Transcontinental Inc

TSX:TCL.A

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to TC Transcontinental First Quarter of Fiscal 2023 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session and instructions will be provided at that time. As a reminder, this conference is being recorded today, March 8, 2023. I will now turn the conference over to Yan Lapointe, Director, Investor Relations and Treasury. [Foreign Language] Mr. Lapointe, please go ahead.

[Yan Lapointe, Director, Investor Relations]

Thank you, Julie and good afternoon everyone. Welcome to Transcontinental’s first quarter of fiscal 2023 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 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 then the latest Annual Information Form.

With that, I would now like to turn the call over to our President and CEO, Peter Brues.

[Peter Brues, President and Chief Executive Officer]

Thanks, Yan. Good afternoon, everyone. Starting with safety, I am pleased to report that our focus on safety is generating improved results. We are off to a good start with a 21% decrease in recordable injuries compared to last year. In terms of financial results, increased profit and packaging for the quarter was more than offset by the impact of lower volumes and printing. In this context, I appreciate the speed with which both sectors implemented initiatives that will generate savings of over $15 million in fiscal 2023.

In packaging, we did not see our usual volume growth. As supply chains have improved and interest rates have gone up, many of our customers have worked to decrease excess inventories and have not ordered their usual volumes. With banana customers suffering from volume declines and increased costs, our Latin American business also experienced significant pressure on volume. Despite these volume issues, the work the team has done to develop products that create value for our customers and focus on developing low cost operations resulted in a 11% increase in profit versus last year’s first quarter, the sector’s fourth consecutive quarter of improvement.

In print, having worked diligently to increase our prices to reflect inflationary cost increases, the sector experienced significant volume decline in key businesses. With six marketing budgets, the pass-through of increased costs resulted in a 10% decrease in retail flyer volume. This decrease had an adverse impact on our retail flyer and distribution businesses profit. Coupled with a key retailer’s decision to postpone its in-store marketing renewal work until later this year, print experienced a $16 million decrease in profitability.

Our print team has a strong track record of adjusting our cost structure. We have already implemented measures to mitigate the impact of lower demand. We are seeing the early benefits of our actions and we will continue to adjust as necessary. Our financial position is solid, thanks to our ability to generate significant cash flow and no major debt maturities until 2025. We remain focused on our disciplined approach to profitable growth while maintaining our dividend and reducing our net debt.

And now over to you, Donald.

[Donald LeCavalier, Chief Financial Officer]

Thank you, Peter. Moving to consolidated numbers on Slide 5 of the earnings call presentation. For the first quarter of 2023, we reported an increase in revenues of $16.4 million or 2.4% versus the same period last year. This growth was driven by the impact of exchange rates and the acquisitions in our packaging and media sectors. Regarding profitability, consolidated adjusted EBITDA for the quarter was at $84.1 million compared to $89 million in the first quarter of fiscal 2022. This decrease was mainly due to the decline in our printing sector, which more than offset increased adjusted EBITDA in packaging sector. Financial expenses increased by $6.9 million to $16.7 million mainly due to higher interest rates and the exchange rates. As a reminder, we have no significant debt maturities before February 2025, thanks to proactive refinancing. Adjusted income tax decreased by $5.8 million due to lower earnings and effective tax rate, resulting in adjusted net earnings of $0.24 per share for the quarter.

Now moving to Slide 6 for a sector review. In packaging, we recorded revenue of $405.7 million. The increase of 5.7% versus last year was mainly due to the positive change in exchange rates. The pass-through of higher raw material prices and other inflationary costs was offset by decrease in volume due to customer destocking and continued pressure in Latin America. In terms of profitability, adjusted EBITDA in packaging grew by $7.7 million or 19.8%. Excluding the impact of exchange rate, adjusted EBITDA grew organically by 11%. This organic growth was mainly due to improved profits from inflationary cost recovery. As Peter mentioned, all our segments improved adjusted EBITDA except our Latin America operations.

