CCL Industries Inc

TSX:CCL.B

Earnings Call Analysis

CCL Industries Q2 Earnings with Acquisitions

In Q2 2023, CCL Industries saw a slight rise in sales by 1.8% to $1.64 billion, supported by acquisitions and foreign currency benefits, but faced a 4.5% organic decline. Operating income dropped 8% to $242 million, and adjusted basic earnings per share fell to $0.90 from $0.94 year-over-year. Net earnings were down to $155.9 million from $163.4 million. The firm had a robust free cash flow increase and a solid balance sheet, though net debt increased marginally to $1.56 billion. Capital expenditures were significant at $30 million in the first half, with plans for expansion in Mexico. CCL has been active in acquisitions, notably in healthcare and technology, with 8 purchases totaling approximately $370 million over the last 12 months.

Sales Show Marginal Growth Amid Challenges

CCL Industries reported a slight uplift in sales during the second quarter of 2023, achieving a 1.8% increase resulting in $1.64 billion, compared to $1.62 billion in the same period last year. This modest rise incorporates 1% growth from acquisitions and a 5.3% positive currency translation effect. However, the company didn't entirely escape the economic constraints, noting a 4.5% dip in organic sales.

Operating Income Witnesses a Downward Trend

Operating income saw a decrease of 8% (excluding foreign currency impact), dropping down to $242 million from the prior year’s $247.8 million for the same quarter. This drop signifies headwinds in operational efficiency or market pressures that outpaced the company’s revenue growth.

Earnings Per Share Slightly Decrease

Reflecting the challenges in operational income, basic earnings per Class B share diminished to $0.88 from $0.91 year-over-year for Q2. The adjusted EPS also edged down to $0.90 compared to $0.94 in the second quarter of 2022, further illustrating that even with market adjustments, the company faced earnings pressure.

Free Cash Flow Remains Steady

Free cash flow from operations was slightly better with an inflow of $120.1 million, which rose by $5 million from last year's second quarter. This increase is attributed primarily to improved working capital management, but was partially offset by a rise in capital expenditures. Overall, the 12-month trailing period ended June 30, 2023, witnessed a free cash flow increment of about $21 million compared to the same period the prior year.

Net Debt Increases While Balance Sheet Strength Sustained

CCL Industries' net debt as of June 30, 2023, was $1.56 billion, showing an uptick of $38.6 million from the end of 2022. Despite the rise, CCL Industries maintains a strong liquidity position with $738 million cash on hand and undrawn credit facilities. The balance sheet portrays resilience with a stable leverage ratio of 1.24x and continued well-positioned financial footing for the fiscal year 2023.

Robust Capital Investments and Acquisition Strategy

Capital investments reached $252 million by mid-year, with an annual plan to spend around $440 million. CCL Container, a segment of the business, has crossed revenues of $300 million and boasts a robust 20% EBITDA margin, enticing further expansion especially in Mexico. Moreover, the company has finalized two significant acquisitions – Faubel and Imprint Energy, strengthening its leadership in healthcare space and innovation in battery technology for labels, respectively. These individual moves are part of an aggressive acquisition strategy with 8 acquisitions totaling about $370 million in the last year.

Mixed Segmental Performance Across Geographies

CCL Industries experienced a 3% organic sales decline, with varying results across regions: modest single-digit gains in Europe and Latin America, but declines elsewhere, particularly in Asia Pacific attributable to market conditions affecting the CCL Design and Secure segments. This varied performance highlights the challenges in specific markets while indicating a resilient geographical diversification strategy.

Direct-to-Consumer and New Business Wins Offer Optimism

2023 repeated the early back-to-school boost seen in 2022, driving consistent sales in direct-to-consumer channels and delivering solid international results. While the horticultural business incurred seasonal losses, overall margins in Avery declined due to this seasonal impact. However, Checkpoint segment reported a strong quarter, buoyed by new business wins, indicating potential growth areas for the company.

