Transcontinental Inc
TSX:TCL.A

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Transcontinental Inc
TSX:TCL.A
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Market Cap: 1.5B CAD
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Earnings Call Analysis

Q3-2023 Analysis
Transcontinental Inc

Company Weathers Volume Dip with Cost Efficiency

This year, despite lower volumes, the company upheld adjusted EBITDA levels through cost reductions, with packaging profitability expected to improve and print EBITDA to drop slightly due to inflation. Long-term growth is pursued through market share gains and aligned investments. Over 90% of packaging's resilience stems from food products, despite inflation worries in grocery pricing impacting future purchases. Nevertheless, margins are on a positive trend compared to the last fiscal year.

Executive Summary

In their latest earnings call, the company faced a 5.5% year-over-year decrease in revenues, attributing the decline primarily to lower volume in the packaging and printing sectors. Despite these challenges, the management has put forward four key priorities, including organic growth, strong return on assets, debt reduction, and sustainable product commercialization. With dedicated cost reduction efforts and operational efficiencies, the company seeks to navigate a fast-evolving market landscape and sustain its long-term growth.

Financial Performance

The company reported a slight decrease in revenues and adjusted EBITDA, with a particularly notable 4.5% reduction in adjusted EBITDA. This decline was largely due to lesser performance in the printing sector, only partially mitigated by improvements in packaging. The impact of higher interest rates on variable debt contributed to an increase in financial expenses, while an effective tax rate of 18.5% led to adjusted net earnings of $0.51 per share for the quarter.

Operational Highlights and Sector Analysis

The packaging sector experienced a revenue drop by 5.4% due to approximately 10% less volume from customer destocking and market softness. Nonetheless, a stronger US dollar and strategic pricing actions bolsters the sector's adjusted EBITDA by 3%. Conversely, the printing sector's revenues saw a 5.6% decrease with significant volume declines in book and flyer printing activities, and its adjusted EBITDA dropped to $45.2 million from $52.3 million the previous year.

Cash Flow and Capital Expenditures

The company generated a robust $109.1 million from operating activities due to improved working capital management, an impressive shift from a $46.9 million usage last year. While capital expenditures remain high at $44.1 million, they are expected to total around $160 million for the fiscal year 2023, preparing the company for competitive advantages and driving long-term growth. The company also projects its net debt ratio to improve further, moving closer to 2x in the coming quarters.

Debt Management and Investments

Even with heavy investments, the company has successfully improved its net debt ratio from 2.63x to 2.50x, thanks to enhanced cash flow from positive working capital changes. Part of their long-term strategy includes lowering their debt to approximately 2x the ratio by focusing on robust free cash flows.

Outlook and Guidance

Management anticipates pressures on packaging volumes to continue in the near term but expects improved profitability for fiscal year 2023. For the printing sector, a lower adjusted EBITDA is projected, due to inflationary impacts offset by ongoing cost-reduction initiatives. The company forecasts firm performance from in-store marketing activities and a positive impact from the raddar project in Q4, with corporate costs at the EBITDA level estimated around $40 million and cash taxes expected to be around $60 million for the year.

Market Dynamics and Volume Recovery

A significant destocking from customers was observed, which was more intense than anticipated. Management engaged with customers who confirmed positive outlooks for growth. Initial recovery signs in volume have been noted in August, but the company remains cautious about the lasting impact of extensive inflation on consumer demand.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
Operator

[Foreign Language] Welcome to the TC Transcontinental Third Quarter of Fiscal 2023 Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session and instructions will be provided at that time. As a reminder, this conference is being recorded today, September 07, 2023.

I would like to turn the conference over to Yan Lapointe, Director, Investor Relations and Treasury. [Foreign Language] Mr. Lapointe, please go ahead.

Y
Yan Lapointe
Director, Investor Relations, Treasury

Thank you, Zayed [ph] and good afternoon everyone. Welcome to Transcontinental's third quarter 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.

