CCL Industries, Inc. (OTCPK:CCDBF) Q2 2022 Earnings Conference Call August 11, 2022 7:30 AM ET
Company Participants
Geoff Martin – President and Chief Executive Officer
Sean Washchuk – Senior Vice President and Chief Financial Officer
Conference Call Participants
Mark Neville – Scotiabank
Stephen MacLeod – BMO Capital Markets
Walter Spracklin – RBC
Matt Ruiz – RBC
Adam Josephson – KeyBanc
Ahmed Abdullah – National Bank of Canada
Michael Glen – Raymond James
Daryl Young – TD Securities
David McFadgen – Cormark Securities
Ben Jekic – PI Financial
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 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.
Sean Washchuk
Good morning. This is Sean Washchuk here. I’d like to thank everyone for joining us on the second quarter investor update. We’re having some challenges with the website right now. So, in order to view the slides, everyone will have to go to our website, cclind.com, and go to Investors, drop down menu, then to Investor Presentations and download our Second Quarter Investor Update Presentation. And from there, I’ll guide you along through our deck today.
So, moving to our Slide 2, our disclaimer regarding forward-looking information. I’ll remind everyone that our business faces known and unknown risks and opportunities. For further details of these key risks, please take a look at our 2021 Annual MD&A, particularly, recession risks and uncertainties. You can also refer to our second quarter report for updated risks and uncertainties. Our annual and quarterly reports can be found online at the company’s website, cclind.com or on sedar.com.
Moving to Slide 3, our financial summary for the three and six months. For the second quarter of 2022, sales increased 14.9% with organic growth of 10.9%, acquisition related growth of 4.8%, partially offset by almost 1% negative impact of foreign currency translation, resulting in sales of $1.62 billion compared to $1.41 billion in the second quarter of 2021.
Operating income is $247.8 million for the 2022 second quarter, compared to $235.5 million for the second quarter of 2021, a 6% increase, excluding impact of foreign currency translation. Included in this figure is a $3.5 million non-cash acquisition accounting adjustments to fair value inventory for the acquisition of the Adelbras in the quarter. Excluding this adjustment, operating income increased 7% excluding currency translation. Geoff will expand on the segmented operating results of our CCL, Avery, Checkpoint and Innovia segments momentarily.
Corporate expenses were up for the quarter, principally due to higher expense for long-term variable compensation versus the prior-year quarter. Consolidated EBITDA for 2022 second quarter excluding the impact of foreign currency translation increased 7.3% compared to the same period in 2021.
Net finance expense was $15.4 million for the second quarter of 2022, compared to $14.1 million in the 2021 second quarter, due to an increase in total debt outstanding this year versus last year. The overall effective tax rate was 24.4% for the 2022 second quarter, compared to an effective rate of 25.5% recorded for the second quarter of 2021, primarily reflecting a higher portion of taxable income earned in lower tax jurisdictions, as well as the U.K. tax legislation that was enacted in the second quarter of 2021 that increased the prior year’s tax rate. This 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 2022 second quarter were $163.4 million, up 8% excluding foreign currency translation, compared to the 2021 second quarter. For the six months period, sales increased 16%, operating income increased 5%, net earnings increased 6%, compared to the six months period in 2021, 2022 included results from 12 acquisitions completed since January 1, 2021, delivering acquisition related sales growth for the period of 4.7%, organic sales growth of 10.8% and foreign currency translation with a headwind of 1.7% to sales.
Moving to Slide 4, our earnings per share. Basic earnings per Class B share were $0.91 for the second quarter of 2022, compared to $0.86 for the second quarter of 2021. Adjusted basic earnings per Class B share were $0.94 for the second quarter, a record — quarterly record compared to adjusted basic earnings per Class B share of $0.89 for the second quarter of 2021. The change in adjusted EPS to $0.94 is primarily attributable to an $0.08 advance in operating income, $0.01 increase from equity contribution for merger and ventures, partially offset by $0.02 negative currency translation, $0.01 from an increased finance costs and additional $0.01 from our adjusted tax expense year-over-year.
Moving to Slide 5, free cash flow from operations. For the second quarter of 2022, free cash flow from operations was $115.1 million, compared to $94.7 million in the 2021 second quarter, reflecting an improvement from cash flow from operations of almost $42 million partially offset by an increase in net capital expenditures for the comparable periods.
For the 12-months ended June 30, 2022, free cash flow from operations decreased $165 million compared to the 12-months ended June 30, 2021. This comparative decline is attributable to an increase in net working capital, coupled with an increase in net capital spending for the periods.
