we had an excellent quarter, and the presentation, as always, is on our website, so everybody is able to access that on cclind.com under the Investor heading for the presentation which you can access or download.

So without further ado, I’ll turn it over to Sean.

Sean Washchuk

Thanks, Don. So I’ll draw everyone’s attention to page 2 of this presentation, our updated disclaimer regarding forward-looking statements. 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 2015 MD&A, particularly under the section Risks and Uncertainties. Please also have a look at our second quarter report for specific additions relative to our Checkpoint acquisition. Our annual and quarterly reports can be found online at the company’s website, cclind.com or on sedar.com.

Turning to page 3, the second quarter of 2016 was another strong quarter for CCL and marked our 23rd consecutive quarter of year over year improvement in quarterly adjusted earnings per Class B share. Sales growth, excluding the impact of currency translation, was 30% to $960.2 million compared to $721.5 million in the second quarter of 2015. The growth in sales can be attributed to organic growth of 6.9%, 2.8% positive impact from foreign currency translation and 23.4% acquisition related growth, which includes 10 acquisitions.

Operating income increased 14%, excluding the impact of currency translation, to $143.1 million for the second quarter of 2016 compared to $122.6 million for the second quarter of 2015. Operating income for the second quarter of 2016 included a $16.6 million non-cash expense for the write-up of the Checkpoint and Worldmark opening inventories. Not for this expense, operating income would have been $159.7 million. Geoff will expand on these segmented operating results of our Label, Avery, Container segment as well as our new Checkpoint segment momentarily.

The second quarter of 2016 included restructuring and other expenses of $19 million, $13.7 million after tax, of which $1.4 million was for severance and other costs associated with the Worldmark acquisition and another $13 million for severance related restructuring and $4.6 million of acquisition costs all associated with the Checkpoint acquisition. There were no restructuring or other items recorded in the second quarter of 2015.

Net finance expense was $7.8 million for the second quarter of 2016 compared to $6.2 million for 2015. The increase in net finance cost was primary related to the increase in outstanding debt to fund the acquisitions of Worldmark in Q4 2015 and Checkpoint in May 2016, augmented by the foreign currency translation impact on US dollar net interest expense, partially offset by the reduction in our average finance rate due to the repayment of our higher cost private placement debts in March 2016.

The overall effective tax rate was 30.5% for the 2016 second quarter compared to 29.4% in the 2015 second quarter, reflecting a higher portion of our taxable income being earned in higher tax jurisdictions. This tax rate may increase in future periods should a higher portion of our company’s taxable income be earned in higher tax jurisdictions.

Net earnings, including the aforementioned $13.7 million after tax effect, restructuring and other charges, for the 2016 second quarter was $72.2 million compared to $73.3 million for the 2015 second quarter. For the six-month period ended June 30, 2016, sales, operating income, net earnings improved 28%, 22% and 14%, respectively, compared to the same six-month period in 2015.

The 2016 results included 12 acquisitions completed since January 1, 2015, delivering acquisition related sales growth for the period of 17.4%, organic sales growth of 6%, foreign currency translation added 4.6% tailwind to sales. Results for the six-month period of 2016 also included the non-cash acquisition accounting adjustments to finished goods inventory of $16.6 million and restructuring and other charges of $21.9 million.

Turning to slide 4, basic earnings per Class B share were $2.06 for the second quarter of 2016 compared to $2.12 for the second quarter of 2015. Adjusted basic earnings per Class B share was a record $2.80 for the 2016 second quarter compared to adjusted basic earnings per Class B share of $2.12 for the second quarter of 2015.

The adjustment to basic earnings per Class B share included $0.39 for restructuring and other charges as well as $0.35 for the non-cash acquisition accounting adjustments to finished goods inventory. The $0.68 improvement in adjusted basic earnings per share to $2.80 was primarily attributable to the improvement of operating income of $0.65, $0.04 impact of currency translation and $0.01 net for the changes of interest, equity earnings and change in tax rate.