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and 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, SVP and CFO]

Good morning, and welcome to our second quarter conference call. I'd like to turn everyone's attention to Slide No. 2 of the presentation, and you can see 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 2022 annual report under the section 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 summary of financial information. For the second quarter of 2023, sales increased 1.8% with 1% acquisition-related growth, 5.3% positive impact from foreign currency translation, partially offset by a 4.5% organic decline, resulting in sales of $1.64 billion compared to $1.62 billion in the second quarter of 2022. Operating income was $242 million for the 2023 second quarter compared to $247.8 million for the second quarter of 2022. An 8% decrease, excluding the impact of foreign currency translation. Geoff will expand on the segmented operating results for our CCL, Avery, Checkpoint and Innovia segments momentarily.

Corporate expenses were up for the quarter due to higher long-term variable compensation versus the prior year quarter. Consolidated EBITDA for the 2023 2nd quarter, excluding the impact of foreign currency translation, decreased 7% compared to the same period in 2022. Net finance expense was $19.2 million for the second quarter of 2023 compared to $15.4 million for the 2022 second quarter due to an increase in interest rates on variable rate debt. The overall effective tax rate was 24% for the 2023 second quarter compared to an effective tax rate of 24.4% recorded in the 2022 second quarter. The effective tax rate may change in future periods depending on the proportion of taxable income earned in different tax jurisdictions with different rates.

Net earnings for the 2023 second quarter was $155.9 million compared to $163.4 million for the 2022 second quarter. For the 6-month period, sales increased 5%, operating income increased 5% and net earnings increased 3% compared to the 6-month period in 2022. 2023 included the results from 6 acquisitions completed since January 1, 2022, delivering acquisition-related sales growth for the period of 1.9%. Foreign currency translation was a tailwind of 4.9% to sales, partially offset by a 1.7% organic sales decline. Moving to Slide 4.

Basic earnings per Class B share were $0.88 for the second quarter of 2023 compared to $0.91 for the second quarter of 2022. Adjusted basic earnings per Class B share were $0.90 for the 2023 second quarter compared to adjusted basic earnings per Class B share of $0.94 for the second quarter of 2022. The change in adjusted basic earnings per share to $0.90 is principally attributable to an increase -- or decrease in operating income of $0.09, partially offset by $0.05 positive foreign currency translation, all other items netted to zero impact. Moving to Slide 5, free cash flow. For the second quarter of 2023, free cash flow from operations was an inflow of $120.1 million compared to an inflow of $115.1 million in the 2022 second quarter.

The increase in cash flow from operations of $5 million was primarily due to improved working capital, partially offset by higher net capital expenditures in the second quarter of this year compared to 2022. For the 12 months ended June 30, 2023, free cash flow from operations increased approximately $21 million compared to the 12 months ended June 30, 2022. This comparative improvement is primarily attributable to increased earnings, better comparative working capital management, offset by an increase in net capital expenditures. Moving to Slide 6, our cash and debt summary. Net debt as at June 30, 2023 was $1.56 billion, an increase of $38.6 million compared to December 31, 2022.

This increase is principally a result of lower cash balances at Q2 2023 versus December 2022. Although the company's net debt increased, the balance sheet closed the quarter in a strong position. Our balance sheet leverage ratio was approximately 1.24x, unchanged from December 31, 2022. Liquidity was robust with $738 million of cash on hand and USD 0.9 billion of available undrawn credit capacity on the company's revolving bank credit facility. The company's overall average finance rate was approximately 3% at June 30, 2023, compared to 2.9% at December 31, 2022, reflecting an increase in variable interest rates on the company's outstanding borrowings under its revolving credit facility.

The company's balance sheet continues to be well positioned as we move through fiscal 2023. Geoff?

[Geoff Martin, President and CEO]

Thank you, Sean. Good morning, everybody. I'm on Slide 7, highlights of capital spending for the year, $252 million, net of disposals at the halfway point, excluding right-of-use assets, and we are planning to spend about $440 million for the year as a whole. Slide 8. So I wanted to give you a bit of color on some investment highlights of late, partly on CapEx and partly on acquisitions.

I wanted to just talk briefly a little bit about CCL Container, which has been set inside our CCL segment for a number of years now. It used to be a separate reportable part of the business. Revenue in that part of the company is now past $300 million with 20% EBITDA margins.