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 two, some of the financial measures discussed over the course of this conference call are non-IFRS. You can refer to the MD&A for a complete definition and reconciliation of these measures to IFRS.

In addition, this conference call might also contain forward-looking statements. These statements are based on the current expectations of management and information available as of today, and they involve numerous risks and uncertainties, known and unknown. The risks, uncertainties and other factors that could influence actual results are described in the fiscal 2022 annual MD&A and in the annual information form.

With that, I would like to turn the call over to our President and CEO, Thomas Morin.

T
Thomas Morin
President, Chief Executive Officer

Thank you, Yan, and good morning to everyone and thank you for joining the call. Three months has passed since our last call which was actually my first day at CEO, and I'm pleased to be with you again today. At that time, our Executive Chair, Isabelle Marcoux and I shared with you our four priorities. Number one was to grow organically and profitably. Second is to deliver strong return on assets. Third is to reduce our debt, and fourth is to commercialize sustainable products.

Planning the organization on these four priorities has been the focus of my first 90 days, and I'm happy to report that the team has responded very well. We took quick actions to adjust to market conditions, which were more challenging in Q4 than in – in Q3 than we anticipated.

Deductions enabled us to improve our conversion rate, mitigating the impact of lower volume on our profitably. We also made good progress on working capital by continuing to reduce our inventories, and this is a key component for us to drive our debt down.

Part of my agenda was also to review our senior management structure and create a leaner, more focused and more agile team, aligned to deliver on our four priorities. And this was done quickly, and a new executive team was announced mid-August and is now fully hands-on.

I also went on the road to better understand our Printing business, visiting our plants, meeting our teams and our customers. I must say that I'm impressed by the engagement of our leaders and co-workers, the quality of our assets, and the strength of the relationship with our customers. This has enabled me to see more clearly the potential of our Printing business, and this includes our more traditional activities. All in all, I'm satisfied with the work accomplished and confident in these actions, taking this quarter and this year, will also benefit us in the long-term.

Now going back to our results and starting with safety. Our year-to-date incident rate has decreased by 23% compared to last year. This is obviously a major achievement by the team. Although significant work remains to achieve an injury free workplace, this is obviously a big step in the right direction.

Turning now to our sectors and starting with Packaging. Like our peers, we were impacted by market dynamics that continue to -- and we continued destocking, as well as a softening demand due to the economic context. But despite these lower volumes and thanks to our actions, profits were in line with last year.

In terms of commercializing sustainability, while generating profitable growth and better return on assets, let me give you a bit on our recycling strategy, and come back of course on the investment we’ve announced on August 22.

First, we took a step back to review our recycling operations and took the strategic decision to move recycling directly into our film production facility. By bringing recycling closer to end markets, we are reducing costs, and we are better positioned to commercialize products with PCR content. With this evolution, we will be closing a Montreal recycling facility at the end of this month.

Second, we've announced the major investment in the new BOPP film line to be installed in our Spartanburg, South Carolina facility. This new offering is a game changer for our industry and for TC Transcontinental. The superior capability of this film will give us a competitive edge, and as a consequence will enable us to gain share as the market evolves storage more specifically. We are pleased with the early interest shown by many of our key customers.

Now in the Printing sector, the measures we took have resulted in significant regarding savings. On the downside, supply volumes continue to decrease, and books have had a challenging quarter. We will continue to adjust cost to volume and take all the measures necessary to protect profitability.

On the positive side, we are pleased with the rollout of our reinvented flyer raddar in Montreal in May, as well as in Vancouver last month. And we are now distributing over 1 million copies of raddar every week.

Also, in the wake of having insourced newspaper volume from Metroland earlier this year, we are taking a new volume from another newspaper, publisher [inaudible] made this announcement some earlier this week actually.

In summary, with our key focus on our four priorities and acting with speed and agility, I am confident that we are on the right path. And on that, I would pass it over to you, Donald.

