Multi-Color Corp (LABL) Q3 2019 Earnings Conference Call Transcript
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Multi-Color Corp (NASDAQ: LABL)
Q3 2019 Earnings Conference Call
Feb. 11, 2019, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2019 Multi-Color Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
I'd now like to introduce your host for today's conference, Ms. Sharon Birkett, Vice President and Chief Financial Officer. Ma'am, you may begin.
Sharon E. Birkett -- Vice President and Chief Financial Officer
Thank you, Nimmy. Welcome to Multi-Color Corporation's Fiscal 2019 Third Quarter Conference Call and Webcast for the period ending December 31, 2018. We're also broadcasting this live over the Internet, accessible through the Multi-Color website, mcclabel.com on our Investor Relations page.
I'm Sharon Birkett, Vice President and CFO of Multi-Color. I'll be leading today's call, and I'm joined by Nigel Vinecombe, our Chairman -- our Executive Chairman. I will begin with an overview of how our company performed this period and provide analysis of our financial results. Nigel will conclude with final comments, and then we will take your questions.
Before we discuss our results, I want to call your attention to the safe harbor statement that was displayed on the registration page you viewed right after you logged on to the webcast. I'll remind you that in accordance to the Private Securities Litigation Act of 1995, this presentation may contain some forward-looking statements that involve both known and unknown risks that may affect the outcome of our results. This safe harbor statement is also included in our earnings release and in our filings with the SEC.
For those of you who are listening and viewing our webcast via the Internet, please turn to slide number one, net revenues. In the third quarter of fiscal 2019, net revenues increased 13% to $397 million compared to $353 million in the prior year quarter. Acquisitions accounted for 16% increase in revenues. Organic revenues was negatively impacted by 1% relating to the timing of revenue recognition, due to the adoption of the new revenue standard in April 2019. The remaining organic revenues were flat due to softer beverage and personal care volumes in the United States, partially offset by strong organic growth in developing markets.
Foreign exchange led to a 3% decrease in revenues, primarily driven by depreciation of the Euro and the Australian dollar quarter-over-quarter. For the nine months ended December 31, net revenues increased 51% to $1.28 billion compared to $851 million in the prior year. Acquisitions accounted for 50% increase in revenues, net of divestitures. Organic revenue year-to-date increased 2% with growth in developed markets in the low single digits and growth in developing markets in the high single digits. The impact of the timing of revenue recognition with the adoption of new accounting standard resulted in a net $3.8 million reduction in revenues compared to prior year. Foreign exchange led to a 1% decrease in revenues year-to-date.
Please turn to slide number two, gross margins. Gross profit -- sorry, core gross profit increased 5% or $3.1 million compared to the prior year quarter. Acquisitions contributed 15% or $9.3 million to core gross profit. Core organic gross profit decreased $4.9 million, net of start-up costs of $0.6 million incurred in relation to the new IML facility in North America, primarily due to softer volumes and operating inefficiencies in the United States. Unfavorable foreign exchange decreased gross profit by $1.3 million, core gross margins were 17% of net revenues in the current year quarter compared to 18% in the prior year quarter.
Core gross profit increased 47% or $76.4 million in the nine months ended December 31, 2019 compared to the prior year. Acquisitions contributed 46% or $74.7 million to core gross profit, net of divestitures. Core organic gross profit year-to-date increased 2% or $2.7 million, remaining decrease of $1 million relates to unfavorable foreign exchange. Core gross margins were 19% of net revenues in the current and prior year-to-date period.
Please take a look at slide number three, Q3 FY'19 results. In the third quarter of fiscal 2019, core diluted EPS decreased 30% to $0.50 compared to the prior year quarter. Core operating income decreased 6% or $2.1 million compared to the prior year quarter. And core operating income included $5.2 million in relation to acquisitions. Unfavorable foreign exchange was $0.6 million. Core SG&A increased $5.1 million compared to the prior year quarter, and acquisitions contributed $4.1 million to the increase, offset by favorable foreign exchange of $0.7 million. Core SG&A increased as a percentage of sales to 8.7% from 8.4% in the prior quarter due to an increase in amortization expense in relation to the Constantia Labels acquisition. Core EBITDA was $57.1 million or 14% of revenues for the quarter, compared to $54.2 million or 15% of revenues in the prior year quarter. Core other income of $0.5 million in the current quarter primarily relates to foreign exchange. The effective tax rate on core net income of 15% for the quarter, primarily due to the mix of taxable income in lower tax jurisdictions. We anticipate the effective tax rate on core net income for FY'19 to be 19%, interest expense was $19 million in Q3 of FY'19, and the full year interest forecast is $76 million.
