Transcontinental Inc. (TCLA) Earnings Call Transcript & Summary

Welcome to the TC Transcontinental First Quarter Fiscal Year 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, March 11, 2025. I would now like to turn the conference over to Yan Lapointe, Senior Director, Investor Relations and Treasury. [Foreign Language] Mr. Lapointe, please go ahead.

Thank you, Joel, and good afternoon, everyone, on the call. Welcome to Transcontinental First Quarter Fiscal 2025 Earnings Call. Before we begin, please note that you can find on our website at www.tc.tc, our quarterly report, including financial statements and related notes as well as the slides supporting management's remarks. 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 Advisor, 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 our outlook does not include the impact of potential tariffs on our operations. Forward-looking statements also involve numerous risks and uncertainties, known and unknown. The risks, uncertainties and other factors that could influence actual results are described in the fiscal 2024 annual MD&A and in the latest annual information form. With that, I would like to turn the call over to our President and CEO, Thomas Morin.

Thank you Yan, good afternoon to everyone. The results for this quarter continue to demonstrate the positive effects of our program to improve our profitability and financial position. Our work to reduce the cost of goods sold as well as fixed costs and to turn around underperforming plants continues across the organization. Turning to the Packaging sector. We've seen an organic decrease in revenues, mainly due to the slower activities in our Latin American operations due to adverse market conditions and continued weakness in medical. However, our cost-out efforts, combined with a favorable mix with significant growth in cheese and beer enabled us to maintain the sector's profitability for the quarter. In our Retail Services and Printing sector, we recorded an increase in profit for the third consecutive quarter, and this, I'm proud to say, despite the impact of the Canada Post labor conflict. So kudos to the team. Increased book printing and specialized solutions activities contributed to this solid result. The sale of our Industrial Packaging business and the strong profitability in the quarter have enabled us to reduce our net debt ratio to its lowest since the acquisition of Coveris Americas in 2018. Meanwhile, we continue to work on our acquisition pipeline. Let me now address the question of tariffs. As I mentioned on our last call, our cross-border exposure is limited to approximately 10% of our combined packaging and retail services printing sales. Out of that 10%, we have the confirmation that our book exports from Canada to the United States are exempted. Faced with such a volatile situation, we are focused on what we can control. First, we're looking at a number of mitigating measures that can significantly reduce the impact of tariffs, considering we can't eliminate their impacts completely. We're having conversations with our customers and suppliers to see what can be done. We're also prepared to leverage our footprint on both sides of the Canada-U.S. border relatively quickly. Second, in this uncertain context, we will redouble our efforts on the execution of our priorities as well as on the year 2 of our program to improve profitability and financial position. We will continue to increase our productivity through continuous improvement and operational efficiency, reduce our costs and as always, be agile and react quickly to any new development. Lastly, the loss of the value of the Canadian dollar versus the U.S. dollar will provide some relief. We've done a great job in 2024 to become more competitive in the marketplace. And for sure, we will continue on that path in 2025. On this, I will pass it over to you, Donald.

