Transcontinental Inc. (TCLA) Earnings Call Transcript & Summary

[Foreign Language] Welcome to the TC Transcontinental Fourth Quarter and Fiscal Year 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, December 13, 2023. 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, Joel, and good morning, everyone. Welcome to Transcontinental's Fourth Quarter and Fiscal Year 2023 Earnings Call. Before we begin, please note that the press release, the MD&A along with financial statements and related notes, as well as 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. Please note that this conference call is intended for the financial community. Media are in listen-only mode and should contact Nathalie St-Jean, Senior Adviser, Corporate Communications, for more information. We have with us today our President and Chief Executive Officer, Thomas Morin, and our Executive Vice President and Chief Financial Officer, Donald LeCavalier. As referenced on Slide 2, 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 2023 annual MD&A and in the annual information form. With that, I would like to turn the call over to our President and CEO, Thomas Morin.

Thank you, Yan, and very good morning to everyone. Thank you for joining this quite early call, I must say. I'm pleased to be here with you to discuss our Q4 results, my first full quarter as the CEO. First, on safety, we improved again this year as our fiscal 2023 incident rate dropped by another 17%, following an improvement of 23% last year. We still have work to do to achieve an injury-free workplace, and yet we are moving in the right direction. Turning to Q4. We have continued to focus on our 4 key priorities. On number one, growing organically and profitably, we are pleased with our growth of 3% in adjusted EBITDA despite a decline in our volume. Number 2, delivering a strong result in return on assets. In line with our new program to improve our profitability and our balance sheet, to which I will come back later, we have announced the closing of our Tomah, Wisconsin, packaging plant and the transfer of these activities within our network. I also mentioned during our Q3 call the closing of our Montreal recycling facility with the integration of our plastic recycling activities directly into our film production plants. And we have announced in early November, the end of Publisac and its gradual replacement by raddar throughout Quebec as well as the rollout of raddar in Ontario and British Columbia. On the third, certainly a major highlight of the quarter, we've made great strides on the reduction of our net debt, thanks to improved working capital for the third consecutive quarter and to a lesser extent the monetization of one of our buildings in Quebec City. This led to a very solid performance in terms of cash flows. Fourth, commercializing sustainable products, we're progressing well with the installation of our BOPE line in our Spartanburg facility, and we continue to expect to start up production at the back end of spring or early next summer. Now let's turn to our sectors. The Packaging Group ended the fiscal year on a strong note in Q4, concluding a year of growth. Lower volumes in the quarter were caused by lower demand, certainly due to the economic context, particularly impacting some nonfood segments, and second, by the [ early ] destocking, which we could see early in the quarter. In our printing sector, we continue to face challenges in our book printing operations and have taken steps to mitigate their impact in 2024. On the other hand, we are encouraged by the favorable opportunities in our retail service businesses as well as the rollout of raddar. And last, our media sector posted a strong performance in the fourth quarter. So altogether, we're satisfied with these results given the current economic context, which may continue into the new year. Looking forward, we all agree that we need to do more to deliver higher profitability, and we need to generate better return on what we've got; decisive actions are necessary. This is why we have put in place an ambitious program to improve the company's earnings per share as well as our balance sheet. This 2 years program is expected to deliver early impacts in the second half of fiscal 2024 and recurring savings between $20 million and $40 million in fiscal 2025. We have 4 main categories of actions. The first is to reduce addressable fixed costs across the organization. The second is to make decisions on less profitable activities with 2 options, either a quick turnaround or a consolidation. The third is to target a reduction of the cost of goods sold, basically leveraging members of our operational excellence, procurement and R&D teams combined into 1 project team to deliver savings. And fourth, sell real estate assets which we anticipate to be approximately worth $100 million, and this is the first step as this is part of a program which can continue beyond the first 2 years. With increased profitability and a stronger balance sheet, we will be better positioned to grow earnings per share. This program is perfectly aligned with our 4 key priorities, and it is the right thing to do at this point in time, especially in the current macroeconomic context. I strongly believe in it, and our team is fully mobilized to execute it smartly and diligently. Now over to you, Donald.

Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on Slide 6 of the earnings call presentation. For the fourth quarter of 2023, we reported a 2.8% decrease in revenues versus the same period last year. This was mainly driven by lower volume in both our packaging and printing sectors. Regarding profitability, consolidated adjusted EBITDA for the quarter was $145.5 million, an increase of 3.1%, thanks to the strong performance in the media sector and positive impact from the share-based compensation. Financial expense increased by $7.8 million to $18.3 million in the fourth quarter of 2023. This was mainly due to the increase in interest rates and by the effect of exchange rate fluctuations. Adjusted income tax of $17.4 million was $3.1 million lower than last year and represented an effective tax rate of 19.6%. This resulted in adjusted net earnings of $0.83 per share for the quarter, a 5% improvement versus last year. Now moving to Slide 7 for the sector review. In Packaging, we generated revenue of $420.8 million, down 2.9% versus last year. The decline is mainly due to lower volume from market softness and to a lesser extent, customer destocking early in the quarter. This was partially offset by a stronger U.S. dollar. In terms of profitability, despite lower volume, adjusted EBITDA in Packaging remained stable at $61.7 million as favorable exchange rates, cost savings and efficiency improvements did offset the volume impact. Moving to Printing on Slide 8. Revenues decreased by 4.8% to $311.3 million. This was mainly due to lower volume in retail flyer and book printing activities. Printing adjusted EBITDA was $61.1 million for the quarter compared to $64.6 million last year. The $3.5 million decline, mainly due to lower volume, is better than the $7.1 million gap we had in Q3 and an even more significant improvement when comparing with a $16.2 million decline in Q1. As we are accelerating the implementation of cost reduction measures, we should be better positioned to adapt to volume. Media had a solid quarter compared to last year, due in part to the timing of orders between Q3 and Q4. Corporate expenses were positively impacted by $3 million lower share-based compensation expense in Q4 following the stock performance. Now turning to cash flow. As expected, Q4 2023 was a strong quarter. We generated $246.2 million from operating activities, an increase of $142.7 million versus last year, mainly driven by improved working capital as we continue to make progress on reducing inventories. We also improved receivables with the successful implementation of a new factoring program. This third consecutive quarter of positive working capital supported our significant improvement in cash flow performance on a full year basis. Our CapEx at $29 million was $5.2 million lower than last year and was the lowest quarter over the last 2 years. In addition to the lower CapEx, we also sold a building in Quebec City for $12 million. Our solid cash flow performance, combined with stable profitability, led to a significant improvement in our net debt ratio. We closed the year with a ratio standing at 2.06x compared to 2.47x at the end of fiscal 2022. We expect to continue to generate significant cash flow that will allow us to reduce our net debt, but the seasonability of working capital, the ratio will likely increase early in the fiscal year 2024. In closing, we finished the year strong to deliver a stable EBITDA on a full year despite significant volume headwinds. We achieved this by driving substantial cost savings and efficiencies across the organization, but this is not enough. This is why we are implementing a new program to improve profitability by reducing structural costs, as outlined by Thomas. This way, we are building a more resilient organization. In terms of outlook, in packaging, while we expect pressures on volume to persist in the near term, we expect improved profitability in fiscal 2024 compared to fiscal 2023. In print, despite the benefits from the ongoing cost reduction initiatives, we expect lower adjusted EBITDA for the fiscal year 2024 from lower volume. We expect corporate costs at EBITDA level to be close to $40 million for the year. This is around $10 million higher, since fiscal 2023 benefited from lower share-based compensation from the stock price performance. Taking into account this headwind and the challenging economic environment, we expect consolidated EBITDA in fiscal 2024 to be at least in line with 2023 as the improvement in packaging should more than offset the decline in print, highlighting the benefits of our diversification into flexible packaging. Finally, savings from our profitability improvement program are likely to start to materialize late in fiscal 2024 and therefore will have a more meaningful impact in fiscal 2025. In terms of capital allocation, we expect CapEx to decrease to around $135 million in fiscal year 2024 with a heavier weight in the first half of the year as we conclude our strategic investments and assisted [indiscernible] before returning to a lower run rate in fiscal 2025. As for cash taxes, this should be around $50 million in fiscal year 2024. On that note, we will now proceed with the question period.