D
Donald LeCavalier

Thank you, Thomas, and good morning everyone. Moving to consolidated numbers on slide five on the earnings call presentation. For the third quarter of 2023, we reported 5.5%, 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 $107.9 million, down 4.5% compared to Q3 last year, as the improvement in our packaging sector was not sufficient to offset the decline in our printing sector. We have accelerated the implementation of cost reduction and efficiency measures across the organization and we are encouraged by what we see.

As Thomas mentioned, we streamlined our management structure to better support our operation and become more agile in a fast-changing environment. These changes, in addition to the initiative implemented at the beginning of the calendar year, have improved our cost structure and overall profitability. Taking together these measures add up to $40 million, with over $20 million coming from the printing sector.

Financial expense increased to $16.1 million, mainly from the impact of higher interest rates on our variable debt. Adjusted income tax of $10 million was $3.2 million lower than last year and represented an effective tax rate of 18.5%. This resulted in adjusted net earnings of $0.51 per share for the quarter.

Now moving to slide six for sector review. In packaging we generated revenue of $403.3 million compared with $426.2 million last year, down 5.4%. The decline is mainly due to volume being down about 10% from continued customer destocking and recent market softness impacting most segments. However, we benefited from a stronger year-over-year US dollar.

In terms of profitability, despite a challenging order for volume, adjusted EBITDA in packaging was up 3% to $53.8 million as favorable exchange rate, pricing action to recover inflation, cost savings and efficiency improvements were able to offset volume impact.

Moving to printing on slide seven, revenues decreased by 5.6% to $273.7 million. We continue to pass through inflationary pricing increases in the quarter, but we were impacted by lower volume, mainly in our book and flier printing activities.

Printings adjusted EBITDA was $45.2 million for the quarter compared to $52.3 million last year due to the lower volume in the quarter. That being said, we are accelerating the implementation of cost reduction measures to better position our cost base for the future.

We have already realized over $20 million in annualized profit improvement initiative for the sector and the teams continue to identify and implement new actions. The deployment of raddar also contributed positively in the quarter. Corporate expenses were in line with last year at around $10 million.

Now turning to cash flow. We generated $109.1 million from operating activities, an increased $60 million versus last year, mainly driven by improved working capital as we continue to make progress on reducing inventories. We went from a working capital usage of $46.9 million last year to a positive $26 million this year. This is the second quarter of positive working capital in a row, and we continue to be confident in our ability to deliver strong cash flows in the fourth quarter.

Our CapEx at $44.1 million are higher than last year, but have started to decline sequentially. We continue to expect CapEx of about $160 million for the fiscal 2023, net of potential disposals before returning to a lower run rate in fiscal 2024. While impacting our debt in the short term, our investments such as the new 60 million BOPP line recently announced, will provide a lasting competitive advantage and should be a key driver of our long term growth.

Despite our investments in CapEx, our net debt ratio continues to improve, standing at 2.50x at the end of quarter, the third quarter compared to 2.63x at the end of January. The improvement over the last six months is mainly due to higher cash flow generation from positive working capital. Debt reduction is our priority and we are committed to a strong free cash flow generation. Our new debt should come down to close to 2x in the coming quarters.

In closing, for the first nine months of the year, despite lower volume, we have delivered similar adjusted EBITDA than last year, by driving substantial cost savings and efficiency across the organization.

In terms of outlook in Packaging, while we expect pressures on volumes to persist in the near term, we continue to expect to improve profitability in fiscal 2023. In Print, we continue to expect lower adjusted EBITDA for fiscal year 2023 from the impact on inflation on volume and cost structures, partially offset by the impact on the ongoing cost reduction imitative.

We also expect strong performance from in-store marking activities and a positive impact from raddar in the fourth quarter. We expect corporate cost at EBITDA level to be around $40 million for the year. Moreover, cash taxes should be at around $60 million for the year.