Thank you, Thomas, and good afternoon, everyone. Moving to Slide 5 of the earnings call presentation. For the first quarter of 2025, we reported a 5.5% decrease in revenues versus the same quarter last year. This decline was caused by lower volume and by the sale of our Industrial Packaging activities, partially offset by a positive exchange rate impact. Regarding profitability, we delivered a strong quarter with consolidated adjusted EBITDA of $97.5 million. Adjusted EBITDA grew by $1.4 million despite the negative impact of the labor conflict at Canada Post and the sale of our Industrial Packaging activities. Financial expense decreased by $4.6 million to $9.3 million, mainly due to a lower debt level following strong cash flow generation in the last 12 months and from the lower interest rates on floating rate debt. Adjusted income tax increased by $1.2 million to $8.7 million and represented an effective rate of 17.3%. This led to an adjusted earnings per share improvement of 14%, going from $0.43 in Q1 last year to $0.49 in Q1 this year. Now moving to Slide 6 for the sector review. In Packaging, for the first quarter, we generated revenue of $389.4 million, a 2.2% decrease compared to last year. The decrease is mainly due to the sale of our Industrial Packaging activities and to lower volume. Notably in our LATAM activities and in the medical market, where we continue to see some weakness. In terms of profitability, adjusted EBITDA in Packaging decreased by 2.3% to $59 million, mainly as a result of the sale of our Industrial Packaging activities. Despite the lower volume, we maintained a 15.2% EBITDA margin as we continue to see the benefits from our cost reduction efforts. Moving to Retail Services and Printing sector on Slide 7. Revenues decreased by 9.2% to $240.7 million. This was mainly due to lower volume in our traditional printing activities, including the transition to raddar and the labor conflict at Canada Post. The decline was, however, partially mitigated by an increase in our book printing and specialty solutions activities. Adjusted EBITDA grew by 6.1% to $41.9 million. This is the third consecutive quarter of profitability improvement for the sector, and we achieved this strong performance despite the negative impact from the labor conflict at Canada Post. There was also $3 million of expenses related to the labor conflict at Canada Post that was put in other cost excluded from adjusted EBITDA. The strong performance came in large part from a combination of our cost reduction initiative, the optimization of our manufacturing network, the favorable effect of the rollout of raddar and growth in our book printing activities. We expect a tougher comparable in the second half of the year as significant cost reductions happened during the second quarter last year with the closure of our Saint-Hyacinthe plant and the transition to raddar across the province of Quebec. Now turning to cash flow. As expected and in line with normal seasonality, we saw negative working cap in the first quarter of 2025. Despite almost $60 million in working capital usage, we generated $23.6 million from operating activities. Our CapEx at $22.1 million were $14.5 million lower than last year. While we allocated $16.3 million in share buybacks in the quarter, helped by the sale of our Industrial Packaging activities, we continue to reduce our net debt and improve our net debt ratio to 1.53x at the end of the first quarter of fiscal 2025 compared to 1.71x 3 months ago. Overall, we're pleased with our results in the first quarter and excluding the potential impacts from tariffs, we remain confident in our outlook. In our Packaging sector, we continue to expect to see volume and profit growth in fiscal 2025. This growth should be more weighted in the second half of the year as we expect Q2 to be a challenging quarter given our solid Q2 last year. This being said, we expect a recovery in Latin America and medical as well as a better performance overall versus last year in the second half of our fiscal year. In our Retail Services and Printing sector, despite the impact of the labor conflict at Canada Post that hit our first quarter results, we continue expecting to deliver a stable adjusted EBITDA in fiscal 2025 compared to 2024. On tariff, the situation is evolving, and we are working on initiative to mitigate the potential impact on our results. While the tariffs create uncertainty, our financial position is very strong with a net debt ratio of 1.53x. We also expect to generate strong operating cash flows in the rest of the year in addition to the monetization of real estate, where we continue to expect to close the sale of 2 buildings in fiscal 2025. For these reasons, we are in a good position to return capital to shareholders, including a special dividend of $1 per share. On that note, we will now proceed with the question period.

[Foreign Language] Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] [Foreign Language] Your first question comes from Hamir Patel with CIBC Capital Markets.

The 2% organic decline in Packaging in Q1, how much of that was price versus volume? And how do you see volumes trending over the balance of the year?

Price was about 1%. I'll focus on 2 things that caused this reduction in the top line in Q1. And I think, Donald, you gave already some color. First is LATAM. So we believe LATAM is a temporary reduction, and there are 3 reasons in LATAM. There was -- there is a drought in Mexico. There is, as probably most of you know, some energy shortages in Ecuador and the Colombian peso has devaluated 10%. So these were the 3 reasons why we went backwards in LATAM with some impact. The second, as we also mentioned, is medical. In medical, we had a low quarter in sales. The one thing I would say is we have a good pipeline of opportunities coming from existing customers as well as new customers and new products, and we have a pretty strong backlog as we speak. So we are confident, as Donald said, for the rest of the year for these 2 segments, which caused the majority of the volume decline.

Okay. Great. That's helpful. And just on the noncore asset side, I believe you mentioned that there were 2 buildings that you're targeting to sell this fiscal year. Could you just remind us what sort of the remaining or expected proceeds would be from those 2?

Well, if you go back to when we announced the program, we estimated that we will be probably having an estimated proceed of $100 million. So far, we conclude for $20 million and I will say that the 2 building that we expect to close this year represent a large part of what's remaining. So you can establish somewhere between $60 million and $80 million.

[Foreign Language] Your next question comes from Adam Shine with National Bank Financial.