[Foreign Language] [Operator Instructions] Your first question comes from Adam Shine with National Bank Financial.

Thomas, obviously a very strong quarter, a good end to the year. Focusing first on the improvement program, a couple of questions. One is, can you elaborate a little bit further on the various buckets? Obviously the real estate one is clearly obvious, but the context here being is number 2, the quick turnaround or consolidation of less profitable activities, more of a sort of unknown, more of a variable, whereas more of the heavy lifting will come from the fixed costs and cost of goods sold reduction efforts? And to the extent that the fixed costs and cost of goods sold come down, can you speak to specific key initiatives that might be planned and how perhaps you might allocate the $20 million to $40 million of potential savings coming from those particular buckets? And then just another question related to the program is, does that offer you any particular line of sight to perhaps reinvesting some of those savings, which perhaps speaks to some of the range in terms of the anticipated savings. Is that part of the thought process? And then a follow-up later for Donald.

That's a very vast question, Adam, you share with me, and thank you for the nice words. A couple of things I would say on this. The cost of goods sold reduction is obviously the largest potential. This is not a surprise. We have a 50% cost of goods sold in our top line, obviously. So any saving on that generates nice multiple. The -- when it comes to fixed costs and the underperforming activities, I'd like to add something to what we communicated. It is not really meant to address potential volume movements. This is really to strengthen our performance, really. So what we're looking at is a few sites, which we will try to turn around. It's a very few number, but we will make quicker decisions if it is to be done. And then the -- what else -- your question was, should we reinvest -- should we reinvest some of this into growth? We'll be in a better position for sure, we'll be -- when this is achieved, will be more competitive, obviously, having an improved manufacturing network and, I would say, an improved cost of goods sold. So we can decide at this point in time what we would do with this.

Okay. All right. I appreciate that. Donald, you touched on the leverage at just under 2.1x. There was a goal to get down to around the 2x level at some point in '24. Obviously, you acknowledge that there's some working capital timing issues at the start of the new year, but nevertheless it does look like, based on the outlook and some of the evolving initiatives that Thomas is referencing, that you could potentially have leverage down below 1.5x within the end of this 2-year program. And I think that's even before factoring in the real estate sales. So can you just speak to maybe some of the particular priorities moving forward? Do you step into the buyback that's been a bit quiet in recent quarters? Is there the prospect of examining dividend increases? And as it relates to M&A, maybe you can elaborate further as to what the pipeline potentially looks like.

Yes. Well, yes, we're glad first to be very close to 2x. That was the target. And obviously, being under 2x in fiscal '24, as you can look at the free cash flow we'll generate, including the $135 million CapEx, and even without selling real estate, yes, we will be under 2x. As far as being at 1.5x in 2025, obviously that will depend of the timing of the real estate transaction, but we expect that the CapEx program in 2025 should be -- will be lower than the $135 million. So you can make a calculation and see that the free cash flow will be very strong in 2025. In terms of priorities, we stick to the 4 priorities, and the third one is to pay down the debt. So that's for sure the priorities for fiscal 2024. And that will put us in a position where, like we were before COVID, is where we're in a position to make acquisitions. But we need to do this program first, pay down the debt, increase the EBITDA, and then we'll see where we go. But for this time today, the priority is to pay down the debt.

[Foreign Language] Your next question comes from Hamir Patel with CIBC Capital Markets.

Thomas, sir, I wanted to follow up on the cost reduction program. How much of the $20 million to $40 million savings would you expect to actually realize in fiscal 2025? It sounds like most of those benefits are going to be building over that year.