For the six-month period, adjusted basic earnings per Class B share was $5.45, up $1.34 or 33% compared to $4.11 for the same period a year ago. The adjustments to basic earnings per Class B share included $0.47 for restructuring and other charges as well as $0.35 for the non-cash acquisition accounting adjustments to finished goods inventory.

The six-month improvement in adjusted basic earnings per share was driven principally by the increase in our operating income which accounted for $1.13, while the impact of currency translation added $0.17 and a reduction in corporate expenses added $0.06, partially offset by the increase in the effective tax rate.

Turning to slide 5, cash flow, for the trailing 12 months, free cash flow was $215.8 million, a decrease of $84.2 million compared to the $300 million for the trailing 12 months of 2016. This reflects the improved operating results, offset by an increase in our change in net non-cash working capital and an increase in net capital expenditures for the trailing 12 month period. Particularly, there was an increase in our second quarter CapEx program. So for the trailing 12 month period, our capital expenditures increased by $70 million for the comparative periods due to a front-end loaded CapEx plan in 2016.

Turning to slide 6, net debt as at June 30, 2016 was approximately $1.3 billion, an increase of $672.4 million compared to December 31, 2015. The change in net debt from December 31, 2015 reflects the increase in drawdowns on our company syndicated credit facilities to fund acquisitions, mostly Checkpoint, and the repayment of our senior notes.

However, this was partially offset by the relative strengthening of the Canadian dollar at June 30, 2016 compared to the rates that were in effect at December 31, 2015. The company’s overall finance rate was 2.1% at June 30, 2016 compared to 3.1% at December 31, 2015, reflecting our current mix of syndicated revolving debt and senior notes, compared to a higher portion of senior note higher cost debt at December 31, 2015.

Despite the recent acquisitions and associated drawdowns of debt from the company’s syndicated credit facilities during the first six months, the company’s leverage ratio of net debt to EBITDA remains at a strong 1.83 times. However, this is an increase from March 31, 2016 due to the acquisition of Checkpoint. Therefore, the interest rate margin on our revolving credit facilities will move from 100 basis points to 120 basis points starting in the third quarter.

Finally, at June 30, 2016, CCL still has approximately $119 million of available undrawn capacity on its revolving credit facilities. Geoff, over to you.

Geoffrey Martin

Thank you, Sean. Good morning everybody. I am on slide 7. As Sean said, we had a front-loaded capital spending program in 2016, a lot of that to do with the very strong rates of growth now we've seen in a number of our businesses three or four quarters creating some capacity pressures. We have mitigated that $6 million for some capital asset sales. We expect 2016 to come in around $210 million.

Slide 8, CCL Label, very strong growth rate this quarter, 10.4%, very unusual high number that for us. High single digit growth in North America and in Asia; double digit in Europe and Latin America where I do believe Easter timing was a factor this year probably contributed about 1% of the numbers, something of that order. Profits were up in all market sectors and all geographies and acquisitions diluted our operating margins slightly.

A bit more color on slide 9, North America, we had pretty good results in all of our businesses actually, probably the one comment I'd add on this slide are the early signs of moderating automotive demand, many of you will have seen that reflected in the results of the automobile companies, so that business’ growth rate has begun to moderate quite significantly as the second quarter progressed and into the third quarter.

In Europe, again pretty strong picture across the board. The one I would draw your attention to here is particularly strong growth in the food and beverage business, very strong demand in the quarter across all the product lines in that sector of the market. One of our businesses in Europe was impacted by a very challenging new product launch which cost us quite a bit of money. That's now being corrected and we should see much better second half in that particular operation in Europe in 2016.

In the emerging markets, more of a mixed picture here. Asia profits actually declined on the strong growth, but we had a very strong FX gain last year to do with export sales from one of our operations in that part of the world, the underlying was still pretty good. China was kind of okay, up a little bit, not very much.

