Transcontinental Inc. (TCLA) Earnings Call Transcript & Summary

[Foreign Language] Welcome to the TC Transcontinental Fourth Quarter and Fiscal 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, December 13, 2022. I would like to turn the conference over to Yan Lapointe, Director, Investor Relations and Treasury. [Foreign Language] Mr. Lapointe, please go ahead.

Thank you, Sylvie, and good afternoon, everyone. Welcome to our fourth quarter and fiscal year 2022 earnings call. Before we begin, please note that the press release, the MD&A, along with complete financial statements and related notes, as well as the slides supporting management's remarks are all available on our website at www.tc.tc under the Investor Relations section. A replay of this conference call will also be available on our website shortly after the call. We have with us today our President and Chief Executive Officer, Peter Brues; and our Chief Financial Officer, Donald LeCavalier. Before I turn the call over to management, I would like to specify that this conference call is intended for the financial community. Media are in listen-only mode and should contact Nathalie St-Jean, Senior Advisor, Corporate Communications, for more information. Please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. You can refer to the MD&A for a complete definition and reconciliation of these measures to IFRS. In addition, this conference call might also contain forward-looking statements. These statements are based on the current expectations of management and information available as of today and they involve numerous risks and uncertainties, known and unknown. The risks, uncertainties and other factors that could influence actual results are described in the fiscal 2022 annual MD&A and in the Annual Information Form. With that, I would now like to turn the call over to our President and CEO, Peter Brues?

Thanks, Yan. Good afternoon, and thanks for joining our call. As usual, I'll start with safety. I'm proud to report that in fiscal 2022, our injury rate decreased by 21%. This is a major achievement by the team. Although significant work remain to achieve an injury-free workplace, this is a big step in the right direction. In terms of Q4 financial results, excluding the impact of the 53rd week in the Canadian Wage Subsidy, we saw a solid increase in profit. I'm proud of the actions taken by the team to make our clients successful and improve our financial performance. Following a disappointing first quarter, our Packaging Sector took action and demonstrated improved profit in each quarter that is followed. Q4 was no different, achieving over 10% growth in adjusted EBITDA on a comparable basis. The Q4 results were achieved despite a 1.8% decline in volume due to the continued weakness in our Latin American business. We have taken action to adjust our cost base structure there to reflect current volume. In our Print Sector, in-store marketing, book printing and premedia activities continued their growth path with double-digit revenue increase. Excluding the additional week, the sector continued to grow organically. Despite organic growth, inflationary pressures had a negative impact on our volume, cost structure and profit. Our Media Sector saw another quarter with a strong increase in both revenues and profits, mostly coming from our most recent acquisitions. In fiscal 2023, we will remain focused on improving profitability and cash flow from our operating activities. Our solid financial performance with no major debt maturity until 2025 gives us the flexibility to pursue our disciplined approach to growth. And now, over to you, Donald.