Yes. So thank you for the question, and good morning, by the way. The -- you're right. Given some of the actions we've been talking about, some will have quicker impacts than others. As I previously said, the largest one is addressing the cost of goods sold. This takes longer, as you can imagine. So that's why we believe the full run rate will be in 2025, probably some first signs in the back end of 2024.

Fair enough. That's helpful. And then just turning to packaging demand, Thomas, is there any sense you have as to where customer inventories sit today, if maybe the -- perhaps the destocking has gone on for too long? And when you think about the growth rates, any trends across the different categories that you would expect for 2024?

Thank you for asking the question. This is obviously a daily discussion with our customers. What I can say is in the nonfood segments, so namely industrial, insulation, to some extent as well in the medical piece, there is long -- still long inventories as we speak, whilst in the food segment, which is the bulk of what we do, it's in my opinion finished, so...

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

[Foreign Language] Your next question comes from David McFadgen with Cormark Securities.

A couple of questions. So first of all, just on the guidance, I guess a clarification. When you're talking about the printing business, you expect EBITDA to be down, but then in the guidance, you also say, but then it will be offset by cost savings. So I'm just -- is the EBITDA going to be down, or is it going to be flat? What's your expectation for '24?

I think what we said is that we have headwinds. There is a decline in volume like we're facing in part of this business, and cost savings and initiatives we're putting in place will mitigate the decline, but not enough. So we said that the EBITDA should be lower than 2023.

Okay. Okay. And so when you talk about focusing on debt reduction, which I think is a great idea, can you share with us a target leverage ratio that you want to get to that you'd feel more comfortable with?

Can you repeat just the beginning of your question? You said the debt reduction?

Yes.

Okay, I get it. So the target for us, and ask David, has been always to be under 2x, but there's no limit when we're under 2x. We aren't going to do acquisition or any programs saying we target to be 2x. We feel we're comfortable this is at the level that the rating agency, that us, see that a better position for us is to be below 2x to do any acquisition or to grow the company. So now we're getting closer to that, but we didn't fix any targets to set this level, we will start decreasing the debt. Just before COVID, we had no debt on the balance sheet, and it was good for us because we were able to make the acquisition. So the target is to be below 2x. And the good news is that we're going in that direction.

Okay. And then when we look at the cash flow statement, obviously you guys had a nice working capital inflow this year. And I know prior to that, you invested a lot of money in working capital. So you took some back. Can we expect that you could recover some more cash this year from working capital?

That's the objective, and that's also part of the program that Thomas spoke about. We do have action on the EBITDA side of the business, but we have action also on the cash side. Obviously, the one on real estate, but also to look at our CapEx program, and that's what we do right now. And the third one is regarding the working cap. And you're right, over the last 2 years before fiscal 2023 we had to invest north of $200 million in working cap. We gained that about half of it this year. So we're hoping to get the other half back in the next year or 18 months.

Okay. Okay, great. And then just a clarification on the CapEx. Did you say it's $135 million, that's your expectation for '24?

Yes.

Okay. So that excludes intangibles, obviously, right?

That excludes?

The intangible.

Yes, that includes -- we had CapEx which are tangible, that are mostly linked to the media business. So when we say $135 million, it's the whole -- the [ true ] CapEx, which is -- yes, so it does include.

It does include your expectation for spending on intangibles?

Yes.

Okay. Okay. Great. And then just a question on the packaging side. So you're talking about lower demand. Most of your business is on the food side. So is that just because with discretionary spending coming under pressure here, people are just opting for lower-priced items on the food side? I'm just wondering what's driving that volume weakness here.

We haven't seen any significant share [indiscernible] loss. I mean that's something, of course, we've looked at and see, hey, did we lose some ground? We did not. So obviously this is the performance of our customers. Difficult to say, the price points, the promotional activities have been not as high as in the past in the last quarter for the food segment. So there is still probably an impact of the higher inflation on food, my guess at this point in time. When we speak to customers, our main customers, they all remain extremely positive when it comes to the midterm, but there is obviously some adjustments short term.

