Transcontinental Inc. (TCLA) Earnings Call Transcript & Summary

[Foreign Language] Welcome to TC Transcontinental Second Quarter of Fiscal Year 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, June 6, 2024. 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, Julie, and good morning, everyone, on the call. Welcome to Transcontinental's Second Quarter of Fiscal 2024 Earnings Call. Before we begin, please note that our quarterly report including financial statements and related notes as well as the slides supporting management's remarks are 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, Tom 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 now like to turn the call over to our President and CEO, Tom Morin.

Thank you, Yan, and good morning to everyone. We are pleased to report a third quarter in a row of improved profitability, largely due to our cost reduction initiatives and a favorable product mix. First, our program to improve our profitability and financial situation, which we announced in December is progressing well. We expect to reach $30 million in the run rate savings by the end of this fiscal year, close to a 2-year objective of $40 million. I commend our team with a quick and effective execution of this important program. Second, our continued focus on optimizing our product mix has contributed to improve our margins in both of our main sectors. In our packaging sector, while destocking remained an issue in our medical business, and with a challenging comparable last year, we achieved a record performance. Demand in our nonfood businesses remains slow, but we are starting to see an improvement in demand in most of our markets, which should drive modest overall top line growth in the second half of the year. In line with the need to accelerate the commercialization of recycle rate packaging, the rollout of our cutting-edge BOP line in Starnberg, the first in North America, is going well in accordance with our plan and it is now in its commissioning phase. Over the last few months, the quality of our work was highlighted by our peers and customers. We have received a number of awards for the Flexible Packaging Association and Pac Global. And we are particularly pleased with the direct customer recognition received from Procter & Gamble with a Partner Excellence Award and from Coca-Cola Canada, the supply of the year 2023 for direct materials. Now turning to Retail Services and Printing. We are renaming the sector to reflect the evolution of our business. Of course, newspapers, books, magazines and other specialty printing remain an important part of our operations. That said, most of our activities today serve a wide range of retailers and brands. From the production of digital and print advertising content to the design and manufacturing of in-store retail environments, our expanded service offering covers far more than the sector's former name indicated, and it has grown for growth. We are proud to have served a great number of retailers over the years and look forward to helping them deliver even more value and better shopping experiences to customers. Reviewing the second quarter, we as well as our clients are pleased with the successful rollout of Radar in Quebec, complete at the end of April to $3.6 million. We look forward to the further expansion of Radar in British Columbia and Radar in Newfoundland, both in the month of July. Finally, I'm encouraged by the continuous growth in our ISM activity. Tomorrow, June 7 marks the one year into the job for me and while much remains to be done, I am pleased with the direction we have taken. I'm proud of the accomplishments of our teams in delivering on our priorities. On that note, I'll turn it over to you, Donald.

Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on Slide 5 of the earnings call presentation. For the second quarter of 2024, we reported revenues of $683.2 million, an 8.6% decrease in revenues versus the same period last year. This decline was caused by lower volume in both our main sectors. Regarding profitability, despite the lower volume, we delivered a strong quarter with consolidated adjusted EBITDA of $110.1 million, a 1% improvement versus a solid Q2 last year. This increase was mainly due to cost reduction initiatives related to the profitability improvement program, and also a favorable product mix, partially offset by lower volumes. These three elements, cost reductions, mix and volume impacted both our main sectors during the quarter. Financial expense decreased by $0.8 million to $14.4 million mainly due to a lower debt level following strong cash flow generation in the last 12 months, partially offset by exchange rate fluctuations and a higher interest rate on our floating rate debt. Adjusted income tax increased by $0.6 million to $12.5 million and represented an effective tax rate of 21.6%. This led to an adjusted earnings per share of $0.52, a $0.07 or 15.6% increase compared to the same quarter last year. Now moving to Slide 6 for the sector review. In Packaging, we generated revenues of $412.4 million compared to $444.2 million last year. The $31.8 million decrease is mainly due to the lower volume caused by a slowdown in demand, in particular, in the medical market. In terms of profitability, despite a strong performance last year, adjusted EBITDA in Packaging grew by 5.6% to $71.2 million. This solid performance led to a 17.3% EBITDA margin, a 210 basis point improvement versus last year. Cost reduction initiatives and favorable product mix supported the margin growth. This is also the third consecutive quarter of margin improvement for the sector. Moving to the Retail Services and printing sector on Slide 7. Revenues decreased by 10.8% to $266.3 million. This was mainly due to the lower volume in flyer printing activities related to the end of Publisac in Quebec and also lower volume in magazine and book printing. Retail Services and Printing adjusted EBITDA was $47.1 million for the quarter. Excluding the $1 million impact from exchange rates, earnings decreased organically by $1.9 million as the lower volume was mostly offset by our cost reduction initiative and the favorable effect of the rollout of RADAR. Adjusted EBITDA margin grew 90 basis points to 17.7% as a result of cost reduction initiative and the favorable effect of the rollout of Radar. Now turning to cash flow. We generated $73 million from operating activities compared to $105 million in the previous year, following the strong working capital benefit from inventory reduction in Q2 last year. Our CapEx at $30.1 million were $23.1 million lower than last year and in line with our full year guidance of around $135 million. Despite the impact in the streaming of the U.S. dollar at the end of the quarter, we maintained our net debt ratio to 2x. We are confident that our leverage ratio will decrease materially in the second half of the year, in line with the significant cash flow that we expect to generate over the next 2 quarters. In this context, we believe we are in a good position to launch subject to the TSX approval, a normal course issuer bid to repurchase up to 5% of our shares. We believe this decision is a good use of capital while we continue to reduce our net debt. Looking ahead, we are improving our outlook for fiscal 2024. We now expect our print sector to deliver a stable adjusted EBITDA in fiscal 2024 compared to fiscal 2023. At the consolidated level, we therefore expect to grow the adjusted EBITDA in this fiscal year to reflect the strong performance year-to-date. We are very pleased with the traction we are seeing from our profitability and financial position improvement program. We expect to reach a run rate of $30 million in savings by the end of this fiscal year. We are also cautiously optimistic about closing the sale of one or two buildings by the end of the calendar year and continue to be confident to reach $100 million in sale of real estate assets by the end of fiscal 2025. On that note, we will now proceed with the question period.

[Foreign Language] [Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets.

Thomas, you pointed to seeing improvement in some packaging end markets here in the third quarter. Are you able to quantify the volume trends you're seeing there? Maybe which areas are the strongest? And when would you expect to lap the negative comps that you're experiencing in the medical market?

Yes. Thank you, Hamir. The trends are picking up at the back end of Q2 in most of our end segments in packaging. The one that remains low is medical, as we said, -- the -- and we believe this will continue certainly in Q3 for this very segment. The rest are expectations, and that covers basically all the rest should yield about low single-digit growth in the second quarter of this year, say, around 2%, I would guess. That's where we see it.

Okay. That's helpful. And you highlighted in terms of the real estate sales expectation to monetize one or two buildings later this year? Are you able to quantify the potential proceeds of what's remaining this, at least this year?

Well, as I said, for 2025, we expect to -- by the end of 2025, at least $100 million for those that we might close this year, there's one that we're really close. It's a small one. But too early to tell because it depends. We feel we're in a good position, and we want to make sure we are at the right time in the market. So to be confirmed, but as I said, overall, we expect $400 million by the end of 2025 and confident we can close some this year.

Your next question comes from Adam Shine from National Bank Financial.

Obviously, a good first year. A couple of questions. Where some of the traction -- faster traction that you're seeing in regards to the profitability improvement, which clearly is moving ahead of expectations, it appears.

Thank you, Adam, it's a combination of 2 things, Adam. We've been working on product mix improvement for some time now. It's not something new back some quarters ago, we were talking about commercial excellence, understanding the value some of our products bring. And we've been pushing those products month after month. So there is a mix improvement here, and that is true for both businesses for packaging and the Retail Services and printing. So that's one element of it. The second element of it is obviously the reduction of our cost base, which we've been accelerating since December as we could share with you. And then when you combine the two together, this is where the margin improved on both ends. Now the big chunk of effort we've done is on fixed costs and SG&A. So this obviously yields some straightforward bottom line impacts.

Perfect. And when we go back to the potential volume improvement in packaging that you alluded to, I think you talked previously last call that you were hoping to see sort of retailers doing a bit more promotional activity to stimulate food demand. Is that part of the equation here? Or are there other things afoot to sort of see better volumes in H2?

Yes. Good Yes, you remember very well what I said. What I would say on Q2 when we look at Q2 specifically, the core of our activity has really helped very well. And it's tough comparable to last year, as you remember, last year was pretty high. So core of our segments, including the product mix I've talked about helped strongly. And that's certainly on the kind of what we just commented on, the improved and enhanced retailer promotional act. The nonfood core segments really suffered in Q2, a bit the same as in Q1. So we've addressed it and we've been active on the market to develop and grow some relationship with new or existing customers. And that's also what yields what we believe a better second half.