Moving to Slide 6, dollars returned to shareholders. During the second quarter, the company renewed a Normal Course Issuer Bid or a share buyback program for the buyback program that expired in May of this year. Under this new bid, the company may purchase up to 9.9% of its public float of Class B voting shares, up until May 24th, 2023. This is all subject to the normal restrictions of the TSX.
During the first six months of 2022, the company repurchased almost 3.4 million shares at an average price of $58.95 for total proceeds of $200 million, including the 14.3% increase in the 2022 annual dividend in February of this year, dividends year-to-date have amounted to $85.4 million, representing 26.7% dividend payout ratio.
Moving to Slide 7, our cash and debt summary. Net debt as of June 30, 2022, was $1.76 billion, an increase of approximately $515 million compared to December 31, 2021. The increase is principally a result of new borrowings to finance the company’s acquisitions during the first six months of this year, and dollars needed to repurchase shares under the aforementioned buyback program. Although the company’s net debt increased, the balance sheet closed the quarter in a strong position.
Our balance sheet leverage ratio was approximately 1.47 times, increasing from 1.06 times at December 31, 2021. Liquidity is still robust with $634.3 million of cash-on-hand and $0.8 billion of available undrawn credit capacity on our revolving credit facilities. The company’s overall finance rate was largely unchanged at approximately 2.43% at June 30, 2022 compared to 2.42% at December 31, 2021. The company’s balance sheet continues to be well positioned as we move through fiscal 2022. Geoff, over to you.
Geoff Martin
Thank you, Sean and good morning, everybody. Hope you are managing to follow the slide, followed by the webcast this morning. On Slide 8, capital spending for the year so far, $190 million net of disposals second half were returned for the year $380 million.
Slide 9 highlights for the CCL segments, very good quarter. And as part of the company, 10.9% organic sales growth largely price led. So some — little bit of volume growth, but largely price led. North America are up high single-digit, Europe up double-digit, Asia Pacific up mid single-digit, Latin America are up more than 30%. Very strong quarter in our Home & Personal Care business and Healthcare & Specialty offset tough comps at CCL Secure. CCL Design sales are up, but profits are still impacted by lockdowns in China and soft demand in the Electronics segment. Sales are up at the Food & Beverage business, the profitability gains they were held a little bit by inflation.
Slide 10 highlights of our joint ventures. Very good quarter, excellent quarter in fact. So we’re pretty pleased to see that.
Slide 11, highlights some results of Avery. Strong trajectory in this business continued especially in North America, we’ve seen a big recovery in name badges. Not quite yet a full recovery, because we’re still seeing some slowness in the convention space for sports events and other forms of events are back to normal. Non-cash acquisition accounting effective Adelbras result that Sean already mentioned, which is $3.5 million for the foreign business. Raw materials inflation of elevated freight/component cost from China pass through was successfully implemented, with supply availability in this business is still challenging.
Slide 12, highlights the Checkpoint. The MAS business had a tough comps actually, saw declines in all regions except Latin America that versus a very strong prior year, and that profits were impacted by China freight and component inflation and lockdowns in the country, which affected large supply chain that’s faced in China.
The Apparel Labeling business on the other hand, had an another exceptional quarter exceeding expectations 25% organic growth driven by RFID and augmented by the Uniter & Tecnoblu acquisitions. So on fast storied MAS and one strong storied at ALS.
Slide 13, Innovia. Three stories again here. Volume was up in the Americas, but down in Europe and sales gain was largely price pass through of inflation. The down story was meeting all in Europe where we had higher than expected energy and freight inflation and the cost of the new line startup in Poland all three which impacted profitability in the quarter accounted for all those declines in the quarter. Profitability did increase in the Americas, but was held by the revaluation of inventories as resin declined and we also saw a higher freight cost in North America.
Slide 14, an outlook comments for the coming quarter. Final price pass through initiatives that have been implemented to benefit the core CCL Label businesses where we had some lag that would definitely benefit the second half of the year and the orders picture remained very solid.
CCL Design outlook still depends on the chip availability recovery and especially in all components, and consumer demand holding up in the electronics space where it’s been a little bit soft recently, recent acquisitions are additive.
Comps at CCL Secure ease significantly for the second half. Avery volume should continue to improve, and augmented by recent acquisitions. Checkpoint RFID growth at ALS has also started to continue, with the softer MAS picture in broad retail that will continue in the second half after the [indiscernible].
Innovia sales likely to decline on lower resins, where resins been dropping in the last three months for today’s purchase prices, and we have to balance the freight and energy inflation in Europe to match the second half of ’21 profitability. We are working on both of those things. Company-wide our China operations were back to near normal, but demand in the country overall remained soft.