Very strong results in Latin America across all the business lines, some of that inflationary in Brazil, so although we’re reporting organic sales growth rate there, a lot of it is price recovery from foreign exchange related inflation. Australia was mix with wine good, healthcare poor, very strong sales in South Africa for beverage and the CCL Design acquisitions, Worldmark augmented our results in Asia and Latin America in the emerging world.

Page 10, joint ventures, most of these are also located in emerging regions and you can see here very strong picture of sales growth, north of 20% actually and the driver for that was really Russia. The local manufacturing in Russia has really been booming on the issues with the low ruble and imports being curtailed and that's being good for our business there.

Strong results in the Middle East; very good progress in Chile. We've begun to construct our IML label plant in the United States with Korsini and last also we completed the outstanding 25% acquisition of a tube plant in Thailand which will now become a wholly owned subsidiary.

On Avery, on page 11, not a very solid quarter. Underlying sales kind of flat, but we continue to see the mix story here, profit gains on margin expansion, selling more of what we make more money on and something less of what we make less money on and we began to see the impacts of Mable's Label, a deal we did at the end of last year, moving into its seasonal profit period. So very good performance in Avery.

Slide 12 now, just first seven weeks, or just one day under seven weeks, the Checkpoint results met our expectations. Sales came in just shy of $93 million. We took a lot of actions in the early weeks of the post-transition, so a lot of restructuring, but we spent about $13 million on severances, mainly in corporate type functions and some field operations and that already has begun to show some impact. We should get most of the restructuring done this year, there will be some of it will drag into 2017, but I expect most of that will happen before the end of the year.

And I know some of you are interested in what our view of the business is right now, I think you can think about an annual revenue run rate in the range of $700 million at Checkpoint. That's about what we see. And I think for the coming quarter, it wouldn't be far apart to take the numbers reported for the seven weeks here and double and it wouldn't be far off for Q3.

This business is very seasonal, so the earnings typically occur in the strong retail season sort of beginning in June and ending in early December, that's when they make most of their money and they don't make much, if any, money at all in the first quarter of the year. So it is quite a seasonal business.

Our target is try and get this up to a 10% operating margin, we did that already in the first seven weeks, but we obviously haven't seen the first quarter losses here and we’d expect to be able to do that from second half of next year on through 2018. Long term, I don't see any reason why this business shouldn’t look pretty much like CCL Label. It will have lower EBITDA margins because the amount of depreciation here is lower than we would typically see in our Label business.

Page 13, CCL Container, low single digit organic sales growth rate reported, 5% excluding foreign exchange. Metal has been declining, so we've got a lot of aluminum, the volume increases where it was certainly double digit and we pass some of the lower effects of lower aluminum on to our customers. We did get some offset in Mexico with mix and we also had some benefits in Mexico with the US dollar denominated sales there exceeded the peso sales. So that was the offset, while issues in our Canadian plant with a stronger Canadian dollar.

Page 14 is a summary of the quarter. We’re very pleased with the results. Just note again excluding and including comments at the bottom about these non-cash acquisition accounting adjustments really for opening finished goods balances where the accounting rules require us to eliminate all profits from any inventory we acquired at the time of acquisition.

So page 15, outlook comments on the immediate period ahead. Our order levels have continued at the sort of rate we saw in the first half of the year, but I want to draw your attention very quickly to the comps because this sort of period of much stronger growth began a year ago and the comps in the second half are very tough. So we’ll certainly see some quite considerable moderation in the growth rates of both CCL Label and CCL Container in the second half and indeed in the coming quarter.

We will, however, have the CCL Design seasonality in electronics to come. So the Worldmark acquisition makes most of its money in the end of the third and the beginning of the fourth quarter in advance of the Christmas selling season. Avery, we expect to see a modest decline in Q3 and modest gain in Q4, kind of flat for the year, plus/minus 1 point on the sales line, but we’ll certainly have a profit gain driven by margin expansion.