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

Operator

[Foreign Language]

Thank you. One moment please. [Operator Instructions].

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

H
Hamir Patel
CIBC Capital Markets

Hi. Good morning. Thomas, on the packaging side, I believe Donald mentioned that volumes were down 10% in the quarter. How did volumes fare in August and when would you expect volume comps to turn positive again?

T
Thomas Morin
President, Chief Executive Officer

Thank you for the question, Hamir. A couple of comments on that. We anticipated destocking when we had a call in Q3, back here three months ago basically. We actually anticipated some customers to reduce inventories. They had told us and sent us some warnings.

This came a bit stronger than expected. So initially we circled back with them and tried to -- it’s actually pretty focused to be clear. And they all confirmed they would have a positive outlook for the year. All confirmed that they would grow this year and we would grow with them.

Now, this impact in Q3, combined with the seasonality, in some cases the summer is not a high season for some of the packaging segments we planned. This was larger than anticipated. This caused us to reduce costs faster.

Now, your question is more forward-looking. We see an opportunity in the month of August starting to recover. That was expected. The question is, how long is this going to last? And is this going to be at the level we were expecting or experiencing last year? But we see an opportunity in the first month of the first quarter going in the right direction. We'll see if it is confirmed for the remainder of the year.

H
Hamir Patel
CIBC Capital Markets

Great. And sorry, just to clarify, that's an uptick year-over-year or sort of sequentially coming off the fiscal Q3.

T
Thomas Morin
President, Chief Executive Officer

It is not yet back to last year in dollar terms. I need to double down on the volume piece, but it's certainly better than Q3 for sure. I know that.

H
Hamir Patel
CIBC Capital Markets

Okay, fair enough. And then just turning to the cost side. Have you seen much benefit yet from the falling spot prices for resin? And what kind of tailwind could that be for you in 2024?

T
Thomas Morin
President, Chief Executive Officer

Yes, good question. The two things to say on that. First, we've been reducing significantly our raw materials inventories in the course of Q3 and I would say it started in Q2 as well. So we would expect to see flowing through some reduction coming from raw materials.

Don't expect much though. You should follow the resin price. Yes, the spot market has been evolving faster, but the overall resin market hasn't gone down that much yet, a little bit still. So yes, we would expect to see some benefit from that. Difficult to estimate how much, but certainly going in the right direction, especially now we've reduced our inventories in raw materials.

H
Hamir Patel
CIBC Capital Markets

Okay, fair enough. That's all I had for now. I'll turn it over. Thanks.

Operator

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

A
Adam Shine
National Bank Financial

Thanks a lot. Good morning. Can we go back to the first question, maybe just on packing, a little bit related to the packaging volume. So you have two elements. One, an acceleration sequentially in the destocking. And then you also alluded to softness and volume related to just economic backdrop.

So Thomas, could we just go back to some of your answers earlier in terms of specifically around destocking? Do you think destocking, as a pressure point, runs its course by the end of your fiscal 2023 or kind of potentially continues into F’24.

And then on the volume side, as it relates to the economic dynamic, are you similarly seeing, an uptick or at least sequential improvement related to that factor as well. Then I'll circle back with another question.

T
Thomas Morin
President, Chief Executive Officer

Yes, thank you Adam. So let's be very specific. When we had some supply issues, all the industry, everybody has grown their inventories. So we grew our raw materials inventories. Our customers grew their packaging inventories. Everybody did that in the course of the last two years.

We ended up, both our customers and ourselves with way too much inventories as the supply chain resumed to better service levels. And when we had discussions with them, we were talking about a month too much. If you count in number of days, it would have been about 30 days too many in terms of inventories. This has led to this reduction in the summer and the numbers, the reduction has been pretty quick.

So to your question, I believe the adjustments has been done with the customers we're working with. I will make this a general statement across the industry. But as far as TC Transcontinental is concerned, I would say most of our customers have reduced pretty much their level of inventories to the right level, which is about a month say of inventories.