Thomas, maybe just with respect to flyers, obviously, concerns out there that we could see a recession brewing. We'll see how that whole tariff dynamic ultimately plays out. Usually, flyers can resonate well in that type of environment. Are you seeing any changes in the behavior of any of your customers quite yet? Do you expect anything? How is the Q2 evolving so far with flyers?

Thank you, Adam, for the question. Good afternoon. You're right in saying that flyers are a good tool in case of high inflation or recession for consumers. So we haven't yet seen an uptick to answer straightforward your question. But indeed, you're right, we would expect this to happen should recession or inflation high rates materialize. I would say that it's something we've experienced in the past. So you're right in saying so. Yet, we haven't seen any uptick on that.

Okay. Anything to note on the evolving transition to raddar just in terms of any additional distribution opportunities and perhaps just acknowledging that some of the pressure over the past year at the top line has been exacerbated as you move through that transition from Publisac to raddar. Are we getting closer to a lapping of that top line pressure or do you see that for another maybe quarter or 2?

Well, I think it's difficult to predict. What I'd say on this, Adam, and the key message here is post the labor issue at Canada Post, we've seen the volume coming in raddar. So one thing was the right thing to support the product during the strike, which we did very well. Our customers are extremely thankful for that. And we saw very much -- very quickly after the strike, volumes coming back to the normal levels. So we'll see moving forward. It's a bit early to say what is next. Thanks.

And Adam, if I can add, you -- second quarter will be the last quarter where we were -- still last year using Publisac for a large part of Quebec -- most of Quebec, except Montreal. And also we were using the plant in Saint-Hyacinthe. So starting in the third quarter, it should be more apple-to-apple.

Exactly. And just maybe one more thing, just on the packaging side. I know you talked about some better results expected in the second half of the year. But I think in the last quarter, as you closed out fiscal 2024, there was a suggestion that the market in medical was perhaps stabilizing a little bit. So was there something that happened in Q1 to sort of reverse course a little bit there or was the comment maybe just a bit optimistic, perhaps premature back in December?

When we were talking in December, we already had a view on the backlog, Adam. So Adam, the backlog has been strong. It's the speed at which we can materialize or manufacture the backlog. So nothing has really changed. It took a bit longer. But the signs are positive as we speak.

Perfect. Thank you for that. Appreciate it.

[Foreign Language] Your next question comes from Sean Steuart with TD Cowen.

I wanted to come back to tariffs. I would guess it's quite small, but the book exports that are exempted from tariffs. Can you give us a sense of the scale relative to the 10% of the combined company sales that are exposed potentially to tariffs, what that would constitute?

What we said is we have roughly 10% both -- in both sectors that's exposed to either mostly US to Canada, but some of it also Canada to US on Packaging. And I will say that the Retail Servicing and Printing represent less than 40% of that impact and a major part of it is either book or information materials. So.

Yes. this 10%-ish include, I think you said it right, also what we sell from the [indiscernible].

Got it. Okay. And then just a question on the returns to shareholders and the thinking around the special dividend and the rationale for that choice versus faster buybacks and your company has pretty consistently increased the regular dividend as well. How we should think about the special dividend versus ongoing increases to the regular dividend going forward?

Well, we look at it as -- first, the good news is now we are in a position with our strong balance sheet. Back in June last year, we were confident enough to announce the NCIB program, of which we bought back close to $50 million of share. And now we're announcing the special dividend following a good transaction for us where we cash north of $130 million. So we thought that the special dividend was another way to return capital to investors. And if you look globally over the last year, we said it earlier today, we returned $125 million. And again, this fiscal year will be an important return to investors. So we look at it as a global. And we still have the NCIB in place, of which there's about 18% that we can trigger. We won't comment of our action in the future, but we look at it as a total return to our investor.

[Foreign Language] Your next question comes from Maher Yaghi with Scotiabank.

I actually wanted to ask you a question on the tariffs from an opportunity perspective rather than what you could lose because I think some of your peers transport a lot more than you across the border. Is there an opportunity to either win market share in either side -- on either side of the border, given your capabilities, your capacity to produce both on the Printing and the Packaging?