Please turn to slide number 4, free cash flow. Free cash flow was $7 million in the quarter due to the timing of interest payments, bond interest expenses paid by annually, $9 million of bond interest expense related to the prior quarter was paid during Q3 of FY'19, no bond interest will be paid in Q4. Free cash flow for the nine months ended December 31, 2018 was $59 million. Capital expenditures of $68 million year-to-date compared to $44 million in the prior year period, and for fiscal '19, our capital expenditures are forecast to be approximately $90 million.
Please turn to slide number five, debt. Net debt calculated as total debt with cash with $1.5 billion at December 31, 2018. We have borrowing capacity $1.9 billion and approximately 75% (ph) of outstanding debt is at fixed rates. Debt is a blended rate of 4.7% and free cash flow priority is debt reduction.
Now I'd like to turn the call over to Nigel.
Nigel A. Vinecombe -- Executive Chairman
Thank you, Sharon, and thank you everybody for joining us. Before we turn to Q3 comments and Q&A, I would like to briefly address today's announcement that our Board of Directors is exploring strategic alternatives for the Company, in order to enhance shareholder value. As you can appreciate, it would not be appropriate for us to comment further, unless and until the Board has completed its review. So with that, I will go into Q3 comments and then we'll take some Q&A on those comments on the quarter.
As you can see that our calendar '18 revenues closed at $1.738 billion, and our core EBITDA for the actual period 12 months December at $287 million. The Q3 revenue shortfall to expectations therefore was $20 (ph) million, and as Sharon highlighted, this is mostly due to foreign exchange and revenue recognition adjustment, and a small portion of the balance is primarily due to delays in onboarding new business that's already been one, but is not expected to be onboarded in Q4. Similarly, Q3 shortfall in EBITDA is from circa mid-$60 million to $57 million and is primarily due to these revenue delays, plus the couple of million in FX.
In relation to Q4, we forecast our revenues and EBITDA will be in line with Q2 actuals, and therefore we would be forecasting EBITDA for fiscal '19 in the $275 million to $285 million range. In relation to fiscal '20, we have highlighted a major customer contract renewal. We expect to lose revenues here, but we still expect to remain the majority labels deployed to this customer in North America. We forecast the impact of this reset and allocation of business will restrict revenues and EBITDA to a similar range in fiscal '20 as per fiscal '19.
So prior to opening the call to questions, I'd like to again remind everyone that the purpose of today's call is to discuss our third quarter results, and I'd ask you please limit your questions to our earnings announcement in relation to that. Thank you in advance for your cooperation. And with that, I'll open it up for questions.
Questions and Answers:
Operator
(Operator Instructions) And our first question comes from Ghansham Panjabi of Baird. Your line is now open.
Ghansham Panjabi -- Robert W. Baird -- Analyst
Hi everyone, good afternoon.
Nigel A. Vinecombe -- Executive Chairman
Hi, Ghansham.
Sharon E. Birkett -- Vice President and Chief Financial Officer
Hi.
Ghansham Panjabi -- Robert W. Baird -- Analyst
So I guess first question, Nigel, just on the -- in the press release you called out a 1% lost personal care volume for the quarter. Did I have anything to do with the contract renewal that you referenced? I'm just trying to get a sense as to the headwind related to that contract both for your fourth quarter and also fiscal year '20.
Nigel A. Vinecombe -- Executive Chairman
No, there was no impact in Q3, but there is going to be an impact in Q4 from that contract renewal. So the lost of the business there was unrelated. One, the majority of that was a piece of business that we were doing temporarily, while the normal incumbent was qualifying, and we did that business for you also on that basis. And the other piece of business was a change in packaging with the resealable label that we were supplying was no longer required. So nothing to do with the renewal process.