Just to draw your attention again to that Checkpoint high season, it is a business that makes most of its money in that sort of June to November period, in fact, almost all of its money. So that’s just something to bear in mind that you'll see whole positive results this year and then the first quarter will be a drag on our results. And last but not least, with the changes in the currency rate, we expect FX to be a modest headwind for the second half of 2016.

With that operator, we’d like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Mark Neville from Scotiabank.

Mark Neville

Maybe just start on Checkpoint, I think you were saying you're targeting 10% EBIT margin by mid-2017 or for 2018, I think you did that this quarter, you just mentioned that most of the profits are earned in the second half of the year, if not almost all. You’ve got more restructuring to come which should also help. So I’m just curious maybe if there's anything that we should be aware of or should be thinking about that why you would only maybe just do the 10% now?

Geoffrey Martin

I just think it's – we don't know more than we know today. So this is a little different to the situation at Avery where we had several months before we closed the deal, we’re on the inside working all the numbers. This is a public company that we really only had access to in detail since May 13. So it's only August 4 today and that's about all we can say.

Mark Neville

And then so you did say most or almost all the profits are second half?

Geoffrey Martin

Really from June through, so the first quarter is loss making and then you catch up a little bit in April and May and then money sort of made from June onwards.

Mark Neville

And then you said you think you should look like or no reason should look like Label, you’re sort of doing the 15% EBIT there.

Geoffrey Martin

Long term, so I don't know whether that’s two years, three years, four years. It’s only been 10 weeks. That's the part we don’t know. I mean the other question is the revenue and how sustainable that will be, it is a business that has an element of capital goods sales which are profitable. So when you get a big rollout of gates and systems that can sort of bump up a quarter or a year and then if you don't get it the following quarter or year you miss it. There’s not a lot you can do. So it is more volatile than some of our other businesses because of that.

Mark Neville

And the $700 million top line you talked about, just sort of contemplate other verticals or that's just assuming you were to sort of stick to retail?

Geoffrey Martin

That's just we stick to retail, but I would say that's where most of the demand we see is likely to be. RFID labels in the industrial world, interesting niche is they are not – the material demands are in the retail space.

Mark Neville

But I mean did you sort of see other applications outside or have you given any thought or sort of the focus right now on the cost side?

Geoffrey Martin

Yes, we see this as more niche and more limited.

Mark Neville

Previously you mentioned some working capital efficiencies, I’m just curious if there's any targets or any numbers you want to throw out?

Geoffrey Martin

We certainly don't think they manage it very well and we think there's plenty of upside there. But again, it's only 10 weeks, so I wouldn’t like to say how quickly we will be able to do it. We think probably the biggest area of what we're going to focus on is inventory. So they turn their inventory about four times a year, certainly should be double that, if not more. So that’s probably the area we will first work on, but it's only been 10 weeks. So we’ll need a bit more time before we could get more specific about that.

Mark Neville

Maybe just one last one on Label, you mentioned some I think pricing gains in Brazil, I’m just curious if there is any other markets where you saw that just kind of get my head around the 10% organic growth?

Geoffrey Martin

Really just Brazil. It's sort of reverse now because the real has been sort of gaining against the dollar, but last year it was all one-way street and even into the first quarter before it began to change, but we’ve been playing catch up on that for a long time now and thankfully it's come to an end and we're getting a bit of a reverse impact. So that's helping us a bit now, but it certainly will. So if you looked at the sort of the translation loss and the organic gain [indiscernible] really gives the underlying picture of what's going on there.

Operator

Our following question is from Stephen MacLeod from BMO Capital Markets.

Stephen MacLeod

I just had a question on the capacity need, so you mentioned you had with your higher CapEx forecast, your front-loaded CapEx, just curious where those capacity restraints or capacity constraints were in the system?