Okay, operator. With that, we’d like to open the call for questions.
Question-and-Answer Session
Operator
Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And the first question today is coming from Mark Neville from Scotiabank. Mark, your line is live.
Mark Neville
Hey, good morning guys. Thanks for taking the time. Thanks for the time, Geoff. Maybe first just on prices, does that sound clear. For all the freight increases that you tend to do sort of through now?
Geoff Martin
There’s a little bit of lag in couple of parts of the businesses. So that’s in three areas of lag you should think about, Food & Beverage in the CCL space, we’ve got some lagging contracts there that we’ve now fixed. Some of the benefits are in the second half. Checkpoint MAS, the freight and component cost inflation increases getting through particularly in Europe in the second half, so we’ve got some energy and freight transportation first one will pick up in Europe. But they’re not already say, three of the comparative materials. I would say cost on 85%, 90% of the inflation we’ve received.
Mark Neville
Can you just on the regional differences that you’re seeing in this results? Second, is there more to do with sort of the raising inflation in those geographies and the mix?
Geoff Martin
The Latin American situation is really about share gains in some parts of the business. So that’s what [indiscernible] it is. I think in Europe it’s definitely — inflation in Europe has gone so we’ve been running in a high clearly it has in the U.S. so that’s probably a fair comment about the new contracts in Europe versus U.S. So and also in Asia we’re trying to get a much large price.
Mark Neville
Okay. In terms of sort of volumes in terms of demand picture. I’m just curious how that’s differs are regionally if there’s a marked difference between so you see in Europe and sort of North America and in India I guess. It feels that the economically is there any risk in the Europe or you don’t know?
Geoff Martin
Yes, I would say the strongest region right now for us is North America. Europe is actually in part, and Asia is actually in part especially in China. The thing that customers go wait for that customers and say, the North America has held up pretty well some parts that clearly coming out of Europe and also from parts of Asia.
Mark Neville
That’s helpful. Just it gives a little blurb by the price. But that’s super helpful. Maybe just one last one from then. Maybe just in NCIB like your stocks gone from sort of mid 50s and 60s. I’m just curious if you tend to be as active?
Geoff Martin
We’ll have to wait and see.
Mark Neville
All right, got it. Thanks, Geoff. Thanks, Sean.
Geoff Martin
Okay.
Operator
Thank you. The next question is coming from Stephen MacLeod from BMO. Stephen, your line is live.
Stephen MacLeod
Thank you. Good morning, guys.
Geoff Martin
Good morning, Steve.
Stephen MacLeod
Good morning. Just on the CCL segment. You had very nice EBIT performance there, and given the fact that most of the growth was from price, I would have thought you’d see a little bit of EBIT margin pressure. So I’m just curious if you can talk about some of the drivers on EBIT in the CCL business in Q2?
Geoff Martin
Well, two of our bigger businesses in there HPC and H&S Healthcare & Specialty did particularly well, and I would say have done particularly in North America, done probably the best show as the price are through. So we had very little lagging inflation in those three parts of the businesses.
So CCL design is a more of an mixed story, because we recently had the impact of chip problem demand with soft in automotive demand and soft in electronics. And in food and beverage we had some contracts where we had inflation light. And then in CCL Secure, we had a very strong EBIT quarter last year with very high margins, yet higher services cost that makes it very challenging and still about the average for the company, but when is going to be was last year.
Stephen MacLeod
Okay, that’s great. So mostly — sound like mostly mix and price related. On the MAS business in Checkpoint, it sounds like you expect some of the softer resell impact to continue in H2. I’m just curious do you expect it to worsen? Or you — is your sort of the guidance based on what you’re seeing today?
Geoff Martin
What we’re seeing today. I mean it’s — there has not been this broad retail so we’ve gone in through all sector — all kinds of sole operators in the MAS business. So, grocery and pharmacy chains all those changes you see in the broad. But, it’s really broad based retail. And we’re currently seeing some slowdown in sale globally and — North America’s not the largest region in that business so Europe is. So, some softness in Europe and some softness in Asia, partly due to the lock downs in China.
Stephen MacLeod
Okay, that’s great. And then just finally on Innovia. Obviously with resins lowering Innovia sales is impacted. Would you expect the back half EBIT to be flat, given what you see right now? Or are you sort of guiding to it that should be — being lower at this point?