Ghansham Panjabi -- Robert W. Baird -- Analyst
And then how should we think about the loss of the revenue related to fiscal year '20. I think you've called out in the past, the industry grows 3% to 4%, you're saying flat for fiscal year '20, is the delta related to this contract loss?
Nigel A. Vinecombe -- Executive Chairman
Correct.
Ghansham Panjabi -- Robert W. Baird -- Analyst
Okay, that's helpful. And then maybe you can just touch on the strategy to offset the volume loss. I mean presumably your asset utilization is going to drop significantly. Should we expect consolidation of facilities to protect the earnings stream and over what time one should expect the savings of that?
Nigel A. Vinecombe -- Executive Chairman
First and foremost, we expect some significant new business wins to come on board in fiscal '20, that have already been one and where we're pleased to have a healthy pipeline now in that regard. So that will have a meaningful impact on helping offset the impact of the contract renewal. Secondly, we still see some good synergy opportunities trailing through fiscal '20 in relations for acquisitions and we do see some good cost saving initiatives. And we do see a lot of productivity gain initiatives, partly through process improvement and partly through new CapEx, that's either in or coming in.
Ghansham Panjabi -- Robert W. Baird -- Analyst
Okay. And then just one final one. Obviously there is just one quarter left and you have a $0.40 spread on earnings, why such a big degree of variability for the fourth quarter, and good luck with the strategic process as well. Thanks.
Nigel A. Vinecombe -- Executive Chairman
Well, we would say that, we've given -- just mentioned $275 million to $285 million in terms of EBITDA, so one would expect it to be the midpoint of that range. And similarly with earnings per share, we just have given guidance like circa 5% either side of the midpoint. So, yes, it's only a couple of quarters to go, and we wouldn't expect to be too far off the midpoint of the range in terms of EBITDA and core EPS.
Ghansham Panjabi -- Robert W. Baird -- Analyst
Thank you.
Operator
Thank you. Our next question comes from Adam Josephson of KeyBanc Capital Markets. Your line is now open.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Nigel and Sharon, thanks, I appreciate it. Good afternoon.
Nigel A. Vinecombe -- Executive Chairman
Good noon, Adam.
Sharon E. Birkett -- Vice President and Chief Financial Officer
Hi.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Nigel, just a few. Just on the loss, the piece of business that you will lose in 4Q onwards, that's -- it sounds like about $70 million of annual sales if I'm doing my math reasonably correct. But can you just, again, you explained briefly to Ghansham, but just, I know you're not losing the customer, just in simple terms, why exactly are you losing that piece of business again?
Nigel A. Vinecombe -- Executive Chairman
Yes its circa's $50 million in top line impact.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay.
Nigel A. Vinecombe -- Executive Chairman
And the reason is that, there was a contract renewal due and this time around the customer has decided to allocate the business differently. Over the years we've had a very substantial share of their spend and they've decided to reduce that share. We will still be the majority supplier, and part of the reason for that substantial position in the past was being some less common technology that has some technical difficulties associated with it, and that customer has now decided that they do want to spread that work around rather than just relying on us for that type of business. So we will help them transition that technically challenging work.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Is this your largest customer? Are you free to divulge that?
Nigel A. Vinecombe -- Executive Chairman
Well, I'm sure you can work that our, if it's $50 million, and it's just in North America.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Yes. Okay. You mentioned some of the revenue and EBITDA shortfall in the quarter were related to revenue -- revenue recognition and some delays in sales, but obviously you reduced your full year guidance by 15%. So I'm just trying to understand how much of the shortfall relative to your expectations in 3Q and consequently for 4Q -- if you're getting if it just delays, obviously, you wouldn't have reduced your guidance by 15% for the year. So can you just again help me understand what exactly happened in the quarter relative to your expectations, such that you reduce your full year guidance by this order of magnitude?