Thank you, Peter. Moving to consolidated numbers on Slide 5 of the earnings call presentation. Last year, we had an extra week in the quarter, which we need to take into account when comparing the results. For the fourth quarter of 2022, we reported revenues of CAD 802.2 million. When excluding the impact of the extra week, this is an increase of CAD 83 million or 11.5% versus the same period last year. This revenue growth was driven by the acquisition in our Packaging and our Media Sectors, price increases following the pass-through of higher raw material inflationary costs to our customers, higher volume in our Printing Sector due to the continued growth in our ISM, book printing and premedia activities and, lastly, positive exchange rate variation from a stronger U.S. dollar. On the profitability front, consolidated adjusted EBITDA for the quarter was CAD 141.1 million. Excluding the Canadian wage subsidy of CAD 3.7 million and the extra week of last year's results, this represents an adjusted EBITDA growth of about 10%. The increase was mainly due to our acquisitions. We also benefited from a CAD 2.7 million positive variation in exchange rates. Financial expenses decreased by CAD 1.4 million to CAD 10.5 million despite higher interest rates. As a reminder, we have no significant debt maturities before February 2025, thanks to proactive refinancing. The tax rate was 23.3%, leading to adjusted net earnings of CAD 0.79 per share for the quarter. Now moving to Slide 6 for the sector review. In Packaging, we recorded revenue of CAD 433.5 million. The increase of CAD 16 million versus last year was mainly due to the acquisitions of H.S. Crocker and Banaplast, the pass-through of higher raw material prices and other inflationary costs and a positive impact from the exchange rates. This growth was partially offset by the effect of the 53rd week. In terms of profitability, adjusted EBITDA and Packaging grew by CAD 3.8 million despite 1 fewer week in the quarter. Excluding last year's extra week, the positive contributions of CAD 1.7 million from our 2 acquisitions and CAD 1.6 million from exchange rates, adjusted EBITDA grew organically by over 10%. The growth is mainly due to the profit improvement from inflationary cost recovery. Moving to Print on Slide 7. Excluding last year's extra week, we recorded organic revenue growth of about CAD 20 million or 6%. This growth benefited from another quarter of double-digit growth in our in-store marketing, book printing and premedia activities. Printing's adjusted EBITDA was CAD 64.6 million for the quarter. The decline was essentially due to the impact of last year's additional week and the CAD 3.7 million in wage subsidies. While the team implemented proactive price increases, the inflationary pressures had an impact on our volume and affected our cost structure and profit. The sector adjusted EBITDA margin for the quarter was 19.8%, reflecting the lower earnings, but also the diluted effect of the pass-through of higher costs. In our Media Sector, we recorded another solid quarter with revenues and profit growth following our 2 acquisitions in fiscal 2022. Corporate expenses were lower than last year due mainly to nonrecurring positive adjustments and lower stock-based compensation costs. Now turning to cash flow. We generated CAD 103.5 million from operating activities, an increase of CAD 10.8 million versus the same quarter last year, mainly due to improved working capital despite closing the year with a higher level of inventory. Our investments in CapEx at CAD 34.2 million are in line with last year. At the end of the quarter, our net debt ratio was at 2.47x, a slight improvement from 3 months ago. Despite our growth CapEx and other investments, we continue to maintain a strong financial position. Finally, we distributed CAD 19.5 million in dividends to our shareholders. Now moving to the outlook. In Packaging, we expect volume growth and improved profitability in fiscal 2023. However, the economic environment remains uncertain and could affect demand in the short-term. In Print, we expect higher revenues in fiscal 2023 from growth in our ISM, book printing activities and the transfer of higher costs. In terms of profitability, we expect lower adjusted EBITDA from the impact of inflation on volume and cost structure. We expect corporate cost at the EBITDA level to be around CAD 40 million for the year. In terms of capital allocation, we expect CapEx in fiscal year 2023 to remain in line with 2022 at around CAD 140 million as we continue our strategic investments before returning to a lower run rate in fiscal 2024. As for cash taxes, it should be around CAD 60 million. On that note, we will now proceed with the question period.

[Foreign Language] [Operator Instructions] First question will be from Hamir Patel at CIBC Capital Markets.

Peter, I was wondering on the Packaging side, are you starting to see signs of some of your customers' destocking? And do you have a sense as to maybe how much higher their inventories are right now versus pre-COVID?

Hamir, thanks for the question. In terms of the Packaging business, what I would say is that it's a funny time in that we're going through or going into a recession. And usually, I'd be telling you in a recession, people stay home more, and as a result, volumes go up. I think, coming after COVID, I don't know that we can say that anymore. I think people just finished taking some time hanging out at home. And I think what's happened with supply chain over the last couple of years, supply chain issues, we and they have built up inventories to protect ourselves. And now, as interest rates go up, there's more and more pressure on working capital and both for us and them. There can be pressure to decrease those inventories. That said, I haven't seen it of significance. We've seen some in specific segments where we saw a decline in volume in the quarter year-on-year. But overall, from a North American perspective, we were fine. And looking forward, while we have to be ready for a potential blip that could happen if there was a correction, we don't see that happening yet.

Okay. Great. That's helpful. And I just had another question on the Printing side of the business. Just given some of the large price hikes that you need to pass-through, are you starting to see signs from some of your print customers about them reducing circulation or page count? And maybe any sort of -- if there's a way to quantify that potential volume hit that you might be expecting?