We spent $30 million in CapEx in that business in the first half of 2023, and we're planning further expansion in 2024, especially in Mexico. So I thought that was just an interesting adjunct to give you a bit of color on what's been going on inside the business in those CapEx numbers.

And the 2 acquisitions we announced just before the earnings, so Faubel in Germany, the largest acquisition we've ever made in the health care space. It creates global leadership in clinical trials labeling. We've always been in that business in quite a big way in the United States. And this really gives us a clear leadership position as this company is the clear market leader in Europe.

Imprint Energy is a technology company that we acquired in -- out in Silicon Valley that's developed some interesting battery technology. It's printed batteries using the technologies we have in our converting businesses that would allows us to make labels that would send signals without the need for a scanner. So like in our RFID label, but acting more like as a cell phone without the need for any kind of scanning device, very important to track and trace applications for high value or sensitive goods. And just to point out, last 12 months, we've completed 8 acquisitions for approximately $370 million. Page 9 highlights on CCL business.

I'll start off by saying that comps for this quarter were always going to be difficult for us, 10.9% growth reported in Q2 2022 in the middle of the supply chain crisis, a lot of customers ordering excess inventories. And we certainly faced that in this current quarter, 3% organic sales decline, low single-digit gains in Europe and Latin America, but offset by a low single-digit decline in North America and a double-digit decline in Asia Pacific, very much driven by the situation in CCL Design and CCL Secure.

We had flat reported profitability in Home & Personal Care and Food & Beverage spaces. A small decline in Healthcare & Specialty versus a very strong prior year, although sales were up in H&S for the quarter and a slow quarter in currency, partly offset by strength in passport components of CCL Secure. The CCL Design, we had gains in automotive, but they were more than offset by the weak end markets that have been reported by many electronics, OEMs, and it especially impacts our business in China.

Moving on to Slide 10. Good quarter in our joint ventures. I won't say any more than that. Slide 11, results for Avery. We had a repeat of the early back-to-school season in 2023, we enjoyed in 2022.

So the comps were sort of like-for-like in that regard. And we continue to see strong growth in direct-to-consumer channels, solid results internationally. Our horticultural business is seasonally loss-making in this quarter. And last year, we only had one month of one of the acquisitions we made in that space. And this year, we had a full quarter of losses.

So that's the reason why you see some margin erosion at Avery. Slide 12, results for Checkpoint, very good quarter. MAS business was strong on new business wins, especially in Europe, price increases we implemented last year to cover the supply inflation definitely kicked in, and we've seen some easing of that this year, particularly in intermodal freight costs from China, which is more or less back to normal like now compared to the challenges we faced this time last year. In the Apparel Labeling business, our profitability improved, that's despite retail supply chain customers in that space focused on managing excess inventory, really all driven by growth of RFID.

Slide 13, a better quarter for Innovia than we expected. Volume was still down in the pressure-sensitive labor materials industry. There's a number of public companies in that space been reporting 25% to 30% drops in their volume, and we certainly saw that during the quarter. And we also had some price-driven deflation particularly in North America, not so much in Europe, but particularly in North America where resins have been dropping faster. There is some price impact in the sales drop there, but profitability improved sequentially on easy inflation, particularly energy inflation, and very good cost controls right across the business. So we're quite pleased to see the improvement with Innovia.

Slide 14, the outlook commentary. Our core CCL business units faced slower volumes, still with many consumer packaged goods customers. We did see some pickup in orders in July. So in Q2, we saw some softening of orders sort of progressively through the quarter, and that did sort of reverse a bit in July, not everywhere, but in a number of places, but still results of many of our customers in that space are reporting low to mid-single unit volume declines. And once we see that, obviously, at some point, translates back to us.

The CCL Design, we do expect to see some modest improvement by Q4 as comps ease and computer industry demand certainly recovers, and we have some new business wins to kick in. So we -- again in CCL Design, we saw in the electronics space, our first improvement in order intake in July versus the prior year. So that's quite encouraging. CCL Secure demand picture remains unchanged for the second half. Again, we have seen some pickup in orders in the month of July.