Geoffrey Martin

They were really in food and beverage business which is being growing double digit now for seven or eight quarters and so that was a big factor. We're also sold out in our aluminum container business, so we put a line in there, you can see that on the Container line.

The big driver for that was in the food and beverage business. In the home and personal care business, another big driver of the growth was tubes that we put quite a bit of money into our tube operations in North America, which were also sold out, completely sold out. So we've had to play some catch up there, so the growth rate in tubes is well into double digits. So we were having to really play some catch up.

Stephen MacLeod

And when you think about the ex Easter impact in the Q2 organic growth rate, like were those – food and beverage, tubes, were those kind of really the key drivers for the strength in the quarter or was it really more broad based than that?

Geoffrey Martin

Broad based than that, the CCL Design also had good growth. I mean everything was in reasonable shape. The Easter factor there, we know growth rate was double digits, so you might take a 1% sales off that, not more. It’s only just the impact of to two days in the quarter. So it’s not really huge. But it's definitely material because you have a full April and Easter interrupted April in the European and Latin American countries that makes – does make a difference in the quarter. But the growth rate was unquestionably strong. And pretty much every region – any place I would say, probably a lot of companies have commented on this, China was sort of – grew, but not much.

Stephen MacLeod

And then turning to Checkpoint, just wondering if you could provide just some color on kind of the restructuring actions that you've taken so far in the first seven or 10 weeks? And then when you look through the back half of the year, if you have sort of some indication around where EBIT sort of falls out on a half year basis including the restructuring – including the benefits from restructuring that you've put through.

Geoffrey Martin

We've been in here 10 weeks, Stephen, so I don't think we can get into too much detail about that at this stage because we hardly know certain things. I can tell you on the restructuring side, most of what we have done has been eliminating corporate functions we don't need, quite some changes to the operating management. We've made a number of changes there, so it’s mainly overhead type functions.

There's been no plant closures any actually planned. So it's been more in the management ranks of how the business is run more than anything and eliminating some consulting cost they had prior to change of ownership, those sorts of things. And then the best thing I can tell you right now is what we know, I think what we could say with some confidence is a good indication for the coming quarter is what you saw for the first seven weeks times two.

And we’re managing this as we see it day by day and I think until we've got more experience of the business, I wouldn't want to comment more than that. I can say we do you know – we’ve seen this, looked at all the data they had internally, we do know that the first quarter is being consistently loss making for quite some period of time. So they just follow the typical retail sales pattern and buy a lot of stuff in the fourth quarter and then well goes dry in Q1. So that’s a consistent pattern that we know about.

Stephen MacLeod

And then just really quickly on the CCL Taisei tube plant, was that the reason for acquiring the minority interest, was it just have control over that?

Geoffrey Martin

We had a Japanese partner there who was very good and certainly helped us a lot technically, they’re very good technical people. But the original plan for the joint venture was that we would sell tubes from this plant back to their customers in Japan and that element of the venture really hasn't worked at all. So that's the reason we said while all the other customers will be out and that interest is really controlling their own customer relationships in Japan, so it was a very amicable ending of the arrangement and they've been a good company to work, but that’s the main reason.

Operator

The following question is from Michael Glen from Macquarie.

Michael Glen

Just starting with the CCL Label, despite the organic growth you had, the operating margins were down about 60 basis points in the quarter. Is that largely a function of some of those inefficiencies you talked about or is there some other?

Sean Washchuk

The reported operating margins are down because we've got a challenge in there for Worldmark inventory. So that’s most of it. And I think if you strip that out, the drop is more like 20 basis points than 60 or 80. So the other difference is the Worldmark finished goods inventory which we have to markup. So that’s all that was non-cash, that’s the main reason for that and the 20 basis points dilution is just the acquisition mix.

Michael Glen

And then can you just maybe discuss Worldmark performance in particular in the quarter?