[Foreign Language] [Operator Instructions] [Foreign Language] Your next question comes from Nevan Yochim with BMO Capital Markets.

You have Nevan on for Steve today. Just a question on the cost savings. Wondering if you can talk about how that will sort of flow through the model in terms of which sectors you'd expect to benefit the greatest like on the margin side?

Yes. I think the -- when we look at it at this point in time, I would say part of it will be corporate costs, obviously, overall structural fixed costs, and the other part for the time being is primarily in the packaging side. This is where we have the bulk of the cost of goods sold reduction.

Okay. Great. And then staying on margins, when we think about 2024, I would expect that you'd have some margin expansion baked into the guidance. Would it be reasonable to expect that packaging margins are greater than 14% this year or next year?

It's always -- we're always careful to talk about margin because you might remember a couple of years ago with the material increase of the raw mat that affected us, it diminished our margin by far. So we need to look at this. If the raw mat remains stable like it is right now, when you look at the -- at what we had in terms of margin at the end of Q4, we were at 14.7% and the average is 13.6%. So Thomas has said that we're pushing for -- the most of the programs we're putting in place is on the packaging side, although a large part of it will come late in fiscal 2024. I'm encouraged to say that 14% should be the target for this fiscal year.

Okay. Great. And then maybe the same thing on the printing side. I mean we're obviously expecting some volume pressure into 2024. I can see that like volumes -- or margins held in for the most part here in Q4. How would you think about printing margins into next year?

Yes. Well, on print first, what I would say is that we're really glad, because when we began the year we were 5% behind margin 2022. You may recall that we were at 19.2% and we -- our first quarter, we're at 14.2%, and now we're flat with last year. So that shows the great work did by the team. But you need to think 2 things for printing. What's growing right now is the ISM business, which we're very satisfied with the margin growth we have with this business, but obviously it's not the same margin we have on the renew side of the business. So we're getting better on the ISM; renew, we're compensating with cost savings, but maintaining the same margin will be more as a challenge for printing group. Having said that, we will need to see the full effect of raddar, but too early to call on that side.

Okay. And then I guess longer term, would it be possible to get back into that 19%, 20% margin range in printing in light of what you just mentioned?

Well, that depends on 2 things. The percentage of decrease over the longer term of the renew, which is something that we don't control. But certainly what we control is the ISM part of the business, and that we will push, and we think we have great opportunity to increase the margin. We did it in the last 5 years, and we still have room to grow it. So I'm not going to make a call on the 19%, but for sure, we will defend those high teens margin for the printing group.

Okay. One last question from me. Just on the other segment. Are you able to break out how much of the year-over-year adjusted EBITDA growth in Q4 came from the higher media volumes versus the lower stock-based comp? And then as we start to think about adjusted EBITDA in other for 2024, would we expect that to go back to prior year levels sort of in the $13 million range? Just trying to get a sense of directionally where you think that's going.

Well, to give you more color regarding media, and as I said in my opening remarks, there was a transfer of business between Q3 and Q4. So if you look at the other, for the media side of the business, I think the base for -- 2023 represent a good base because we have the full impact of both acquisitions we did in the group, the first 6 months, we have the positive impact coming from acquisition, but now 2023 represent a good benchmark, and obviously, we want to grow this business. But you can take that -- the full year number as a good number for media business. As far as the corporate costs, I mentioned also that they will go probably up to $40 million because of the positive we have from the stock base. And obviously, if the stock base move, like move up, it will be a negative impact. So -- but that's something we discount at the current price to date. As far as media in Q4, I will say that in terms of dollars, it's -- the impact is around $5 million positive.

Mr. Lapointe, there are no further questions at this time.

Thank you, Joel, and thank you, everyone, for joining us on the call today. We look forward to speak to you soon.

[Foreign Language] Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.