I think yes, I think it's a good question. We're obviously looking at any opportunity to not only mitigate as we could share with you, but also potentially take advantage of the tariffs given our footprint on for -- certainly for Packaging as well as for Retail Services and Printing. Also considering the lower Canadian dollar, obviously, that helps. I think it's a long process to make it straightforward, to materialize sales on both Retail Services and Printing and Packaging, it's a long process. We're talking about a 12 month-ish process. Now can this be fast forwarded given the urgency by tariffs? Maybe. So we're actively looking at opportunities, of course, and the team is engaged in capturing some opportunities short term. But let's not expect a very quick win at this level. It takes some time to qualify and to deliver. But yes, quick answer, we're looking at it as well.

I guess that brings us back to the process of tariffs and impact on that 10% you mentioned. How quickly clients can turn around and find another local supplier for the products that are in question here, i.e., if, let's say, tariffs are implemented in the beginning of April, how quickly you think that 10% can be affected?

Well, the 10% is impacted right here. I mean these tariffs are happening April 1. On April 1, there is an impact that is for sure. Now the question is more on the mitigation side of the process. We have a strong supply chain basis on both sides of the border. So we have a reliable supplier, both in Canada and in the United States. And we can really engage with both of these supply sources solutions for the most part, not for everything, but for the most part. So how quickly can we engage? We're already engaging with our suppliers as we speak. And we've been engaged with them for the last 2 months, I would say, trying to find ways in case of, which is where we are today.

So the 10% is, I just want to make sure I get this. The 10% is the final sales that you make that are affected potentially by cross-border tariffs, right?

Yes, either...

It's not the input cost. It's not 10% of the input cost. It's 10% of top line.

And this is why the details regarding the input cost came out recently. We're working on it with the Canadian authorities to understand the details and to see where it could affect us, but there's too much still to understand what will be the potential impact for us in Canada. This is why there's a lot of volatility in this market right now. So hard for us to say this is the impact.

Yes. No, I mean, I think every day, you wake up with a different answer. So maybe one last question, and that's related to the special dividend. In the context of a possible recession, either both in the U.S. or in Canada, and a weakening dollar, et cetera. Even with that, you still felt your balance sheet is strong enough to support a special dividend. Can you maybe talk a little bit about that view that you have that got you to decide to pay the dividend now instead of waiting a couple of months to see what tariffs could mean to the economy?

Well, first, yes, you did mention tariff, precision and also the U.S. dollar. So there's a lot of different aspect to look at. But I will say first that the U.S. dollar being on $145 -- $144, $145 is very positive for us. Actually, you can see in our bridge in our first quarter, the impact of having a dollar probably on average at $1.40 give us $2 million more profit on the packaging. So if it's $145, that's important for us. So that's one thing. Second thing, yes, we do have a strong balance sheet. We're at $1.53. If we pro forma the impact of paying a dividend, we're back where we were at the beginning of this year, which is roughly at $170 million. And we see the - we have a strong forecast in free cash flow, as you're aware. We have limited need in CapEx. So we're really confident about the future of our balance sheet. And too hard right now to say if the recession was the impact. But as Thomas mentioned, usually on the retail services side, this is a resilient business on the recession. And on the packaging side, we're doing packaging for food, for retail food. So overall, I won't comment on what would be the impact of recession. But when we take all those aspects, the Board and the management was confident to pay that dividend right now. And it's usually at this first quarter where we announce the new color versus the dividend for TC.

I see. Maybe, sorry, one last question on M&A because there's voices out there saying that if we do have and if Canada has to face certain tariffs, there could be an increase in potential M&A within Canada, within Canadian firms. What's your view on that? Is there a potential for increased opportunity to transact in the coming months given also your strength in your balance sheet?

Well, I think we mentioned already at the last call that we were actively looking at complementing our footprint, notably in Canada and in the ISM segment of our portfolio. What I can tell you today is that we don't change our plan, and we are actively pursuing in this direction. Now we also remain opportunistic. If there is something of any interest in large scale, why not? But for the time being, the focus remains exactly the same as it was 3 months ago. We have a strategy and an action plan, which is being delivered as we speak.

[Foreign Language] Your next question comes from Stephen MacLeod with BMO Capital Markets.

Just wanted to follow up on a couple of things. One was just with respect to just the cost savings and the initiatives that you've implemented and we're obviously seeing the benefits of. Just can you just give us some understanding or some update as to where you stand in terms of recognizing the full percentage of the expected savings that you had laid out?

Yes. Thank you for the question. We said, I think, last time that we had achieved, I think, $30 million out of our $40 million program. So we still have $10 million to go. That's what I would say in the short answer.