So maybe that will change by the time we get into Q4. We'll have to wait and see. Avery, we expect to be solid. The only unknown really is the back-to-school replenishment orders, that's always something we wait on every year. We got none last year.

We're waiting to see if we get any this year. We find out during the month of August. The Checkpoint, favorable inflation recovery will still be our friend for the balance of the year, and we expect RFID strength to continue. At some point, we expect Innovia's volume picture to change as the label materials industry recovers its own volume as they're publicly announcing the plan to do as the second half rolls through. So we hope to be participating in that. And inflation in that space remains very benign. The FX tailwind is expected to continue at current exchange rates, so that should also be a friend in the second half.

So with that, operator, we'd like to open up the call for questions.

[Operator]

[Operator Instructions] Your first question for today is coming from Ahmed Abdullah with National Bank of Canada.

[Ahmed Abdullah, National Bank of Canada]

On the CCL segment's volume moderating, are you able at this point to offset some of that volume pressure with some pricing?

[Geoff Martin, President and CEO]

Well, not really. I think we had pricing benefits last year, driven by inflation. But if anything, this year, things have moved deflationary. So most of our raw material procurement costs have declined this year over last year. So it's pretty unlikely we'll get any price benefit. That's different from our customers' experience at the moment, but they're going to be in the same boat at some point that we are in that is getting more price increases for their goods at Walmart and so it is going to get increasingly difficult as we go forward. But -- so I think the answer to that is no.

[Ahmed Abdullah, National Bank of Canada]

Okay. And in the release, you highlighted that you had some productivity initiatives and cost-cutting efforts that would still deliver strong results. Can you just give us some color around what those initiatives and efforts entail?

[Geoff Martin, President and CEO]

In which business?

[Ahmed Abdullah, National Bank of Canada]

At the CCL segment.

[Geoff Martin, President and CEO]

Yes. So we're doing a lot of things -- when business slows up, we do a lot of things internally to reduce labor costs, focus on raw material input costs and do all the things you do. It's a self-correcting system we have here. But you always want volume to come back at some point. And we are quite pleased to see the order intake improve in July versus the prior year. That's -- it's the first time we've seen that for 4 or 5 months. So that's giving some indication that probably this is beginning to bottom out.

[Ahmed Abdullah, National Bank of Canada]

Okay. And just lastly, on the RFID business segment outside of apparel, have you received any other orders following the first one you highlighted on the last conference call?

[Geoff Martin, President and CEO]

There's a lot of interest in RFID outside of the apparel space, both in general merchandise retailing, food industry retailing, freight and logistics, pharmaceuticals. So we've got a lot of interest across the board in that space. So RFID is an area of encouraging growth.

[Operator]

Your next question is coming from Stephen MacLeod at BMO Capital Markets.

[Stephen MacLeod, BMO Capital Markets]

Just wondering if you could give a little bit of color on last year's CCL segment growth of 10.9%. How much of that are you able to quantify as price versus volume growth from last year?

[Geoff Martin, President and CEO]

Very difficult to do that, Steve. But it's a mixture of both. I can say that. There was certainly some price in there, and there's probably some volume, maybe 60% price, 40% volume, and that's just purely guess on my part. But it's certainly a mix of the two. It wasn't all volume driven. It is a combination of price and some volume. The business that grew very strongly in volume last year was CCL Container. So that certainly had an impact on the CCL segment last year because the volume increase was well into double digits last year.

[Stephen MacLeod, BMO Capital Markets]

Okay. That's great. And then just thinking about Q2 and with the commentary around slower volumes at the core CCL units, Design, Secure and then your commentary around July is sort of picking up. Do you foresee organic growth potentially returning back into positive territory in Q2?

[Geoff Martin, President and CEO]

Not surely yet. So it's -- we've only got July as a short month because of the July 4 holiday. So it's -- you can't really make any predictions in Q2 in the month of July. So August is a bigger month with more workdays in it, so we'll have to wait and see how things unfold. But the comps are much easier this quarter than they were for Q2.