Geoff Martin
I think it depends on how well we do with the energy and freight situation in Europe. That was the main problem with our quarter, I mean it’s still got the startup costs of the line in Poland that was entirely materials, but the freight manages to catch up on that, making sure we’ve got enough recovery on that in our pricing is important in the second half. If we do that, I think we’ll be okay. If we don’t do it, we’ll have to repeat [indiscernible], but we’re working on it.
Stephen MacLeod
Okay.
Geoff Martin
I would expect to see some sequential improvement maybe as well as we did this time last year with a squeeze in inventory we’re going to have, will not be difficult.
Stephen MacLeod
Okay, that’s great. Okay, great. Thanks Geoff.
Operator
Thank you. And the next question is coming from
Operator
Thank you. And the next question is coming from Walter Spracklin from RBC. Walter, your line is live.
Unidentified Analyst
Hi, gentlemen. Thanks for taking the question. This is Ruiz on for Walter. I know we ask you this every quarter, but any change to the M&A line? Is market volatility pumping in the U.S. dollars or valuations still a lot bigger?
Geoff Martin
No change so far.
Unidentified Analyst
So far, okay. All right. This one is on CCL, so organic growth in CCL core segment has been solid and your outlook sounds optimistic. How far would you say you had visibility on demand and any views as to sustainability beyond that direct line of sight?
Geoff Martin
Well strong retailing business in large parts. And we know it sounds we have visibility for about six weeks. But we don’t see any anecdotal change in circumstances. So, customers are still very much focused on supply availability than anything else. So, supply chain issues still remain in many areas of packaging, and customers are more focused on making sure they got what they want, when they need it. That’s the big issue right now.
Unidentified Analyst
Okay. Thanks, Geoff.
Operator
Thank you. The next question is coming from Adam Josephson from KeyBanc. Adam, your line is live.
Adam Josephson
Geoff and Sean, good morning.
Sean Washchuk
Good morning.
Geoff Martin
Good morning, Adam.
Adam Josephson
Good morning, Geoff. You just — in response to the last question, you just talked about how supply chain problems are leading, packaging buyers that keep their stocks up yet. In the earnings release, you talked about supply chain problems easing globally. So can you help me square those two things?
Geoff Martin
Well supply chain is still relative, so lot of part has evolved, but it is still terrible compared to how it was a year-ago. So it is better than — is it looking like it’s improving? Yes, it is. How are they compared to a year-ago? Terrible. So our key raw materials represent the raw materials typically eased the way in three days together on SKU raw material from a supplier, we’re going to be waiting for six to eight weeks.
Adam Josephson
Yes, and do you see that…
Geoff Martin
But it has some of the pain points we were experiencing UBM strong particularly obviously over. So some of the pain points are easing, but compared to how it evolves in the last time, we used to call it normal, this year is pretty difficult.
Adam Josephson
But you see that – I’m sorry go ahead sir.
Geoff Martin
No, go ahead.
Adam Josephson
Do you see that easing further in the weeks and months ahead for I mean, there’s no other event like the EPS, is there anything that sticks out to you that would suggest to you that these problems will significantly further ease in short order?
Geoff Martin
Well, yes I would say that we’re currently seeing some signs of easing. And also you’re saying that in deflation rather than inflation, resin and aluminum. And so I think it is reasonably well. So I think paper is the big question. So paper supply industry in the U.S. will always [indiscernible] paper supply in the U.S. has become challenging just in general.
Adam Josephson
Yes, understood, Geoff. When we look at your CCL segment organic growth and try to compare it to historical when we’ve been in recessionary periods, if it’s fluctuated anywhere from call it, flat to up 5% to 6%. But this time, it’s distorted with all the price increases related to all the inflation. How would you characterize your volume trends now compared to what you’ve seen in past recessions? I think you said your volume was slightly up in the second quarter, and I assume you’re expecting something similar in the third quarter. Can you just frame what the volume trends you experience are compared to years past and recessions past?
Geoff Martin
Well, of course it’s a very different economic outlook compared to that was in the last one, where we had big moment of global financial crisis [inaudible] which was a real recession with an unemployment so repetitive. So this time, we have a — we had a technical recession in GDP declined three quarters in a row. But we still can’t find people in unemployment — employment is at record levels. So it’s an unusual situation. On top of that, you’ve got supply chain constraints which we didn’t have in the last recession. So it’s very hard to read, what’s actually going on underneath in all.
But if you look at the results of our customers, most of them — most of the sales increases that we saw, there were exceptions, but a lot of them were price led rather than volume led. So, we look at that quite closely and following upon closely. And the outlook is probably like it’s been this quarter little improving, little bit of volume growth, yes, but not much.