Moving to printing on Slide 7, revenues decreased by 3.1%. This decline resulted mainly from about a 10% decrease in retail flyer printing and distribution partially offset by the pass-through of inflationary increases. Printing’s adjusted EBITDA was $40.6 million for the quarter compared to $56.8 million last year. This decrease is mostly caused by lower volume in retail flyer printing and distribution activities. Corporate expenses were lower than last year due mainly to lower stock-based compensation cost.

Now turning to cash flow, we generated $12 million from operating activities, an increase of $18.4 million versus last year due to improved working capital and lower income taxes. Our investment in CapEx of $51.2 million is higher than last year due to the timing of some disbursements. In fiscal 2023, we expect CapEx to remain elevated as we continue our strategic investments before returning to a lower run-rate in fiscal 2024. At the end of the first quarter, our net debt ratio was at 2.63x, a slight increase from 3 months ago due to the scalability of working capital and significant CapEx in the quarter. We expect the ratio to come close to 2x in the coming quarters giving our free cash flow generation.

In terms of liquidities, $274 million were available at the end of the quarter. Standard & Poor’s recently reaffirmed our investment grade rating, confirming our solid financial position. Finally, we distributed $19.5 million in dividends to our shareholders. Thanks to our ability to generate significant cash flows, the Board decided to maintain the dividend at the current rate of $0.90 per share per year. This represents an attractive yield of more than 5% based on today’s closing price.

Now moving to the outlook, as mentioned by Peter, our team implemented cost reduction initiatives that will generate significant and recurrent savings, improving our financial performance. In packaging, we expect volume growth and improved profitability into fiscal 2023. However, the economic conditions remain uncertain and could affect demand in the short-term. In print, we continue to expect growth in our ISM and book printing activities. In terms of profitability, we expect lower adjusted EBITDA from the impact on inflation, on volume and cost structure. We expect corporate costs at the EBITDA level to be around $40 million for the year. However, cash taxes should be at around $60 million.

On that note, we will now proceed with the question period.

[Operator]

[Operator Instructions] Your first question comes from Adam Shine from National Bank Financial. Please go ahead.

[Adam Shine, National Bank Financial]

Thanks a lot. Good afternoon. Peter, can you speak to us at all in terms of any improvement in trend that you might have seen in recent weeks or is there ongoing continuation of the Q1 trend at least early in the Q2?

[Peter Brues, President and Chief Executive Officer]

Adam, are you talking about a specific part of the business or in general?

[Adam Shine, National Bank Financial]

Well, both sides. I mean, I guess, talking about the issues that impacted Q1 and whether those have continued into Q2. So specifically, are we still seeing the same level of flyer volume decline in printing? And then over on the packaging side, are you still seeing the same degree of LatAm pressure and destocking or has some of that eased at all or do you see line of sight to that easing potentially at least maybe GAAP in Q2 into Q3?

[Peter Brues, President and Chief Executive Officer]

Thanks for clarifying, Adam. Appreciate it. So why don’t I start from a packaging perspective. So I am looking in packaging, when we talk about destocking and softness in LatAm, which has continued from last year, we saw volume decline of 3%. And frankly, if I split that, it’s split pretty evenly between the Latin American business and our beverage segment. If I look at the Latin American business specifically, in terms of – from a volume perspective, we know a big portion of that relates to the conflict in the Ukraine. And so as a result, we took cost reduction measures that will impact going forward. So, it’s been very focused on or eliminating a significant portion of costs related to the business to put it in a better position relative to the volumes we have.