And that's certainly the case also in Q4. So we'll have to wait and see how things unfold. But currently, I'd be a bit surprised if we would have the same degree of shortfall in Q2, but we'll have to wait and see how things unfold. And it's a summer quarter. So I certainly wouldn't be making any decisions on the long-term health of the business based on what happens in that quarter. But by the time we get into Q4, we'd have a different viewpoint of that because in October and November, we would activity -- expect volume to be quite strong.

[Stephen MacLeod, BMO Capital Markets]

Right. Okay. That's helpful. And then just on the -- I just wanted to ask about the Faubel acquisition. Can you just talk a little bit about what the -- sort of how that's complementary to your business and what that does for you strategically in the Healthcare segment?

[Geoff Martin, President and CEO]

Yes. Well, we've been in the clinical trials labeling field. These are labels that are used by drug companies as they're getting drugs approved in the field for eventual use, it's a very high-margin business. We've been in the U.S. for a number of years, never found a way to get into it in Europe because this company is being the strong market leader in Europe for a long time. We've been trying to buy it for about 15 years, and we've had 2 or 3 attempts at it in the past. But bringing the 2 sides of it together, it really gives us global leadership with the drug industry in Europe and the drug industry in the U.S. And those 2 components really drive most of the world's drug use. So if you're not with the R&D labs in AstraZeneca or [indiscernible] in Europe, and you're missing out. So we have those relationships with the U.S. drug companies and that we'll have it in Europe, too. So we're very pleased with that. We think we paid a good multiple for it. It was a competitive situation. So indication of multiples coming down a little bit, but we're very pleased to finally get the deal through.

[Stephen MacLeod, BMO Capital Markets]

Great. And then maybe just finally, just along those lines, you've talked in the past about acquisitions and multiples coming down. It sounds like you're seeing some of that. Would you still characterize the landscape as being quite ripe in terms of your pipeline for acquisitions and multiples being in areas we'd like to pay?

[Geoff Martin, President and CEO]

Well, I think the multiples situation is better. But of course, if you're a seller, you may not think that time is right at the moment. So this particular situation in Germany, we had a family who reached the date where the founder of the company was at an age where he simply had to sell and he just was so concerned about that. But there are other sellers who maybe look at the market to sell right now and I think it's not so good because the multiples are down. So it's a mixed source when multiples come down, sometimes so there are opportunities.

[Operator]

Your next question for today is coming from Michael Glen at Raymond James.

[Michael Glen, Raymond James]

Geoff, can you give an indication about how the pricing mechanisms work if you're thinking about a deflationary environment with labor materials, how that works with customers?

[Geoff Martin, President and CEO]

Yes. Well, it's -- the label industry is highly transaction intense. So pricing is dynamic all the time. We don't really have any fixed price contracts in labels because the designs in what we're making are changing, in some cases 2 to 3x per year. So there's always repricing opportunities to finance those things through. And that works in an inflationary environment. It also works in a deflationary environment.

So I would say -- I would characterize the volume drop in the HPC space was not very dramatic in labels in Q2. Most of the volume drop actually was in tubes. And there, we certainly saw a lot of people advancing purchases last year to make sure they got what they needed. So the tube business was 1 of -- in the HPC space was probably the business that where we saw the biggest volume drop.

[Michael Glen, Raymond James]

Okay. And then can you provide some color or thoughts around in the CCL Secure business and your outlook and view on what's happening in the polymer currency market right now and the longer-term outlook for that business?

[Geoff Martin, President and CEO]

Yes. Well, it's still growing. So we still see a lot of opportunities there because we've got single-digit market share globally. So a lot of paper still to convert to polymer. Use of currency, maybe counterintuitive to a lot of people listening to the call is still growing despite the electronic payment systems.

So banknotes have survived; credit cards, they survived; electronic funds transfer, survived; checkbooks; check cards, the iPhone was launched in 2007 and since 2007 currency in circulation in the U.S. has almost doubled. So the use of currency isn't really driven by the retail payment systems, it's driven by broad use of cash in society, and it's still going up. So we still -- but it's very lumpy. It depends on whether you've got new issues, the timing of orders is always challenging.