Sure. So first, what I'd say is that the Print team has done a fantastic job over the last years, doing -- making sure that our pricing reflects the volume that's being purchased and ensuring that inflationary increases are passed through. That said, the result of that, while it's fully covered, the inflationary costs on our P&L, it does have an impact on volume. We have customers -- when we're looking at the retail sector, we have customers that have fixed marketing budgets. And when pricing increases, they have to look at how to adjust, as you said, page count or volume. And we've seen in the past quarter, pressure on volume. Usually we see October as a strong month and we didn't see that historic strength repeating, affecting volumes in the business specifically. And in newspaper, we saw people like Postmedia for certain papers, making the choice that they wouldn't print Monday editions. So, I mean, that's been the effect in the quarter. I think, what is of importance is the actions that we have to take as a result of that we have to look at from -- as a result. And what I can tell you is, we're going to take a really close look at volumes. And if we feel we need to adjust our cost base for our platform, we'll do so. I think, of equal importance, you guys have heard me talk about following through on our last person standing strategy. And while I think strategies are really sexy and fun to talk about, the reality is, it has to be about execution. And when we talk about last person standing in terms of newspapers, what we said is, look, as costs increase and as volumes go down, our partners in newspaper industry are going to be less efficient -- in a less efficient place to continue printing their own newspapers. And as a result, we have to partner with them and see if we can help them improve their profitability by moving the printing of newspapers in-house to us and position them to free up some assets that may be captive on their side. So, a ton of work has been done. And what I can tell you is, we're very close to finalizing a deal that would see us take over the volume of it from a major publisher. So, yes, having an impact on volume, and we'll continue to take actions to ensure we protect the volume we have. We find ways to grow our volume, and we adjust our cost base if we need to.

Okay. Great. And just following up on that, would -- if you do reach an agreement to bring some of that printing in-house, would that be similar margins to the overall segment?

It would.

Okay. All right. That's all I had. I'll turn it over.

[Foreign Language] Next question will be from Adam Shine of National Bank Financial.

Peter, just following up on one of the last couple of questions just related to Printing. I mean, this has always been a segment where you guys have historically done a good job of driving efficiencies and keeping margins or at least protecting overall EBITDA. In answer to the last question, you alluded to the fact that you'll look at where the volumes are and make adjustments accordingly, but maybe you could talk a bit more proactively rather than necessarily react differently to anything out there in the marketplace? Just on an efficiencies basis, do we start to look at the prospect of printing margins dipping lower in the teens? Or is there this opportunity to, through efficiency efforts, preserve something a little bit closer to the F '22 levels?

So, thanks for the question, Adam. From a percentage standpoint, you see percentage declining and you'll appreciate the percentages change as inflationary costs get passed through. So just the mathematics of it gets done. In terms of being able to preserve our cost structure, we continue to have opportunities to maintain the most efficient cost structure. And I can tell you that we're doing a robust evaluation of our cost structure currently and marrying that to where we see volumes going. And based on that, if we need to, we can take action to ensure that our margins remain at a solid level.

Okay. And maybe one for Donald. Just in regards to free cash flow, obviously, helpful in terms of some of the outlook elements, CapEx and cash taxes that you provided. Obviously, this has been a year of significant working capital usage. Can you speak at all around the working capital dynamic and maybe provide a bit more insight as to where free cash flow goes next year?

Yes. Well, it's hard to make any forecast on working cap because we were affecting in the last 2 years, mostly because of 2 issues; first, the pricing, and second, supply chain issues. So -- and the team did a very good job to make sure that we have the right inventory to respond to demand by our clients. Having said that, with what we see now, the supply chain issue seems to be less of an impact. So, therefore, on that side, we will certainly see a decrease of inventories in the coming quarters, but this is what we see right now. And over the pricing will depend where the pricing all goes right now. It's a good direction. But it's very hard to make [ calls ] over the next fiscal year. But you're totally right, the reason why today we're at that leverage is, obviously we did some 4 acquisitions this year, but a large impact from the impact of the working cap that we had to finance in fiscal 2022.

[Foreign Language] Next question is from Drew McReynolds at RBC.

Three from me. Just following up on the printing volume, you alluded to, obviously, fixed marketing budgets and your customers adjusting. Can you just unpack a little bit in terms of the inflationary kind of impact versus actual direct macro impacts or economic impacts that you're seeing today? Second question on other revenues, it looks like the run rate is closer to CAD 100 million or CAD 110 million in annual revenue. Just wondering if you could just ballpark -- help us ballpark that for modeling purposes. And then the last one, just on free cash flow priorities. If you could just give us an update given the macro environment looking into 2023, just what has changed, if anything, on your free cash flow priorities.