Now, so that's what I believe will drive a better – more, I would say normal demand in the forthcoming months. The thing which is difficult to estimate is the impact of inflation our customers have passed on to the market. So like we did, all our customers have passed significant amount of inflation this year to the market and these at some point, may have an impact on demand.

Too early to say Adam, but that's something we obviously actively discussed with them so far. And as of what I said, all of them report steady demand and don't expect to see a reduction in volume. But at this point in time, that's still to be demonstrated.

A
Adam Shine
National Bank Financial

Okay. No, I appreciate the added color. If we go back to one of Donald’s additional comments in terms of outlook, he did allude to the fact that ISM should grow, which is something you've been alluding to in recent quarters. But you sort of come off the idea that book is going to grow, and obviously you saw pressure in book in Q3. Can you just speak to what exactly transpired early in H2 and whether indeed that book pressure continues into Q4?

T
Thomas Morin
President, Chief Executive Officer

Yes, I mean we covered that, the two of us with Donald. So now I’ll send one quick word, the order intake in book is strong and the pipeline is strong, so it’s really promising. So I’ll confirm what obviously Donald said.

On the book side, it's been a bit of a roller coaster. We were very busy till the few months back, and then we saw the demand reduced. Obviously this is something we're investigating. We're adjusting our costs as we speak obviously, to take care of that.

Now, the team has been very quick in identifying some potential growth opportunities in books, so that's where the focus is on now Adam. We have a good asset base as I said, a good team. We know from a quality standpoint where we should be playing. So it's all about going and hunt again, which is where the team is focusing on as we speak.

Now, how long is it going to take? I'm not too sure yet, but pretty sure there are some opportunities.

A
Adam Shine
National Bank Financial

Okay, thank you for that, and I appreciate it.

Operator

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

D
Drew McReynolds
RBC

Yes, thanks very much. Adam kind of tick off a few of mine. Just two then. On the raddar, Thomas or Donald, just can you give us a little bit more granularity on what you're seeing since that launch and may and how it's contributing to results relative to what [inaudible] used to.

And then secondly, back to packaging, maybe for you Thomas, obviously a lot of investment going into sustainability, kind of recyclability efforts. Do you expect a flow through to crystallize and that investment to kick in in fiscal 2024 and how confident are you in terms of kind of gaining market share within – within the segments that you compete in. Thank you.

D
Donald LeCavalier

Yes Drew, I'll take the one on raddar. First, the most important thing for us on the raddar was the importance of securing our print product. We had a quick turnaround in Montreal facing this situation, and we’re really proud of how quick we were able to react to that. And now, as you can see, we're starting to do some raddar product also in Vancouver, so that's very important for us.

So far the clients appreciate the solution with great feedback after our first quarter of doing business with raddar in Montreal, so this is very interesting. And there's a number. Obviously we won't disclose any numbers regarding the impact on the bottom line, but what I can tell you is that the distribution in Montreal for us was operating loss before raddar and now its behind us, so that's the good news.

T
Thomas Morin
President, Chief Executive Officer

Yes, and I think it's been very impressive, the speed at which the team developed the product. We have a new connection with our customers and stakeholders. The way it's been – the Vancouver example was done within a month. Yes, that's pretty impressive.

All right, second question was on the investment in sustainability and how fast can we expect to see this flowing through our growth agenda?

Obviously this is a key milestone, not only for TC Transcontinental, but also I believe for the flexible packaging industry. The BOPP film provides a great deal of benefits and I suggest we have a specific event on that, because there is a long list of things we can share. How great this product is from a performance perspective, all the way down to the total cost of ownership for customers.

The process and the agenda so that we clear, the line will be operational in spring next year. It's a big machine. We expect to pull the first rolls of film sometimes in March, April, and start the commercialization right after that.