And so the second thing that hit that part of the business is that we – given supply chain issues and supply chain specific to Latin America, we have volumes of higher cost raw materials. And as volumes have declined, we had an amount of raw material at higher price than you can currently buy today and that affected us in the quarter. We work diligently through the quarter to ensure by the end of the quarter that volume that inventory was gone. So I would say the two things that are important when I think of Latin America is I don’t see in the current circumstances in absence of a change in a conflict. I don’t see volumes bouncing. I see cost structure being in a better position both from a better inventory cost as well as an adjusted cost base. In terms of the beverage side, we saw significant destocking. And what I can tell you is at the time we took cost side of the business within the quarter, and that were significant. We don’t include that when we talk about the $15 million. The reason is we’ve seen a significant inflow of orders currently, and as a result, that cost reduction – the costs taken out from a direct labor standpoint, aren’t required both in terms of indirect we are maintaining them to position us to be more profitable going forward. So we do see in the beverage segment, a significant strengthening coming out of last quarter. If I look at kind of the history of the business, and I look at volumes, and in general, I’m cautiously optimistic in terms of way volumes are going but certainly from beverage standpoint, things look good. I think we’re exceptionally proud in the quarter that every business with the exception of at LatAm increased, its profitability year-on-year. And the fact that we’ve gone four quarters in a row with growth. We’re pleased with that. And we’re determined to continue that trend to the end of the year.

From a print perspective, I would say that, difficult to say, we’ve had a soft quarter 10%. Don’t anticipate that suddenly jumping back down to low single digits, I think what’s key for us is that the team has reacted as we always have to take out a significant amount of costs and the costs when I talked about the $15 million that’s been taken out in the business, that’s impacting, like, that’s cost out now impacting now. That doesn’t mean the team didn’t have other actions to continue to put into position and execute. I would be disappointed if that number wasn’t significantly higher in terms of run rate within this year, in the coming quarter. And then I would also add, if we’re looking at the business when I was talking about the ISM business, we had a significant retail customer that deferred a store refresh, that had a really adverse effect on our volume in the quarter, that refresh is back on coming now. And that’ll have an impact, a strong impact on volume going through the year. And we continue to grow with the relationships that we have from retailers through flyers, we continue to grow that side of the business, and we expect it to strengthen through the year.

From a newspaper perspective, we close the Metroland deal. And that will have a positive impact on the business as we move through the year. And then I’d also had that we’re adding book capacity right now equipment’s arriving. And being installed, that will have an impact as the year continues. So, done significant cost reductions from a print perspective, we will continue to do so, and will continue to adjust as necessary, ISM anticipate strengthening, look, strengthening newspaper, strengthening as we move through the year.

[Adam Shine, National Bank Financial]

Peter thanks for that color. If I could just ask one quick question related to the margin in printing, in the past, and pursuant to your earlier remarks about historically being able to adjust the cost base to reflect some of the or at least to mitigate some of the top line pressures. I mean, our assumption, I think has been that the margin could stay at 19% per last year or maybe even higher. But given where things are and acknowledging obviously the savings you’ve alluded to and expectations have more to come. Do we need to think about a resetting of that margin expectation? A couple of points lower than 19% or there’s still optimism of getting back to that level.

[Donald LeCavalier, Chief Financial Officer]

One thing I would have to consider regarding the margin is – we – this group has been affected also by inflation of their costs. What we have been doing in this quarter and you will realize it when you see 2% down on top line, but we say volume down 10%. So that means that we have passed a lot of cost to our customer. So if you look at the drop of 5%, that we added a quarter about close to 2% of that drop is coming just by inflation. So that’s part of it. And we also have a part of it coming from ISM that has Peter mentioned, we expect that business comes back. So the remaining is linked to what we call the renewal business. And as Peter has said, as I said in my opening remarks, we’re putting in place cost cutting initiative that will hopefully push us back more in the normal margin for that part of the business.

[Peter Brues, President and Chief Executive Officer]

And inflation, the adjustment to margin as it relates to the denominator changing because of inflation is something you should anticipate to continue.

[Adam Shine, National Bank Financial]

Okay. I appreciate that. Thanks a lot.

[Peter Brues, President and Chief Executive Officer]

Thanks, Tim.

[Operator]

Your next question comes from Hamir Patel of CIBC Capital Markets. Please go ahead.

[Hamir Patel, CIBC Capital Markets]

Hi, good afternoon. Peter, your outlook was pointing to year-over-year EBITDA growth in packaging but decline in prints. How would you expect overall EBITDA to fair? I think, about put and takes between the two?