Adam Josephson
Yes, and I appreciate that, Geoff. And on the price factor initiatives, we talked about earlier, how much inflation did you actually recover in your CCL business in the first half? Just trying to understand how much more growth one should reasonably expect year-over-year in profitability, given whatever additional price recovery you will have — had along with all the other benefits say, easier comps in CCL Secure, the acquisitions in CCL Design et cetera?
Geoff Martin
That’s very hard to measure that in the neighborhood, millions of transactions for those shapes and sizes that you can only really intuitively guess, but they vary, Adam. But it’s very hard to understand numerically. Then what all I can say is that we fall in the dust slightly in the past quarter, my guess helped me calling the situation unlikely to change for the second half of the year.
Adam Josephson
But presumably the price-cost relationship will be more favorable in the second half rather than the first half?
Geoff Martin
Yes, yes but that’s again where we’ve got a lot of pass through arrangements, some of the things that are really dropping like movement will be passed on pretty much real time. So that’s kind of a wash on the bottom line where it’s…
Adam Josephson
Got it. Okay, yes. Just one last one Geoff on RFID. Can you talk about what — from your seat, what the penetration is in Apparel and other markets compared to what it was a year-ago? And has your thinking or outlook changed with respect to the long-term opportunity you have in RFID?
Geoff Martin
So nice one, like everybody in the industry today in Apparel and apparels been, it is 100 pounds or greater than room of RFID still continuing to grow, and the technology is still continuing to develop. So the form factor of RFID also beginning to change. So not just the rollout of RFID, it’s the form factor that’s using, so more users stock back, less users hard thing specifically.
And so we still think we’re in the early to mid-stages of RFID growth and I haven’t seen a lot of change in that comment since last quarter. We are getting quite excited about opportunities outside of apparel, but they’re all in niches, and there’s lots of them. So the challenge there is to finding on and making sure you got the last mile of the business development in terms of marketing activities that most properly priced to make a real profit in that part of the business. We’re excited about it.
Adam Josephson
Wonderful. Thanks, Geoff.
Geoff Martin
No problem.
Operator
Thank you. And the next question is coming from Ahmed Abdullah from National Bank of Canada. Ahmed, your line is live.
Ahmed Abdullah
Thank you. Good morning all. You managed to deliver strong results for about 11% organic growth in the first and second quarters of this year. You think where you stand on all the moving pieces and how pass throughs have gone and inflationary pressures. Will you be thinking about a similar level of organic growth in the back half of the year?
Geoff Martin
We will have to wait and see. I mean, we’ve got some resin and aluminum are both dropping quite significantly. So we definitely want to see the same rate of growth as an overview in the second half of the year, because resins are dropping. And where we got pass through of resin and aluminum, can business is also being dropped and we’re going to see an impact there. So the bottom half is no, I don’t think we feel the same way of organic growth because I think we are having much inflation in the second half. I mean both the number will be well in likely same.
Ahmed Abdullah
Okay, that’s fair. And at Avery, you highlighted that you saw a bit of a pull forward as the back-to-school season on earlier than usual start this year. Can you perhaps quantify how much of a pull forward that may have been I mean, will we still see a bigger third quarter in the year for the segment?
Geoff Martin
Well basically the big month for the back-to-school shipments is July, but this year was in June. So the pull forward that was really from June into May. So, first one again I remember back-to-school shipments beginning in May. So we started in May, accelerated in June, for July it was — July bottom off since July last year and we were expecting to see some pick up in August, because the reorders are much more organized this year.
The retail industry had a climate of back-to-school inventory last year where the chaos that we found they are much better organized this year. So over the season, we look into revenue season we are expecting sales to be up, but I think it will be more in Q2 this year than it was this time last year and less in Q3 than this time last year.
Ahmed Abdullah
Okay, and that’s fair, and on the Innovia, the sales declined given the lower resin prices. Are you thinking more sequentially or versus last year as well?
Geoff Martin
Sequentially.
Ahmed Abdullah
Sequentially, okay.
Geoff Martin
Yes, I think with the offset as last year, but we will have to wait and see.
Ahmed Abdullah
Okay, and that’s fair. That’s it for me. Thank you.
Operator
Thank you. The next question is coming from Michael Glen from Raymond James. Michael, your line is live.
Michael Glen
Thanks. Just to start, if we’re looking at CCL Design and we’re thinking of the automotive business there, can you give some sense as to how much below trend or how much opportunity for upside there this time?