So it's a lumpy business. But in total, it's up $200 million for us in revenue, has premium profitability than any other quarter -- we had last quarter. So probably $6 million or $7 million of the delta difference in profitability in Q2 was driven by the shortfall in CCL Secure.

[Michael Glen, Raymond James]

And the inventory dynamic, can you just hash that out in a little more detail, like how much excess inventory is being held...

[Geoff Martin, President and CEO]

A lot of banks, there was a run on cash in the pandemic. So a lot of banks -- so banks are the most -- central banks are the most conservative organizations on earth. So if they have to see any risk in not being able to have cash when consumers want cash, they always over order and particularly in the developed world, the United States, Australia, U.K., Canada, all these central banks fill their vaults full to overflowing. And then put the brakes on the ordering in particularly in the last year or so.

[Operator]

Your next question is coming from Walter Spracklin at RBC Capital.

[Walter Spracklin, RBC Capital]

So I guess, going back to, first of all, the container business and the decision or that's my question, was this an organic process where it just was growing well and has now developed into a larger segment? Or would you say it was on the part of a strategic decision that you made to grow that segment? And through either acquisition and internal expansion efforts that it got to the size that it did?

[Geoff Martin, President and CEO]

There are no acquisitions in the CCL Container space. It's all internal growth. So -- and aluminum aerosols have been an area of growth in the consumer goods space as have aluminum bottles. So the move away from plastic has benefited the aluminum bottle growth in the Food & Beverage space and then in the Home & Personal Care space. So they've been the 2 main drivers of growth there and we decided to invest in -- particularly in our operations in Mexico to take advantage of that and grow organically.

Historically, it was a business that underperformed in the CCL segment. Today, it's above par compared to the other businesses. So returns on capital in the CCL Container is better than in many other parts of the business today.

[Walter Spracklin, RBC Capital]

That's encouraging. And correct me if I'm wrong, I think in one of our meetings, it was mentioned on your team that, in fact, containers is a good leading indicator of how the economy is doing. Am I right in remembering it that way? And if so, are you seeing any evidence?

[Geoff Martin, President and CEO]

Yes. I think what we said, Walter, container was historically in the past, if there was a downturn in the economy, the salon business all has suffered and the aerosol containers we make for that segment, typically, like in '08 and '09, we saw significant drops in salon demand. So the salons as a percentage of the total of that space has declined quite significantly. So even if that occurs, I think the growth in aluminum bottles is more than enough to offset it.

[Walter Spracklin, RBC Capital]

And I guess, are you getting any indications from the sales patterns within your container division to suggest, yes, we are going deeper into recession or we are maybe bottoming coming out? Is there any indicator or -- and it doesn't have to be just container, anything in your business to suggest. So I think I heard you say a few times that July is looking a bit better, but it's tough to look at July as a good indicator. But just any indicators from your -- yes, that might suggest some bottoming here?

[Geoff Martin, President and CEO]

Yes. I hope so. We -- probably the best indication we saw in July was the pickup in orders relative to July last year. So the first half order intake in 2022 was very strong. We saw it tail off in July last year. So this year, it's better than it was in July last year. So that we take some encouragement for that. I mean, we know in some categories, our plastic tube business, for sure, gain the benefit of supply chain staffing this time last year and we're paying the pain for that in the current quarter. So I would say bottoming out, hopefully. But we'll have to wait and see. I think the next couple of quarters, it will bump along the bottom a bit. And then we'll see what 2024 brings.

[Walter Spracklin, RBC Capital]

That's great. And last question here on CapEx. I know the number you quoted, is there anything -- I know we're in a different environment now that we're still looking at the past toward normalization. Is that a good number as a normalized number to look at going forward? Or is there anything to suggest that, that would be larger or smaller than what we'd expect going forward?

[Geoff Martin, President and CEO]

Certainly not larger.

[Operator]

Your next question is coming from David McFadgen at Cormark.

[David McFadgen, Cormark]

A couple of questions. Just on the CCL segment. In the press release, you called out significantly lower demand for labels and tubes in North America. I was just wondering, is that the primary driver for the organic decline in CCL? Or are there some other big factors?