[Peter Brues, President and Chief Executive Officer]

Well, we don’t give forecasts, what we hopefully it will respect what the strategy of our group is not to replace the printing business with a packaging business growing, but that’s the direction we’re going as a strategy. And that’s what we expect to happen in the future regarding that. So that’s the color I can give you on that side.

[Hamir Patel, CIBC Capital Markets]

Okay, thanks. And then just turning to growth, just wondering if you could share what you’re seeing on the M&A pipeline front and if you’ve seen any moderation in multiples with maybe less private equity competition?

[Peter Brues, President and Chief Executive Officer]

From an M&A perspective, right now, I would say there is – I would it’s the heat that has been in the market would be diminished, given our current circumstances in terms of interest rates, etcetera. So just I think you can see there are fewer businesses being sold. And certainly, competition for us it’s a different.

[Hamir Patel, CIBC Capital Markets]

Thanks Peter. And just lastly, I just want if you could speak to some of the new products that you have coming to market in packaging. And specifically, there’s anything to note on maybe the coffee living side?

[Peter Brues, President and Chief Executive Officer]

I’d say that. Coffee specifically, we continue to work to develop a compostable solution. And I think we can be really proud of the team and where we are from a development standpoint and preparing our customer to support a launch of something compostable. I would say notable things beyond that would be from a post-consumer recycled content and films. We’ve seen a significant beverage company launch, turn all of its packaging, having – to have PCR content now, that’s resulted in us having the ability to increase volume with them. We also see another significant beverage customer, increasing its volume with us and being interested in going away to PCR. We also have been successful with a major U.S. retailer and one of the – and we’re the first organization that’s commercial with a PCR content film for poultry. And then we’ve had a successful launch with the major FMCG launching at [indiscernible], Caroline and doing 50% PCR content, so that they can claim the significant content and position them for success. So we’ve had some significant wins. And we continue to work with our customers to position them to have products with their customers can be proud of, that consumers can be proud of and as legislation moves in the U.S. to increase the taxes on items that aren’t recyclable. We want to position them to be in a position to avoid those taxes.

[Hamir Patel, CIBC Capital Markets]

Okay, great. Thanks. Appreciate all the details there. That’s all I had. I turn it over.

[Peter Brues, President and Chief Executive Officer]

Thanks, Hamir.

[Operator]

Your next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.

[Stephen MacLeod, BMO Capital Markets]

Thank you. Good evening. Lots of great color here so far, so thank you. I just wanted to follow-up on a couple of things, just on the printing business, is it fair to assume that, would you expect to see a lot of the volume headwinds to be isolated to the first half of the year, or do you expect that it was likely that continue through the year?

[Peter Brues, President and Chief Executive Officer]

I think it’s early to say. I think that what we have seen, historically, is that we saw volumes be significant around Black Friday and in April. What we are certainly seeing now is that those volume spikes are certainly much lower than they were historically. And right now, the key for us is to track volume really closely, work with our customers to understand how we can support them and adjust our cost base as necessary. So, we think we have done – we have identified the things we need to do in the short-term. And if we see that volumes are changing, we will continue to adjust. And we will adjust as we need to make sure we remain in the strong position we have been historically.

[Donald LeCavalier, Chief Financial Officer]

And maybe to add just some color on that Q1, 2022. Last year was for print was a good quarter overall, and weak, but we started to sell that pressure on the volume at the end of the of Q4 this year. So, the comparable to the end of the year might be less harder on that side.

[Stephen MacLeod, BMO Capital Markets]

Okay, I see. Thank you. And then just continuing on the printing side of things. I just wanted to clarify one thing that you said you were talking about margins in printing and hoping to get back to normal margin levels with cost savings. Would you expect – will you suggest that was a longer term target, or would you actually suggest to be in that sort of historical range in fiscal 2023?

[Donald LeCavalier, Chief Financial Officer]

Well, I won’t make any forecasts on the timing of that. But when you look at history of TC, when we had no change in the demand, we will react with the capacity. Sometimes those actions take more times when it’s you saw in the past, when you close the plant, sometime it’s removing crews. So, it will depend on the timing of the action, there is some action already in place, but surely to make a call regarding when in 2023, we will be back to the margin, but still thinking about the impact of inflation that will definitely put weight on the margin for this fiscal year compared to last year.