Geoffrey Martin

Yeah, it's a very seasonal business. So they make their, a bit like Checkpoint, their money making season is now. So I think like everyone in the electronics space, there’s certain OEMs in that space, change of model times, old models are being phased out, new models being phased in. So that leaves you sucking wind a little bit while that's going on and then once the tide comes it gets turned on the summer, then you’re wondering how you’re going to cope. So we’re going through some of that at the moment. Generally, we’re quite pleased with the performance of the business so far.

Michael Glen

And so with Worldmark, would you expect it to be more accretive to overall margins in the back half of the year then?

Geoffrey Martin

I would expect it to be sort of not far away from the average in the – certainly in the August through the end of the year.

Michael Glen

And then just turning over to Checkpoint, in terms of the high season in the second half of the year, just understand, what are the products that drive the sales and profits to the back half?

Geoffrey Martin

The main reason – you obviously got the pre-Christmas selling season, so that's the biggest sales season for all retailers no matter what you sell. So all retailers build inventory during this time in terms of purchases they make. And then a lot of what we make at Checkpoint is [indiscernible] so they don't wait till this appears in the store, they’re doing it – as they’re building inventory in their supply chain. So that's a pretty common phenomenon for all retailers.

And then you have the loss prevention office’s annual budget, so CFOs of most companies will remind the loss prevention office over the budget for the year and if you haven't spent it by the end of the year it’s gone. So there tends to be some sort of spending driven by that phenomenon during the fourth quarter in particular.

Michael Glen

And then the outlook on the $700 million in sales, do you have an organic growth rate embedded in that?

Geoffrey Martin

No.

Michael Glen

And then just circling in on the RFID, there's an increasing number of our industry articles regarding things like smart labels and label technology. Does having the RFID in-house allow you to develop products in those categories?

Geoffrey Martin

They certainly have capabilities, the RFID business at Checkpoint, I can tell you is pretty small, it’s not material to the business at all and it’s loss-making. So I can tell you that. But there's certainly a lot of interest in the apparel space in RFID, it’s in the apparel space, it's not in other spaces in retail. There are a number of roll outs going on. We are involved with some of them, not all of them and it's clearly a phenomenon that’s going to grow over time. I think it's going to take multiple years, I don’t think there's going to be a mad gold rush in the next two years, but it certainly a phenomenon that's going to happen.

Michael Glen

And maybe just one more, do you have a sense as to – if the company wants to roll out an RFID system using Checkpoint, what's cost per store for a roll out would be?

Sean Washchuk

That’s as long as a piece of string, because it depends on how many items you tag, some stores would want to tag everything if they’re smaller, other stores will selectively tag their big areas of merchandise where they're going to do that, you then got to decide as a result of that how much infrastructure you put in the store, how complicated you want to make the software and so on. So there isn't a path to that. I think I would say it's not – in the past, it’s been considered prohibitively expensive. I would say those days are sort of coming to an end.

Operator

The following question is from Ben Jekic from GMP Securities.

Ben Jekic

I have two questions. My first question is, Geoff, if you can elaborate on what you're observing in the auto industry and especially in the context of, I think, your plant that you’re building in Mexico to support that side of CCL Design is getting close to being built, so where are you with that project?

Geoffrey Martin

The plant is coming to a conclusion, so it will start up – I don’t think it will be starting up this year, but certainly will be next year. I would say we haven't seen a lot of difference yet in Germany. So the German OEMs are more export driven, still seem to be doing well. But if you’ve seen all their results, most of them [indiscernible] is an exception, but most of the autos have began to report lower rates of growth, so it’s just they are running into the problem the same as I’m talking about for us in the second half of the year. But where are we seeing it most is in the US. So the sort of more traditional US manufacturers outside of trucks, we've begun to see just the pace of growth has just tailed off. And I think if you look at all the commentary in the automotive sector, you’ll see that's pretty broad based.

Operator

[Operator Instructions] The following question is from Mark Neville from Scotiabank.