Geoff Martin
It’s about 300 — little over $300 million in sales, before getting [indiscernible] fair chunk share. And it’s still difficult in all the major, so we still got lots of problems with OEMs, rescheduling production, parts availability. So that’s the big challenge in automotive and it’s disrupting our operations everywhere, particularly in the U.S., we’re not very big in China, particularly in the U.S., Europe seems to be better, so Europe is performing better than North America, that’s probably the best I can — color I can give you.
Michael Glen
And is the biggest — is the bigger exposure for that business overall, it’s in North America versus Europe?
Geoff Martin
Well now we have there, no, no, Europe is the biggest business for us in automotive.
Michael Glen
Okay. And then for the MAS, there’s these stories we read about increased — you talked about the grocery and the pharma, broad exposure and then we read these stories about increased use of security products by expanding line of items. Are you seeing any of that come through in your results?
Geoff Martin
You can see that in the details, but not in Checkpoint MAS.
Michael Glen
Okay. And then –
Geoff Martin
Your company wants to use RFID, those revenues would appear in the CCL side Checkpoint.
Michael Glen
But putting — like we read these articles about people putting security products around meat and stuff like that or?
Geoff Martin
It’s really around RFID, it’s not really around security, it’s really around RFID sure, and we’re not tracking it in the story.
Michael Glen
Okay. And then…
Geoff Martin
An example of Checkpoint in Europe, so we are doing in-store, so as an in-store, fresh meat in front of the new applications is the new potential applications for RFID, I think we have a lot of traction that at Checkpoint in the product space.
Michael Glen
Okay. Are then are you able to isolate out, there’s a bunch of M&A, how much M&A contributed to the EBITDA in the quarter? Are you able to isolate that out?
Geoff Martin
No.
Michael Glen
Okay, thanks for taking the questions.
Geoff Martin
No, problem.
Operator
Thank you. The next question is coming from Daryl Young from TD Securities. Daryl, your line is live.
Daryl Young
Hey, good morning, gentlemen. The first question is just around potential for trade downs that is at private label products, we’re starting to hear I would call it an acceleration of companies talking about their team, consumers strategy and trading down. I’m just curious if it’s at first percolate into your order book yet or is still the supply chain driving more in volumes?
Geoff Martin
Yes, we don’t see a lot of that in the consumers oriented in the CCL business, so Daryl. In the Home & Personal Care sector the area where we see is in a recessionary environment is less you can start on, so professional products which are our premium product, people tend to buy professional grade shampoo of all models, you got to have, it is on paper there, we get a little bit of that, it’s not very material. And in the Food & Beverage space, we don’t see a lot of that and so it’s private label, but not very big for us. But the categories that we’re in, in the CCL space are not really vulnerable to product label attack.
Daryl Young
Fair, okay. And then you called out both paper and aluminum that have seen big cost and potentially some easing there. I guess this free…
Geoff Martin
Paper was a supply problem, not a cost problem. Paper was a supply problem.
Daryl Young
Okay, sorry. But for the — when you narrow on trade as well and potential for that’s gone over 1.5 million some softening there as well. Does that pulled a pretty big headwind to the revenue line and the organic growth prevalence and as we look out and say 12 months from now?
Geoff Martin
The freight is very earlier factor in Europe, because in the United States most of our customers pay for the price themselves and organize the price themselves. That got a big factor in North America for us. It is in Europe, but better in Asia and Europe particularly, and in my view in North America, because we’re trying to ship from Mexico into the United States and pay for that. So I won’t say freight will materialize in the revenue line. So the revenue lines is going to be driven by what’s going on in the resin market, and what’s going on in the Avery, both of which is dropping quite, but in aluminum case drops 25% in three months.
Daryl Young
Got it. Okay. Perfect. And then just one last one on CCL Design in the Electronics market. There is some talk of lower PC sales I guess the mix within CCL Design between the consumer electronics. How big of an exposure or concern with that year? Are you seeing any of that through your clients?
Geoff Martin
Yes, well they’re all large customers that are as all the big names in the space from the PC industry got a big boom in the pandemic and has soft sales. So the global predictions are that PC market will drop 10% this year, cloud computing goes all the way. So we’re expecting that have to confirm with us in the second half. But we’ve got some new programs in some other process is the sort of quite a big offset. So let’s wait and see how that will unfold.
Daryl Young
Okay, that’s great. That’s all for me. Thanks for your time.
Geoff Martin
No problem.
Operator
Thank you. The next question is coming from David McFadgen from Cormark Securities. David, your line is live.
David McFadgen
Yes, thank you. A couple of questions. First of all, just on the MAS business, I was wondering without a surprise the result that you recorded in the second quarter and is it kind of indicative of just the general macroeconomic slowdown and as you’re seeing that soften retail?