[Geoff Martin, President and CEO]

The 2 big drivers in the CCL space with the decline in CCL Design, so they were down organically about high single-digit zone. The declines in the Home & Personal Care and Food & Beverage space are very small, very low single digits. Healthcare & Specialty was up low single digits and CCL Secure was down in the mid teens.

[David McFadgen, Cormark]

Okay. And do you know when the bank on inventory will normalize. So CCL Secure would...

[Geoff Martin, President and CEO]

It's very, very difficult to call out. It's -- they make their own decision. So we just have to be ready when they're ready.

[David McFadgen, Cormark]

Okay. And then just on Avery, am I correct to understand that Q2 benefited from the back-to-school ordering. It was like last year, what took place earlier?

[Geoff Martin, President and CEO]

No. I think just a repeat of last year. So we had the same experience in 2023 that we had sort of like-for-like. We thought this year, the order pattern would go back to the normal pattern, which is more in the July and August timeframe, but retailers were taking a lot of stuff in the month of June as they did last year and even started at the back end of May. So it was basically a repeat of what happened in 2022, which was a surprise to us, but a pleasant one.

So the question really is about what happens in August in replenishment. That's the unknown. Last year, we got no replenishment orders. We're waiting to see what happens this year. And it's -- there's no point in asking the retailers. They simply don't know. So we'll find out the answer to that when we close the month of August.

[David McFadgen, Cormark]

Okay. And then on Innovia, obviously, tough quarter. Do you expect that repeat in Q3? Or is it improving at all so far in Q3?

[Geoff Martin, President and CEO]

Well, we're pleased -- very pleased with the sequential improvement at Innovia. Let's call it was better than we thought it might have been going into it, particularly in the American space. So -- but we're really waiting to see what happens in the pressure-sensitive label materials industry. There's a couple of public companies that have released drops in the 30% magnitude in that industry, and that's our largest customer segment at Innovia.

So until they improve, we can't improve. So I think that's really all about pressure-sensitive materials that are in the labor converted channel in inventory until that gets used up and the replenishment orders come in on a more normal basis, we'll be suffering along with them. But they're all calling out that they expect that to gradually improve in the second half of the year and that seems to make -- resonates with us.

[Operator]

Your next question is coming from Ben Jekic at PI Financial.

[Ben Jekic, PI Financial]

Most of the questions have been answered. I do have 2. And the first one is just on Faubel. Is there any gross angle to that story? Or is it sort of a more presence -- market presence for you?

[Geoff Martin, President and CEO]

Well, clinical trials labeling is an area of growth in that industry because obviously, the pharmaceutical industry grows by inventing and innovating new drugs. And so billions of dollars spent every year on R&D, and that eventually translates into clinical trials processes that fuel growth. So we get better growth rates in the clinical trials area than we do over time than the core business. It can be slightly volatile, driven by the number of studies. So if you have big studies going on one year, they don't repeat every year.

So a little bit of volatility. So you can have 15% growth one year and 3% the next. So it's a bit more volatile in that respect. But if you look at it over a 5-year time frame, it's typically growing faster than the core health care industry is growing at. And more importantly, it's very profitable.

[Ben Jekic, PI Financial]

Yes, that was indeed a great multiple for such a profitable operation. And then second one is much smaller and the question is, last couple of quarters have noticed that depreciation for Avery is probably twice as high as the CapEx. Now that is an asset-light business, but is there anything sort of to read into that? Or...

[Geoff Martin, President and CEO]

You're sure that's right number, Ben?

[Ben Jekic, PI Financial]

I think I'm reading from the capital spending on the slide. That's okay. I can call after the call.

[Operator]

[Operator Instructions] We have reached the end of the question-and-answer session, and I will now turn the call over to Geoff Martin for closing remarks.

[Geoff Martin, President and CEO]

Okay. Thanks for joining the call so early this morning, and we look forward to talking to you again in November, when we'll be calling you in from our Board meeting, which will be taking place in Europe. So we look forward to that. Thank you very much.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.