I can take the -- regarding your question, Drew, for the volume for media, it's -- I think what we have said when we did the acquisition, especially the FP acquisition is that there is seasonality in those numbers. So therefore, Q3 and Q4 are the peak as it is for our media business than we had before. But you made the right assumption with the numbers because if you look at the other this year, we were slightly above [ CAD 100 million ]. And obviously, we'll have the impact of the full year of the acquisition. But as I said, the first 6 months -- the last 6 months out represent the first 6 months of the business. So, you need to evaluate that when you modelize for media business. Can you -- for the third question, can you -- you want to take the first one.

I'll do the first one. I'll do -- so in terms of the first question, the -- in terms of the flyer, what I'd say to you is that what we've seen historically in an inflationary period that what we know is a family can save CAD 1,500 a year using the flyer. And what we've seen historically is customers use flyers as a means to help the consumer and attract them to their stores. And it remains something of value and when we see what they're doing, we continue to see strong volumes in terms of that. That said, we usually have a stronger month in October and we didn't see that. From that, we're not at a point here where we can extrapolate what that means. It was a month. And we're going to have to watch it closely. So, there's not some macro effect. We do recognize that as pricing goes up or as the cost of our service goes up, that can put pressure on volumes. But it's not something at this point where we see something we forecast as having an impact on the business in the long term. And we need to be ready and adjust our cost structure if that's what's required.

And Drew, maybe for me, can you just repeat your third question for the cash flow?

Yes, sure. Just on excess free cash flow priorities, dividends, debt repayment, kind of further M&A. Just wondering how that has evolved just given the macro environment seems to be changing month-to-month here.

Yes, for cash flow, obviously, we're at CAD 250 million right now, and usually the position we like to be following acquisition is near 2 or below 2 and this is what our target is. But obviously, if there's acquisition and Peter can comment a little bit more on the M&A side. This is part of the strategy of the growth. But right now, CAD 247 million, it's really to pay debt, especially in the short-term current environment. Pay down debt will be the first priority.

The only thing I'd add is, look, we're pretty proud that we closed 4 acquisitions in the last year, you're talking about CAD 125 million of cost to that. And as we talked earlier in the call, we spent over the last 2 years, probably CAD 200 million on working capital growing. And so in this environment, we'll be prudent and at the same time, we're committed to continue to grow the business. But I'm much more comfortable growing the business when the net debt-to-EBITDA ratio is closer than 2 than it is right now. Right now, it's about 2.47 and rather see it closer to 2.

[Foreign Language] Next question is from Stephen MacLeod at BMO Capital Markets.

My question is around the packaging business. And I'm just wondering, coming off of the Q4 where you saw a bit of a dip in volumes and as you talk about the near-term uncertainties, can you just give a little bit of color as to where your initial volume and pricing expectations are for 2023?

Say, in terms of 2023, first, why don't we talk in terms of packaging, we looked at a business that in the first quarter was a disappointment. And then we saw Q2 was a small improvement year-on-year. And in Q3, a strong improvement, Q4, a strong improvement. And that's baked by actions that the team has taken both in terms of growing volume and we saw a 2% pure volume growth year-on-year, which I think in the economic environment and the uncertainty we have in COVID environment, we had at the beginning of the year or Omicron environment is an extremely solid performance that we can be really proud of. And while I'm not going to spend a ton of time forecasting into next year because of the environment, because of the uncertainty around the environment and what I talked about in terms of the potential for inventory adjustments, et cetera, what I'd say is we've had weakness in LatAm for a couple of quarters. The war in the Ukraine continues to persist and therefore, we're taking costs out. For me, what's important to say is that business remains a really strong business. And I think taking cost out, if anything, positions it to be stronger coming out of that. In terms of the rest of our businesses, we've put a bunch of time and effort, whether it be in R&D, whether it be in capacity, whether it be in working with sales teams to understand where we create value for customers. And as a result, we have confidence that we're going to continue to create value for shareholders next year. But at this time, to start estimating what the year is going to look like from a growth perspective, et cetera, I think it wouldn't be prudent to do. But what I am confident in saying is the team has done the work. And I expect us to continue to improve. We understand that our credibility is built on surpassing last year quarter after quarter, we've done it 3 quarters in succession. And our target has to be to do the same thing in Q1 next year.