Geoff Martin
Yes, I would say so, because it is broad based. It was I think you saw there where it happened in, most pronounced in Asia. So the lockdowns in China had a little bit of factor in there. The next region that was most impacted was Europe, which is probably not a surprise. The region that was least impacted was North America which is currently relating to Latin America result. So regional color was the big factor and our largest business in MAS is in Europe and Asia than North America smaller part of our segment.
David McFadgen
So what appear based on your PC results that business that too was most impacted by the macroeconomic environment is Checkpoint and MAS, so is that correct? And your business is very resilient this time maybe a slowing macroeconomic environment?
Geoff Martin
Maybe that’s a fair statement, yes.
David McFadgen
Okay. And then can you remind us about the size of the MAS business in revenue?
Geoff Martin
About $400 million.
David McFadgen
Okay. And then lastly just on inflation. It seems like you’re nearing the end of the pass through. So as you correctly to interpret asset inflation is indeed slowing down and you’re seeing this soften do you remember?
Geoff Martin
We’re definitely seeing inflation easing in the direct commodity space, so resins going down, aluminum going down, metal also is going down. So we haven’t seen that transfer into — where the commodity gets converted into intermediary material. We haven’t seen any deflation now that is very significant so far. But it does not eventually flow through so if resins drop and so the cost go down, nominal prices from raw materials supplies go down, just if they do.
David McFadgen
Okay.
Geoff Martin
But I would characterize this is easing at the moment in all of them. See inflation in the area where we’ve seen, but the deflation is in resins and…
David McFadgen
Okay.
Geoff Martin
So those inflations would vary for Innovia and the aluminum segment taking the business, which is under $150 million in sales. So the company is strong once they get in that.
David McFadgen
Okay, all right. Thank you.
Geoff Martin
Okay.
Operator
Thank you. The next question is coming from Ben Jekic from PI Financial. Ben, your line is live.
Ben Jekic
Thank you. Good morning. Geoff, I just have a quick question on MAS just to make sure I understand fully. So you had an operating margin that was the lowest in the last eight quarters. Is it demand-driven or is it the impact of the freights and components inflation or both? And then what progression?
Geoff Martin
Both.
Ben Jekic
Okay. And if I look at your outlook it seems like that dynamic is still going to persist in the second half. Is there — you know should we be thinking of similar margin as in 2Q or at least directionally a little bit higher?
Geoff Martin
We’ll have to wait and see.
Ben Jekic
Okay, thank you.
Operator
Thank you. The next question is a follow-up coming from Mark Neville from Scotiabank. Mark, your line is live.
Mark Neville
Many, thank you. Good morning, Geoff. Good morning, Sean. Just curious to talk about sort of energy and freight cost in Europe. So your success at what you’re doing of course those between surcharges through and on the securities of that maybe as you’re seeing risk if or if your businesses are reliant on natural gas from Russia and if you’re talking sort of kind of measures to just getting done in all situations?
Geoff Martin
Yes. So the energy intensive business we have in Europe is Innovia and the plant — the main supply plant for that business is in the U.K. So we’re not — so we do have a small operation in Germany that’s not very big and for the main supply plants that’s in the U.K. so the freight expectation has been is in the U.K. has been a significant factor. So most of the revenues are around will come down. And the U.K. energy prices have been random. And so that’s also going to impact them.
Mark Neville
Yeah. And…
Geoff Martin
And we’re having on — we’re implementing surcharges and there is some lag in that. And we’ve got some improvement over Q1. I think we’ll see some sequential improvement in Q3, Q4 again. That’s certainly was very much top of mind at the moment.
Mark Neville
Got it. All right. Thanks, again.
Geoff Martin
No problem.
Operator
Thank you. [Operator Instructions]. We have another follow-up coming from Adam Josephson from KeyBanc. Adam, your line is live.
Adam Josephson
Thanks, Geoff. Just one more question on the label demand issue. On the last call you talked about how. It wasn’t clear to you how much of the demand was related to your customers. Just keeping access supply on hand versus real end demand. Isn’t any more clear to you now than it was three months ago?
Geoff Martin
Not really. I think you look at the impact of packaging from the gross margin of our customers, it’s pretty immaterial. So think when you talk about labels. So no one’s going to run risk of supply availability in label supply in a situation like this. So if your job is to buy labels for the XYZ, big CPG company and there’s a huge plants somewhere selling what other brand it is no label if you can even stick through this pretty much straightaway.