And as we said also when we spoke about the outlook for fiscal '25, we expect top line for price pressure to be relatively flat on the Packaging side. And obviously, Printing is going through a transition, but we were -- we remain confident to see growth. So obviously, the cost program will be -- not only we will achieve the remaining $10 million, but we're proactive on many other issues to be even better to achieve more than this $40 million.

Great. Okay. That's good. And then maybe just turning to the impact on the retail services and printing business. I mean, do you see a scenario where the long-term run rate on margins in that business is now north of 19%?

Well, obviously, as we said, and we're still in transition, the full impact will be at the end of the second quarter. But because of using less paper and paper is a pass-through. So we always say that roughly paper represented 50% of the flyer products. And with raddar, we use way less paper. So just mathematically, it helped us to have better margins. So I would say that the margin we will make over the last 12 months do represent the new base, and it's up to us to get -- to be better, and we're confident that raddar can expand across Canada and create more opportunity to be even better on the margin side. But we're definitely glad with the margin increase that we had in this Group for the last 5 quarters, which is going back at the close to 20% margin that we used to have in the past.

Yes. Okay. Okay. Great. One other question I had was just on the CapEx outlook for 2025. Are you still kind of in that? I think it was $120 million range? And then maybe could you just give us some color on how to think about the tax rate for the year as well?

Yes. We're confident with the $120 million. We do have discussion internally, and Thomas spoke to it in his opening remarks to maybe use some CapEx to mitigate the impact of the tariff. And I will say that you might see also movement on the working cap to also protect versus the tariff impact. But the $120 million should be the right spot, even though that now at $145 million, most of our CapEx in U.S., but we're working hard as a Group to maintain that $120 million. And we'll see for the tax rate, we should be in the same zone as fiscal 2024.

[Foreign Language] Your next question comes from Drew McReynolds with RBC.

A couple of clarifications for me. First, on the strike impact Donald. You referred to, I may have missed it, $3 million of strike impacts not being in EBITDA. Is that the right interpretation? I can't recall what you said.

It's just that those are expense that we -- that occurred in Q1 that we put in place to protect our product and to support our clients. We put in place an infrastructure in the first quarter, creating distribution in rest of Quebec. And that, that was -- that came with a cost, and we can put this cost below the line. And that's the $2.9 million that I referred to. So when you go back to what we said in December, say that it should be an impact of $7 million. I'll say that today, the global impact is roughly in that region, including the $2.9 million that we were able to put below the line.

Correct. Okay. Yes, that's perfect. And another point of clarification, just back to tariffs. You did mention last quarter, 10% of total revenue was cross-border sales. The language today, did I hear you correct that's 10% in Packaging and 10% in Printing is roughly that exposure?

Thank you for clarifying this. It's 10% combined…

Yes. Okay. So 10% combined is the exposure. And then within Retail Services and Printing, you said a portion was below 40%. Obviously, the book printing is the majority. What was the below 40%.

Well, if you take the 10%, which is the console numbers for TC, from that 10%, there's about 40% coming from the Retail Servicing and Printing. And of that amount, a large part of it is what we call Information Materials that are currently excluded from the tariff from Canada to U.S., which is obviously mainly our book business, but it also includes some other business that we do on retail services.

Okay. And then maybe a last one here on maybe to you, Thomas, on the end market demand within packaging coming out of last quarter, you obviously alluded to the volume and pricing put and take. And it just seems like out of the gate here as it pertains to LATAM and medical, it just took a little bit longer to kind of get back to where you need to get back to. Is there anything else that's kind of changed from your commentary last quarter? Or do you still see that kind of end market demand improving?

Yes. There is nothing really material that's changed. A large amount of my comments are driven by our own actions. I mean we don't rely that much on the overall market trend in case it's a macro trend. So our line of sight on the pipeline of opportunities and deals we've closed is still the same.

[Foreign Language] [Operator Instructions] Your next question comes from Martin Kim with Cormark Securities.

I just have a short one. Is there any long-term target leverage ratio you're looking at?

For leverage ratio?

Yes.

We don't establish target, but we do we do prefer to be under 2. That's been historically the case, and this is where we always push to be. Obviously, when we do acquisition, we will definitely go above 2 like we did in the past. But we're more comfortable to be under 2. This is where we can do like we did in the last 12 months, being proactive either on NCIB, dividend or an acquisition.

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

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

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