And then Don, you gave a little bit of color around the other segment -- media segment in terms of revenues, always a tough segment to model. Just curious if you can give a little bit of color around maybe how to think about how EBITDA stacks up for next year, just given the fact that Q4 was so strong?

Well, I think the good way to modelize is, look, what was our business on the educational side in media before the acquisition. And I would say the acquisition is a good -- what we had before -- the acquisition is almost aligned with what we had before because it's totally aligned with our current business. So -- and the media number before the acquisition was, I would say, very high percentage education. So, the best benchmark you can use is look at last year and just do the same for your model for -- to represent the acquisition. As I said in the previous question, for sure, Q3 and Q4 represent the biggest part of the business for both our current business and the acquisition we did during the year.

[Foreign Language] Your next question is from Mark Neville at Scotiabank.

I guess just curious if you're seeing any relief or decline in resin costs? And I guess if -- how you're feeling about your inventory and packaging, there's maybe a risk potentially to short-term to margin as those prices come down and you have [Technical Difficulty].

Thanks for the question. Resin, so P Resin specifically has been -- has seen some decline. And we've been aware -- you'd see the industry has about 10% capacity that's coming on stream in the near term, which has obviously an impact on pricing. So yes, we've seen a decline in pricing. I can tell you that there -- the suppliers are attempting to stem the decrease in calendar Q1 by announcing an increase, we'll see if that can stick given capacity coming on. That said, we're aware of what was going on and the teams understood the importance of balancing security of supply with getting our inventories to a level where we can benefit from reduced pricing on raw materials.

[Foreign Language] Next question will be from David McFadgen at Cormark Securities.

A couple of questions. Just on the printing business, you talked about the revenue expected to be up in fiscal '23, and then you also said that you expect the EBITDA to be down. I was wondering if you can give us a little more detail or a better outlook on the printing EBITDA. Do you think it would be down mid-single digits? I was just wondering if you could just help us with how much you think it might be down.

I think the issue right now is difficult to judge. So, what we're trying to do is in a time that's uncertain to give the best indication we can for the year ahead. What I can tell you is the amount of work we've done in the last year to maintain volumes has been significant. We continue to do that. That said, to repeat what I said earlier in terms of there has been inflation. There continues to be inflation of costs. It's paramount that we pass those through. We understand that, that has an impact on volume. And volume obviously has an impact on our bottom line. But at this time, to predict how inflation is going to continue for a year and how that's going to impact volume, I think isn't something that I want to do today. And as the year progresses, we can give a better view. But from our perspective today is we'll do everything we can to hold volume. And given the current circumstances, there is a risk that it will have an adverse effect on profitability. But to say what that impact will be at this point, I think it's too soon, and it's too uncertain to be starting to guess at that.

Then a question on working capital. It was -- you discussed earlier in the call, the last 2 years, you've invested over CAD 200 million in working capital. One of the attributes that a lot of investors like about Transcon has been strong free cash flow. But if you keep investing this level of working capital really rose to free cash flow. So, do you think that you could have flat working capital this year or actually maybe free up some working capital and get some of that back? Is that realistic? Do you even think about that?

It's a great question. So, I mean investing in working capital is a bit of a misnomer isn't it. The reality has been that raw materials have risen massively. And as raw material pricing goes up, unfortunately, the net of working capital is to the negative from a cash flow perspective. And you couple with that were some raw materials, really specific raw materials. And today, oil specifically continue to be difficult to acquire. And as a result, it's important to keep a certain level of inventory. That said, if we're looking at the coming year and we look at the direction that resin is going, for example, as resin goes down, our inventories will go down from a pure price perspective and you'll see a recovery of working capital. So, while I don't want to predict because no one has been successful in life predicting the direction on a full year basis of raw materials, what I would suggest to you is, as raw materials go down, you'll also see our working capital go down. And as supply chains free up, you'll see our working capital go down. And we understand the importance of doing that. And as we see PE, specifically polyethylene, specifically going down, we are focused on making sure that our inventories go down so that we can benefit from a decline in raw materials as opposed to be hurt if we have high-cost raw material inventories on hand and pricing reflects lower costs or lower price. So in conclusion to your question, long answer is we will do everything we can to see working capital go in a different direction this year.

[Foreign Language] [Operator Instructions] There are no further questions at this time.

Well, thank you, everyone, for joining us on the call today, and we look forward to speaking to you soon.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.