Now, we obviously are already working at qualifying this decision with customers with a great deal of success as we speak. So the question becomes, how fast is this going to be delivering growth? It's obviously part of our plan, we wouldn’t do that otherwise.

Difficult to tell you exactly the date. Should we have an impact in ’24, I think the first thing will be to secure and replace the current non-recyclable films we buy today by this film. So this will bring benefits, but not necessarily visible benefits in the first year. I think it's prudent to say that.

Now, in the long term obviously, this is delivering a significant amount of additional volume, which is already something we have identified and already working on with customers. So we’re already working on share gains if you will, and it's done in line with investments.

D
Drew McReynolds
RBC

That's great. Thanks for the added color.

Operator

[Foreign Language] Your next question comes from David McFadgen with Cormarx Securities. Please go ahead.

D
David McFadgen
Cormarx Securities

Great, thank you. Yes, a couple of questions. So when you look at the packaging business, it seems as though the organic decline in Q3 was primarily a destocking event that's over now. Is that correct? It wasn't really that much macroeconomic driven. It's more of a one-time destocking event. Is that correct?

T
Thomas Morin
President, Chief Executive Officer

When I look at the $41 million, to be extremely specific, I would say clearly identified two-thirds of that is destocking, that's very clear. This is something we could share with customers and we could definitely double check on.

The rest, its smaller accounts, smaller customers. Difficult to say whether this is activity related. The one thing we know though is that there is no share with loss or very little, no customer loss. So I would say amongst the $40 million, to be clearly specific, probably $30 million is for sure destocking period.

D
David McFadgen
Cormarx Securities

Okay.

T
Thomas Morin
President, Chief Executive Officer

And it tends to be a – tends to shape to be fully understood.

D
David McFadgen
Cormarx Securities

Okay. And when do you characterize your packaging business as being pre-recession resilient? Yes, okay.

T
Thomas Morin
President, Chief Executive Officer

Yes, I mean so – and I would say I would be very specific on that. About – I would say more than 90% of what we do is packaging food if you will, so this for sure is resilient.

There is still some activities we do in the industrial market, which is not a recession resilient, and that's a minor share of what we do. The rest is food and pharmaceuticals and medical related, so this has proven to be resilient.

D
Donald LeCavalier

But to be prudent David is that – I agree that it's recession proven, but with inflation going on right now, especially at the grocery, we're doing packaging for food. So the numbers of items that people will buy will remain the same in the next month as inflation keeps pushing in that direction.

That's something that we're following closely, and obviously we have discussion as Thomas had mentioned earlier with our client. But this is something to consider. So there's recession, but there's the impact of inflation, and as you know, it's regarding the price and the grocery. It's very important right now, the impact. So this is something to consider also.

D
David McFadgen
Cormarx Securities

Okay. So when you look at your free cash flow, obviously you're starting to free out some of that working capital that you invested over the last couple of years. I think you’re invested – I think it’s probably close to $200 million maybe. Do you think you could get a lot of that – Sorry. Do you think you could get a lot of that back?

D
Donald LeCavalier

Well, obviously if you look at the price of – for an example of the reason, it's not at the level it was before we invested the $200 million. So that will remain a negative impact, but for sure, as our clients are doing, and this is what we've been doing in the last two quarters. We don't need as much an entry that we needed during the supply chain issue. So that we’re getting back, and we're still going to push, and I think we can do – we did a good job so far, but we're not satisfied. We're going to push for Q4 and everyone is aware in our organization that 2024 we’ll want to push in that direction, because as you know our priority is pay down debt, and that's an easy way to pay down debt.

D
David McFadgen
Cormarx Securities

Yes, exactly. So just on the book volume, just kind of wondering, what is driving – what drove the results in Q3 on the book side? Just a little surprised on the week this far.