Nigel A. Vinecombe -- Executive Chairman
Yeah. So two different reasons Q3 versus Q4. In Q3, while the revenue is largely impacted by the FX and the revenue recognition adjustment, that doesn't have the most significant impact on EBITDA, that's a couple of million dollars impact in EBITDA. Most of the EBITDA is with those two items that we called out, the soft beverage volumes, circa $4 million in sales year-on-year, and the soft -- and the loss of the Home & Personal Care business also circa $4 million. So there is a couple of percent of our organic growth rate for the quarter, and that $8 million in sales had about a $4 million impact in EBITDA. There was specialist pieces of business, but high margins. So that's the main impact in Q3. We have expected prior to revising our forecast that would be offset by new business wins, but those have been late coming on board. In Q4, the primary impact is as a result of the start of the contract renewal affecting EBITDA from Q4 onwards. And similarly, not having the run rate of new business that we expect in fiscal '20 up and running in that quarter.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Right. And the softer beverage volumes that you mentioned, is that specific to beer or soda or can you be a little more specific there, because I know you've had problems with some of Constantia's beer and soda business a few quarters ago.
Nigel A. Vinecombe -- Executive Chairman
It was a little bit of both. We are not overly concerned on the beer side, we don't think that's necessarily been a situation on the soft drink side. It has been a brand that has really fallen away in terms of the demand for the customer, so it's not that we have lost anything there, it's just a brand specific thing where volumes are much, much lower than they were in the prior year. So it's not a signal that there's anything systematic in terms of change in the soft drink volumes per say, it's specifically related to one brand.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. And the lost personal care volume, just one more time, what was that related to?
Nigel A. Vinecombe -- Executive Chairman
Two pieces of business. The main piece was a brand that we were doing temporarily, while the long-standing incumbent was technically figuring or not, and secondly a piece of business that was discontinued, they changed packaging and they no longer required that particular label.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. Just a couple on cash flow, Nigel or Sharon. You were previously expecting roughly $100 million of free cash, if I'm not mistaken, I think you said you did $59 million year-to-date. What are your cash flow expectations for the year?
Sharon E. Birkett -- Vice President and Chief Financial Officer
I'd say, they are in the $75 million to $85 million range.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
And is that all just big based on the lower EBITDA, Sharon, or is there something else as well?
Sharon E. Birkett -- Vice President and Chief Financial Officer
Correct.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
It's on the lower EBIT. And so, and is working capital flattish in terms -- in other words, if EBITDA is going to be flat in fiscal '20, is it reasonable to assume similar level of free cash flow?
Sharon E. Birkett -- Vice President and Chief Financial Officer
I haven't given free cash flow guidance for FY20 yet.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. And just on leverage, I think you were at 5.2% (ph) at quarter end. Are you expecting that to be up, down or flattish sequentially just based on the (multiple speakers)?
Sharon E. Birkett -- Vice President and Chief Financial Officer
In that range, and I do think that the free cash flow will also be consistent with that $75 million to $85 million range for FY20.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
You do, OK, all right. Thank you, Sharon.
Operator
Thank you. Our next question comes from Roger Spitz of Bank of America. Your line is now open.
Roger Spitz -- Bank of America Merrill Lynch -- Analyst
Hi, thank you very much. Can you say when does the new contract start? And when does it expire? And it sounds like you've lost some of the volumes you've talked about, was it also perhaps a component of margin contraction of the business with that customer that you retained?
Nigel A. Vinecombe -- Executive Chairman
Yes. So the contract was due to renew in the middle of '19 and negotiations have settled, but it starts -- some of the business starts changing from January, and we've got some -- we've got retain more volume than they otherwise would have done as a result of bringing forward some of those concessions, and the concessions are a mix of price and loss of some volume.
Roger Spitz -- Bank of America Merrill Lynch -- Analyst
Okay. And I don't know if you've can talk about this, but is it possibly to give sort of EBITDA bridge either sequentially or pro forma year-over-year from where you were to where you are now in terms of volume, price et cetera?
Nigel A. Vinecombe -- Executive Chairman
Well, roughly we were expecting circa, and if you look at analysts' expectations prior to this quarter, and you can be talking circa $300 million in EBITDA, core EBITDA, and now we are talking circa $280 million in core EBITDA, and so in the third quarter, there's about $8 million shortfall to expectations, primarily made up of those two North American parts of business, and some FX and some couple of smaller items, and then the balance largely relates to Q4 and that the single largest piece of that is the impact of the contract renewal kicking in.
Roger Spitz -- Bank of America Merrill Lynch -- Analyst
Got it. And lastly, if you haven't already gone over this, can you discuss more fully the US operating inefficiencies you've been referring to?