Your next question comes from Maher Yaghi from Scotiabank.

Great. [Foreign Language] Just wanted to ask you just a clarification on your earlier comment regarding packaging growth in the second half. Is that the 2% to 3% that you talked about, is that including medical or excluding medical?

You already add 1% to my number, that's very kind of you. So far, we believe it includes it. The medical is not a big segment for us, but yet impactful from a decline as we speak. We factored that low activity for the rest of the year.

Okay. Great. So in terms of the printing side, you were facing quite a heavy comp -- tough comps in the second quarter. It does look like we're still in that 5% to 6%, 7% range in terms of decline year-on-year. Is that what you're looking at in the second half potentially or things have changed?

Things have changed in my view, not so much in terms of volume, but in terms of product offering. What you need to factor in, Maher, is the change in the product offering we have in the retail services and printing activity. And that's the rollout of Radar, which has an impact, obviously, on the top line, and that's reflected in the minus 5%, but also an impact from a product mix standpoint in terms of bottom line. The other thing is the book segment. If you compare year-over-year, our book activity was actually strong in the first half and much less so in the second half. So when you compare year-over-year, we'll have an easier comparable.

And maybe just to complete on Radar, you -- last year, we had -- we have started the Radar rollout in Montreal. So year-over-year in Q3, Montreal will be -- will have no impact, and now it's more the rest of Quebec that will be impacted by Radar.

There's some phasing right.

Okay. Okay. Great. Now just turning on the cost side, definitely a strong performance in the second quarter. How much additional cost of control, we could look at or could see on the packaging side, still not visible yet in results.

So our plan, as we communicated, is to aim at $40 million. We believe we're going to be on a run rate of $30 at the end of this fiscal year. So there is another $10 to go for. and this is not specific to packaging Maher. It is company-wide, obviously, as we're addressing our fixed costs in particular. That being said, the focus remains the same. Beyond fixed cost, we're looking at the cost of goods sold. We have still some work to be done in there, and that would be more on the packaging side, to your point. And the second thing would be on the underperforming sites. We still have some sites lagging behind, and we're addressing this at the same time. So we believe say, over the 2 years, we believe we should be in a position to meet our targets of $40 million, continuing to work on those 3 things.

Great. And Thomas, a significant part of your initial objective was to reduce volatility on the margin side, on profitability side that we saw maybe in the past. Can you tell us how you believe the company has repositioned itself so far when it comes to reducing that volatility. Definitely, we're seeing less volatility on the earnings side than your reported results, but maybe you can tell us a little bit more if that project has run its course and achieved its goal.

Yes, good question. Well, there is so much we can control, but what we can control, I think the story is that we have a much better control, obviously, on our costs. And we're using this to reduce this volatility, if you will, but more importantly, to improve our profitability, that's what's matters as we speak. Moving forward, we've been experiencing in the last 3 quarters, a lower demand, as you all know, and that's not specific to us. We'll see what a better demand can yield in terms of profit moving forward, volatility will still be there given the demand in the marketplace. But again, as I said, everything we can control in the right direction we do. So that's what led to less volatility and improve margins.

Maybe one last question on the buyback that you discussed earlier. We're seeing leverage come down, what is your overall leverage level that you'd like to maintain? Just for us to understand how much cash you could deploy on the buyback. You mentioned the 5%, but that's kind of an overall goal, but what is the level of leverage that you think the business long term should trend to and we'll make the math work on the other side to see how much extra cash you have for the buyback?

We always said that we -- other than following acquisition, we want to be below 2. It's important for us. It's important for the Board, and that's what we aiming by the end of this fiscal year. Also what's good for us is the large part of our huge CapEx program is behind us. So that encourages us that we will be in a great position regarding debt to EBITDA by the end of this fiscal year. So we -- instead of saying what is the target? We -- what we can say is that we're confident that we're going in the right direction regarding our priority to reduce the debt, and we feel comfortable to put this program in place while maintaining this direction of going down, and we expect that now we don't have those issues, working cap. So Transcontinental has been a very good company to produce a lot of free cash flow, and that's the direction we're going. So we're comfortable where we're going on the debt level to conclude on that, and we have room to make NCIB and still decrease the debt. That's the strategy.

Your next question comes from Stephen MacLeod from BMO Capital Markets.