[Stephen MacLeod, BMO Capital Markets]

Okay. I see. Thank you. And then maybe just finally, just on CapEx, you mentioned that you said that you expect CapEx to continue to be elevated this year, would you expect CapEx to be roughly in line with where it was in fiscal 2022 for the full year?

[Donald LeCavalier, Chief Financial Officer]

We have disclosed at the opening of this fiscal year to be, the amount was 140. Right now, the U.S. dollar is probably as eyes 136 for sure, that has an impact on us since most of our CapEx are in the U.S. So, this is why now we will say that they will be north of 160 if I had to make the call, but it’s really linked to the U.S. dollars. Peter?

[Peter Brues, President and Chief Executive Officer]

And just an array will you know those, the bulk of those expenditures are specifically in segments where we see that we create the most value for customers and our opportunity to grow is important and in investments that support our sustainability program from a product development standpoint. So, we remain committed to those investments and we will execute them.

[Stephen MacLeod, BMO Capital Markets]

Okay. That’s great. Thank you very much.

[Peter Brues, President and Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Your next question comes from Sid Dilawari from Cormark Securities. Please go ahead.

[Sid Dilawari, Cormark Securities]

Hi, Peter. Maybe if I can just ask a couple on the packaging side. It’s obviously good to see some organic EBITDA growth and margin expansion during the quarter. But I just wanted to quickly get your thoughts around volumes in packaging, excluding Latin America. I know you mentioned, the beverage vertical is doing fairly well. And you expect that to be positive year-over-year growth and the following quarters. But maybe if you can comment on some of the other verticals that will offset some of the decline in volumes in Latin America?

[Peter Brues, President and Chief Executive Officer]

Sure, I think first, from a lot Latin American standpoint, I think it’s important to recognize that if we are looking on a full year basis, the impact of the training [ph] hit us hardest in Q3 and Q4 last year. So, as the year progresses, our comparables will be in line. If I look at the various segments, like there was no segment that popped, all our segments suffered destocking. The most significant two are the ones that I talked about last time and beverage. But there was no segment that was jumping. We saw the impact of destocking across segments across customers. That said, what I think we can be really proud of is when we look at our EBITDA result. It demonstrates the work we have done in ensuring that inflationary costs increases, we done that. As we look at our product portfolio, we ensure we are focused on products that create value for our customers and for our shareholders. And that we continue to get a cost base that is advantage versus our competition. So, volume is not the reason this quarter is ahead of last year, it’s all the hard work behind it. And if I look at the year going forward, I said shrink is much more robust than it was. And I expect all the segments, I am cautiously optimistic that the other segments in which we participate will improve as the year progresses. And then earnings will continue doing what it’s doing.

[Sid Dilawari, Cormark Securities]

Okay. Great. And then maybe if I can just ask a quick follow-up on just the packaging costs, you highlighted two portions, a contractual portion and a non-contractual portion for price pass-throughs. But on the non-contractual side, obviously, it’s much quicker, but on the contractual side, there is a fair amount of lag maybe one month to three months. Maybe if you can just comment on what portion of the top line roughly is contracted and how much of it is non-contractual?

[Peter Brues, President and Chief Executive Officer]

70% of the business is contracted as a general rule of thumb in terms of the packaging business. And generally, you are right, that it’s quarterly. But that does it can vary with something shorter, something longer. And I would say right now if we are looking at raw materials, polyethylene is really – has declined a bit, but it’s been relatively flat. I say the biggest raw material right now moving has been foil, which continues and people may have seen that tariffs have been imposed on Russia, which will – I would expect and continue to put pressure on oil pricing. And the team understands the importance of making sure that those costs are passed through and that we continue to make sure we find appropriate supply.

[Sid Dilawari, Cormark Securities]

Okay. Great. Thanks a lot. I will pass it on.

[Operator]

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

[Yan Lapointe, Director, Investor Relations]

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

[Operator]

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