Nigel A. Vinecombe -- Executive Chairman
We see in some plants in North America, but we are not hitting our job standards, and so we expect to be able to improve in terms of our performance to expectations on a job-by-job basis on average. And also we do have some new technology from the installed and some that's coming that will give us some significant productivity gains.
Roger Spitz -- Bank of America Merrill Lynch -- Analyst
Got it. Thank you very much.
Operator
Thank you. (Operator Instructions) Our next question comes from Jason Rodgers of Great Lakes Review. Your line is now open.
Jason Rodgers -- Great Lakes Review -- Analyst
Yes. Could you provide your organic growth forecast for the fourth quarter, and if you're expecting it to be flattish for fiscal '20?
Nigel A. Vinecombe -- Executive Chairman
So we would expect that revenues for Q4 will be in line with revenues for Q2, which is in the mid $430 million (ph).
Jason Rodgers -- Great Lakes Review -- Analyst
And then as far as fiscal '20, how are you thinking about organic growth there?
Nigel A. Vinecombe -- Executive Chairman
We think it will be relatively flat given that the normal growth that we would expect to experience, 3%, 4% growth will be largely offset by the customer reset.
Jason Rodgers -- Great Lakes Review -- Analyst
And regarding emerging markets, do you still expect those regions to grow in the high single digits? I'm wondering if you're seeing any impact from potential or ongoing trade concerns?
Nigel A. Vinecombe -- Executive Chairman
We still expect those types of growth rates, yes.
Jason Rodgers -- Great Lakes Review -- Analyst
Okay, thank you.
Operator
Thank you. Our next question comes from Chris McGinnis of Sidoti. Your line is now open.
Chris McGinnis -- Sidoti & Company -- Analyst
Hi, good afternoon. Thanks for taking my question.
Nigel A. Vinecombe -- Executive Chairman
Hi, Chris.
Chris McGinnis -- Sidoti & Company -- Analyst
Just quickly, can you maybe just provide an update on Constantia, how that's performing and maybe the result seen is, I know that was an issue earlier in the year, I mean, just any detail around that? Thanks.
Nigel A. Vinecombe -- Executive Chairman
Yes. If you break it down to the different regions, I think Constantia in Europe, in Africa, and in Latin America is trending positively, but in terms of the revenues and earnings growth, North America is the challenge. And so the team is focused on improving organic growth rates and improving operational performance in North America. So that's the hotspot for us, the team are focused on currently.
Chris McGinnis -- Sidoti & Company -- Analyst
Okay, thank you very much.
Operator
Thank you. And we do have a follow-up question from Adam Josephson. Your line is now open.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Thanks, Nigel and Sharon. If you rewind a quarter or two, say, going into fiscal '19, whatever your EBITDA expectations were at that time. How much of the shortfall that you're now projecting relative to those initial expectations? Would you say we're kind of self-inflicted wounds versus end market or customer problems that were just simply beyond your control?
Nigel A. Vinecombe -- Executive Chairman
Well, if you think -- and the earlier data point in terms of post the Constantia acquisition plus synergies, we were talking about circa $315 million in EBITDA, and that were talking about $280 million, and there's a little bit of FX in there, circa 4.5(ph) probably FX over full-year. The single largest size of that difference is the underperformance in the Constantia business to expectations. It's not the only one, but it's the most significant.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
And again, just -- but -- and would you say that's more just owing to customer problems or end market problems over what you had no control? Or was that mainly just poor execution?
Nigel A. Vinecombe -- Executive Chairman
I think there's an opportunity to execute better.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude today's question-and-answer session. I would now like to turn the call back over to Nigel for any closing comments.
Nigel A. Vinecombe -- Executive Chairman
Now thank you everybody for your time and your interest for MCC at the moment. It's business as usual for the same. So thank you for today.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may now disconnect. Everyone, have a great day.
Duration: 27 minutes
Call participants:
Sharon E. Birkett -- Vice President and Chief Financial Officer
Nigel A. Vinecombe -- Executive Chairman
Ghansham Panjabi -- Robert W. Baird -- Analyst
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Roger Spitz -- Bank of America Merrill Lynch -- Analyst
Jason Rodgers -- Great Lakes Review -- Analyst
Chris McGinnis -- Sidoti & Company -- Analyst
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