D
Donald LeCavalier

I think Thomas gave some color earlier, but what I can't hand on that is that book, a little bit like we – we talked a lot about the destocking on the packaging side, but this is something that happened also on the book side, you know before like last year and even at the beginning of this year, but mostly last year. When you compared to last year, supply chain was an issue on book. It was a closed market. The publisher were ordering a lot of invents now. They are doing the same. They are just pushing down their inventories.

Maybe less books are read right now, because post-COVID impact of that in this quarter. Overall book year-to-date is still an event versus last year, so that's good. So we still believe that book is a growing business for us, but it was a top order. And operating, we had to do some adjustment also.

D
David McFadgen
Cormarx Securities

Okay. All right, thank you.

Operator

[Foreign Language] Your next question comes from Stephen MacLeod with BMO Capital. Your line is open.

S
Stephen MacLeod
BMO Capital

Great, thank you. Sorry about that. I was on mute. Thank you. Good morning. Great questions so far or great color so far, so thank you. Just a couple of follow-ups for me. Just on the packaging side, I just had two questions. Are you largely through the destocking impacts? And then secondly on packaging, are you still seeing the ability or having the ability or needing to put through price increases?

D
Donald LeCavalier

All right, so on the destocking, I think we covered some ground all ready and I will repeat that. I think we've seen the bulk of it. Now again, to be confirmed, because there was a combination of seasonality and destocking in Q3, so we need to see both reverse in Q4. So far we see some of it, maybe not full of it yet. So to be continued as a discussion. At least on the destocking I think we've turned some corner, we need to confirm that.

As far as the ability to pass on the price increases, I mean we've done most of what we had to do, in line with our customers and contracts. The inflation of our input costs is not decreasing, but not increasing anymore, that's what I can see today. There are few pockets here and there, but nothing really that would cause us to pass on increases to customers at this stage. I don't see things – at least in the near term, I don't see things that would cause us to have this discussion.

S
Stephen MacLeod
BMO Capital

Okay, that's great, thank you. I did dial-in late, so I apologize if you had already covered that on the destocking.

D
Donald LeCavalier

It's always good repeating.

S
Stephen MacLeod
BMO Capital

Yes, thank you. And then, sort of sticking on packaging and putting all those moving parts together, how do you see volumes – how do you see volumes and maybe organic growth evolve in Q4, and would you expect to see a similar level of margin pressure?

D
Donald LeCavalier

So on Q4, I'd like to rewind the tape. So Q4 versus Q3 should see a better sales volume, just because of seasonality and less of destocking as we said. The question really we have is Q4 versus last year, because if you remind – if you remember, last year was a period of time where customers were stocking heavily. So the reason we’re destocking now is that because we stocked back in the day, and that’s what happened last year.

So if we compare organic growth, we need to take this side and understand how much of the growth last year Q4 was related to customer stocking, and so that we can compare apples to apples okay, that to make it very clear.

Now moving forward, as you've seen, we are investing in TC Transcontinental. A lot of capacity for specific markets. We talked about our sustainability. There are other market segments we are invested in. This is done in line with customer contracts and agreements. So we’ve always been favoring a customer backed investment, and this leads to organic growth.

So to your question, this is our trajectory, and this is what we've done and therefore we expect to see growth coming in, in those specific market segments.

T
Thomas Morin
President, Chief Executive Officer

And maybe Steve to add, when you mentioned margin pressure, I think we’re – yes, we do have margin pressure, but when we compare to last year, I would say that margin are going in a better direction than last year. And actually when you compare our Q3 versus our Q1, where we had the same top line, the margin was way better and all the cost efficiency that we put in place at the beginning of Q1 on the packaging side and some price increase to cover inflation are resulting in that right now. So yes, margin pressure, but at least it's going in the right direction compared to fiscal 2022.

S
Stephen MacLeod
BMO Capital

Right. Okay, that's great. Thank you very much.

Operator

[Foreign Language]

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

T
Thomas Morin
President, Chief Executive Officer

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

Operator

[Foreign Language]

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