There’s a lot of people taking supplier risk out of the equation, making sure there is no availability of label is not a problem. And so we’re seeing demand that as well don’t really gel with the sales — with the volume in results for that customers, specifically in North America. In Europe and Asia is small match to customers, but in North America where retail is bigger and supply chain is small, businesses are bigger. We’re seeing some caution in the behavior of big CPGs to make sure they have what they want.
Adam Josephson
So you have no good web on it seems like it’s your customers in a fact have excess inventory that eventually they’re going to have to work off?
Geoff Martin
Well it’s — we were almost work it off sometimes they may just trade away like a chop and change all the time too. So labor got economically immaterial. So from my end is so much cost around these supply availability people are just fine, if you need a million and about $3 million you can do that as well you can even take a space and — a lot of caution being taken to make sure — the customers make sure they have what they want and what they want, what they needed.
Adam Josephson
I guess for all that you keep volume more than they need for months if not quarters to come. It’s just…
Geoff Martin
What that happened in and things that like a conference. Our [indiscernible] business that wouldn’t happen. We also have long lead times there and it’s beyond what we would expected to see given the current condition of in our last big CPGs before you know want the big volume growth when we see 10 or 15 something tells you that is a joke.
Adam Josephson
And this has been going on for how long assuming disconnects between the volumes they’re reporting and their…
Geoff Martin
I think since the supply chain issues really started, which probably a year almost kind of going on for about a year. So this is the first time that is easing a little bit in this time of any business. So we’ll have to wait and see.
Adam Josephson
And why do you suppose that’s a North American phenomenon and not also happening elsewhere?
Geoff Martin
Well we got faith in it.
Adam Josephson
Right, yes. It’s a good point.
Geoff Martin
We’ve got a more faith. And then Europe is, people which are much more congested part of frozen of that inflation. So in the U.S. it has also got warehouse space available to flip start, looks for easy in Germany.
Adam Josephson
Yes. Now I understood. Just two other things on M&A multiples and you just talked about I think, the private market multiples for label companies haven’t been quite high in recent years. Have you seen any changes along those lines recently? What are you — how would you characterize multiples these days? And how attractive or aren’t attractive they might be to you?
Geoff Martin
Well, I think that they’re still elevated. But we are seeing signs of transactions being entailed by the financing markets, so that’s an easy the first indicators those things are going to change. So we’ve seen some public to private transactions goes partially from the financing and financing that deals with inventory so that the financing was very difficult. But that’s suppose fairly time sensitive, we’ve seen early evidence of that.
Adam Josephson
Yes. And just one last one. Your exposure to ocean freight, Geoff. Have you in terms of the supply chain easing, but staying pretty bad on a tremendous historical perspective. Any observations on the ocean freight to these things you’re reliant on that?
Geoff Martin
Where we’re reliant on is Avery. So we are in floatation of rings for binders in North America in particular. So that’s the big factor. And Checkpoint is, we may get everything you made through Checkpoint, made in countries in places where we ship automation prices in the container. So that’s also a big factor. And then the heat that the rampant inflation is stock, that if the pricing levels are still highly elevated compared to historical norms.
Adam Josephson
And is that because of the port congestion that continues from the past you can count?
Geoff Martin
Everything, because China lockdowns is one thing after another. All congestion in the U.S.
Adam Josephson
Yes. Thanks so much, Geoff.
Geoff Martin
No problem.
Operator
Thank you. And we have another follow-up come from Mark Neville from Scotiabank. Mark, your line is live.
Mark Neville
Yes. Sorry to sort of keeping back. Maybe just a follow-up on Ahmed’s question. Just in terms of the inventory situation I don’t know if you have a sort of historic comparison to this. But if they have really inventory to gets to a point where you can all respond. Do this things really come off I believe or is this something you’re going to work through. I mean you touched on it earlier. But just I guess just a little more color if you could?
Geoff Martin
Well labels do tend to obsolete pretty quick. So the overall the rate of obsolescence typically goes up. Because designs change all the time, regulatory comments after gathering into the label graphics. So there’s a fair amount of obsolescence may go and people all draw them.
Mark Neville
Yeah, okay. So it doesn’t sound like the rest is that material is?
Geoff Martin
No, no, I think we’re obviously — I think that — I think what will happen, Mark is when demand and once the supply chain issues go, people will be less concerned of in the supply chain risk taking them out for the balance.
Mark Neville
Okay. All right. Thanks Geoff.
Geoff Martin
No problem.
Operator
Thank you. There were no other questions from the lines at this time. I would now like to hand the call back to Geoff Martin for closing.
Geoff Martin
Okay, everybody. Well, thank you very much for joining our call today. We look forward to seeing you next quarter. Thank you very much.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.
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