Thank you. Good morning, everyone. Lots of great color so far. Just a couple of things. When I look at the packaging margin in Q2, obviously quite robust at north of 17%, just curious if you can break down on a year-over-year basis, how much of that improvement was driven by mix? And how much of that improvement was driven by the cost reductions that you've identified?

Well, we won't say or disclose the number, but cost reduction is the big impact, and I will say mix is the second impact. That's the way to look at it. But cost reduction, you can see it because you see the decrease in sales and the large improvement we had on the margin side, well, margin and EBITDA, which is the most important thing for us, growing the dollars. So cost reduction, for sure, had a big impact. But what we're encouraged is the mix is going in the right direction, and this is because we invested CapEx in those plants that are good for us on the margin side, and it's working as we speak.

Right. Okay. Great. And then just looking forward here, we previously talked about sort of, I think, like a 16% margin level being a good place to be potentially aspirationally on the packaging business. Just curious, like how do you feel about your margins for the balance of the year? And is that 16% baseline, all else equal, a higher number now when you think about the long-term margin profile of the packaging business?

Well, first, yes, we're confident for the rest of the year with this baseline. We don't like to talk too much about margin in the future because as we saw a couple of years ago with the large impact of the recent price going up, that can influence. But the most important thing for us is we grow the EBITDA in dollars, and this is what we've been doing in the last six quarters for packaging, and this is what we want to maintain. As far as margin, we think the mix improvement will help, the cost program will help, but hard to say where we'll be 2 years from now because of what I said.

Yes. Okay. That makes sense. And then maybe just turning to the print -- the new retail or newly named retail and printing services -- or retail services and printing, sorry, could you just remind us sort of where you sit in terms of the revenue breakdown between, I guess, what we would consider to be legacy printing or traditional printing and the ISM and sort of retail-focused businesses that are providing some offset -- offsetting growth.

Well, just maybe to say that was legacy printing represents close to 1/3 of the business as we speak right now, which is mainly newspaper, magazine and book. And ISM, now is part of the REIT, what we call the retail part. So ISM and everything regarding the flyer that's now radar, but it's way more than radar also the digital, we're working in the premedia part of the business. So it does represent roughly 2/3 of the business.

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

Okay. Great. A couple of questions. Just on the medical vertical, is this vertical just going through a short-term impact? Or is this a permanent impairment?

We believe it is -- well, it depends what you mean by short term. That's always the same thing. The -- what happened in medical is -- this has been overstocked in, I would say, last year. Last year was strong in the medical. This is obviously the aftermaths of the pandemic. The difference between medical and the rest of our activities from a customer standpoint is that inventories can last for some time. So we've been talking to all our customers there and some of them sit on 6 months, some others on 10, so we believe this is -- depending on what you mean by short or long term. This can be another couple of quarters. That's our understanding.

So it seem that to me, I have seen that the business is kind of rightsized and once it's rightsized, then it probably grows again, no?

Agreed.

Okay. And that could maybe be another couple of quarters to get to the rightsize and then...

That's the best estimate at this point in time. We're obviously having extremely regularly connections with our customers so that we monitor this with them.

Okay. And then I was just looking at the cash flow statement. I believe that you indicated at the beginning of this fiscal year that you thought you would have a working capital inflow similar to what you had last year to recover that big investment that you made a few years ago. I'm just wondering, is that still the expectation?

Yes. We expect to be positive working cap by the end of fiscal year, and we expect the second half to be positive on that side for sure, yes. Obviously, what we had last year because last year, we were coming from -- last year was very solid, coming from few years of being very negative on the working cap, but we're trending in the direction to get better again this year.

Okay. So if you look back a few years and you accumulated that working capital investment is about $200 million, a bit more than that. Do you expect to eventually get all of that back? Or probably not going to get to that level, but you still expect some inflow.

Yes. Well, to be exactly back where we were before will be tough because there's still some raw material that are not at the price it was back then, so that -- if that's changed since, so it's hard to say, but we feel that by the end of this fiscal year, all the work we've done internally, obviously, the supply chain now is more secure for us, so we don't have to maintain that much of inventory. But we're really proactive to get better at every part of the working cap. So we have plans going on that we feel comfortable with. But to catch everything back is art and the business is changing at the same time. The mix for us is changing. So it's hard to compare apple-to-apple, what was the situation, I would say, pre-COVID.

[Foreign Language] Mr. Lapointe, there are no further questions at this time.

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

[Foreign Language] Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.