Mark Neville

Maybe just on Avery, I know you don’t like to throw this out, but can you maybe give us a sense of how fast your print and media is growing versus sort of the other binary office product businesses that you have at Avery?

Geoffrey Martin

Actually this year there's not a lot of difference between the two because we've had much better – now we’ve exited some of the things we didn't want in the other categories, we reinvented some of those. There's not a lot of difference between the two. But print and media still – if you’re going to printable media, you’ve also got products that are declining as well as products that are growing. So there really isn't a lot of difference.

Mark Neville

So I'm just curious as to sort of what's dragging the consolidated number now? Is it still just adjusting mix in that part of – in that business?

Geoffrey Martin

I think there’s still some secular decline products in there, dividers, indexes, labels for envelopes, you see some secular declining things going on in there and there still machinations of how retailers order their stuff. So quarter to quarter, it’s still volatile driven by when we’ll not decide to send trucks to pick up back to school products and things like that. So that’s kind of what it looks like in the inside.

Mark Neville

And your white label business, is that within the printable media?

Geoffrey Martin

Yes.

Mark Neville

And then just on the back to school, I’m just curious how that started for Avery?

Geoffrey Martin

It’s gone better this year, we were better prepared for it. We’ve built more inventory this year than we had last year. So it's gone smoother. The season is a little later on our side, so probably July and August will be better than June. We shipped a bit more in those months. So I think it’s gone okay.

Mark Neville

And maybe just on the capacity, is there – you mentioned some capacity constraints, is there anywhere else we're still feeling a little bit of pressure or once these projects are up and running you should be okay?

Geoffrey Martin

I think we feel – we put quite a bit of money into few of these places, but we’re still growing rapidly in some of them. So I don’t think it's entirely gone away yet, but it’s – we had these four or five quarters now where we've had this 6%, 7%, 8%, 9% and now 10% growth rate. So it’s pretty unusual for us. So when it compounds itself, it has quite a dramatic effect on some of the operations we have.

Mark Neville

Just the CapEx guidance of $210 million, can you just remind me what that was?

Geoffrey Martin

What do you mean what it was? $195 million, it was up $15 million.

Mark Neville

And then for 2017, I mean, is it going to stay sort of at these level again?

Geoffrey Martin

It will be 200 and change, something like that.

Operator

The following question is from Ben Jekic from GMP Securities.

Ben Jekic

Just one question is on Checkpoint and I apologize if it was already addressed. The $700 million revenue level, if memory serves, that's a little bit lower than what it was I think in 2015 run rate. Is that sort of a consequence of just business performing at its own for this past period or are you expecting any divestitures or kind of allowing some businesses to...

Geoffrey Martin

Just that, that’s an estimate than it's a round number.

Operator

The following question is from Stephen MacLeod from BMO Capital Markets.

Stephen MacLeod

Geoff, I just had a follow up question for you, for Sean as well, I just wanted to get a sense of what pro forma depreciation, amortization and corporate costs look like with Checkpoint fully in the mix?

Sean Washchuk

I think the depreciation will be $200 million plus, probably in the $220 million range, maybe $230 million. And corporate costs will be closer to – it shouldn’t really change, they’re going to be a lot closer to what you see here in Q2 rolling out for the remainder of the year.

Geoffrey Martin

I think D&A, $220 million, $230 million range. So that $230 million number would be depreciation and amortization, Steve, not just depreciation.

Operator

The following question is from Michael Glen from Macquarie.

Michael Glen

Everything has been answered, thanks.

Operator

Thank you. There are no further questions registered at this time.

Geoffrey Martin

All right, well, thank you operator and I want to thank everybody for attending the call. I appreciate the questions. If there are any follow up enquiries, as you know, please give Sean Washchuk a call, he’ll hopefully be able to answer all your questions. Otherwise, we look forward to chatting with you next quarter. Thank you, operator.

Operator

Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!