Q2 2021 Transcontinental Inc Earnings Call
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<unk> welcome.
Welcome to the TC transcontinental second quarter of fiscal 2021 results conference call. During the presentation. All participants will be in a listen only mode. Afterwards, there'll be a 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 June 9.2.
On to 'twenty 1.
Now I'd like to turn the conference over to UNFI director and Investor Relations.
Jim a hammock NASA data and.
And a point director for that's thrown a equities a nicer and certify. Please go ahead.
Thank you Gabriel and good afternoon to all on the lines.
You're on your family are healthy and continued strength. Thanks.
Welcome to a PC.
Second quarter 2021 results.
Earnings call before we begin I'd like to highlight that we have provided as we have done last quarter, a slide presentation to help guide today's discussion.
A presentation along with the press release from the MD&A with complete financial statements and related notes.
But he should earlier today are all available on our website, a TCR T C under our Investor Relations section.
A replay of this conference call will also be available on a website after the call.
We have with US today are president and Chief Executive Officer, Crossword, 80 gig and our Chief Financial Officer done.
Got it.
Before I turn the call over to management I would like to specify that this conference call is intended for the financial community media.
A media are in listen only mode and should contact Natera, Inc. St. John Senior advisor, a corporate communication for more information on your request.
Please be reminded that some of the financial.
That's a measure this cost over the course of this conference call on non life on it.
You can refer to the M D a need for a complete definition and reconciliation of such measures to AFI.
In addition, this conference call might also contain forward looking statements.
These statements are based on a current expectation with management and its.
Information available as of today and they involve numerous risks and uncertainties known and unknown.
The risks uncertainties and other factors that could influence our actual results are described in the fiscal 2020 annual MD&A and in the latest annual information form.
With that I would now like to turn the call over.
For our president and CEO software.
Yes.
And good afternoon, everyone.
We delivered another strong quarter with a solid performance across our 3 sectors.
I'm very proud of the resilience innovation and agility that our team demonstrated again.
And this quarter.
We continue to operate in a challenging context of the pandemic.
Slide 4 gives an overview of our performance.
In packaging, we generated solid EBITDA, despite the negative impact of higher resin prices and a stronger Canadian dollar.
Excluding those 2 headwinds we would have recorded significant growth and the profitability versus last year.
At the same time sustainability continues to be a major focus for transcontinental and a market. That's a recognizing our R&D efforts will come back.
And in a minute.
And print 1 year after the start of the COVID-19 pandemic. We are pleased to return to organic revenue growth. We expect this trend to continue for the coming quarters.
We are pleased with having also significantly increased profitability.
Back to like the pandemic still impacting some of our customers.
Moving to Canadian wage subsidy, we recorded an adjusted EBITDA margin, a 22.5 per cent compared to $17.9 last year.
At the consolidated level, we continued to generate strong free cash flow.
We used to deliberate on our balance sheet.
The solid financial position provides us with the flexibility to invest in our growth either organically or through acquisitions and all of our true sectors.
Moving to slide 5.
Our focus on employee safety has never been more important than during this pandemic as it wasn't there for natural for us to step up and respond to the Quebec government call for business to support its COVID-19 vaccination campaign.
Since may 26, we are offering supervised vaccination to a local population.
Powerful for our employees and their families at 1 of our Montreal sites.
Moving to sustainability and packaging our integrated approach to sustainable package is a competitive advantage that helps to differentiate us from our competitors and supports our growth.
This is why we.
Sure a need to invest in innovation and product development, we want to ensure that we remain ahead with a recycle ready compulsive Bowl and PCR product portfolio.
We need to reduce waste and help the flexible packaging industry moves towards a circular economy for plastic or a.
Innovation is being recognized.
We continue by our customers and by the industry and a.
The last few months, we won several prices for some of our new products, including a recent recognition for a post consumer recycled shrink film, which we launched for the Coca Cola Company.
Let me now come back to the performance of each sector for.
Nice quarter.
Our packaging sector had another solid quarter in terms of revenues, we said last quarter that we expected full year organic growth, excluding the impact of a resin price to be between 2 and 3% after 6.
6 months, we are in the middle of that range.
With an expected strong second half of the year, we believe that we could reach a full year number close to 3%.
This growth is coming from investments in product R&D and Capex and from the ramp up of new business won over the last 2 years.
Our balance portfolio of products is very resilient and has enabled us to perform well during the pandemic. We expect that this growth will continue as the economy recovers and a trend towards sustainable products continues to gain momentum.
In terms of profitability the double.
Ed wins of resin price increases and currency variation continue to have a significant impact.
<unk> will go into more details, but I want to I like that we achieved very solid results. When we exclude these external factors thanks to very strong execution.
Our print sector also at a very solid quarter.
As mentioned earlier the sector, a return to organic growth and continues to demonstrate its resilience in these challenging times.
Our cost discipline and excellent execution allowed our print sector to generate very good margins.
In the quarter.
With the lifting of some government restrictions impacting our customer we expect to see substantial organic growth in the second half of the year.
We also have very good momentum in our in store marketing group, We recently announced that we won an important customer.
<unk> representing over $20 million in annual revenues, we also announced the acquisition of BG I, a retail which not only brings additional business and capacity, but also at a very talented team with skills that complement our product offering to retailers and brands.
This acquisition offers.
For significant cross selling potential and sourcing opportunities and stronger design and execution capabilities. It also creates a timely a fortunate ts as we help retailers prepare for a post pandemic environment by reinvesting in the in store customer experience.
With these recent announcements are ISI group is expected to generate revenues of close to $200 million on an annualized basis, and we expect it to continue to grow.
In summary, our.
Capacity a bit better support can be Taylor's Inc.
Clearly.
It's clearly expanding not only do we continue to help retailers attract customers to their store with a flyer business.
Also improve the in store consumer experience with our full service capabilities of in store marketing.
Our offer now includes interior and exterior signage.
Displays fixtures and furniture's made in plastic wood and metal quite a change from a traditional printing business. Finally, our media sector also out on an excellent quarter with strong revenue and EBITDA growth.
We continue to grow our share of revenues and vertical.
With a promising outlook like in store marketing books, and pre media Inc.
Including our media sector, which also had a good momentum a growth verticals account now for about a third of our combined print and media portfolio.
Yes.
In conclusion.
<unk> I want to leave you with a few messages.
First once again all of our 3 sectors performed well in a quarter I like thing or a focus on operational excellence and ability to drive efficiency gains.
Second with the recent product introductions and a new business won in a.
Inc sector and a recovery in our printing sector, we expect solid organic revenue growth for the second half of this fiscal year.
Finally, our healthy balance sheet, and our ability to generate strong and predictable cash flows provide us with the flexibility to continue investing to grow.
<unk> and true acquisitions in all 3 sectors with that I will turn it over to them.
Thank you Francois and good afternoon.
I'll start with a consolidated numbers on slide 6 once again, we had a very strong performance across all.
Or a <unk> and delivered a solid quarter.
But I consolidated level, we reported revenues of $623.3 million in line with last year, Despite a negative currency impact a $44.2 million.
It's important to note that we generated organic.
<unk> growth in all 3 sectors during the quarter.
On the profitability front, despite the negative impact from resin prices and currency variation.
Adjusted EBITDA increased from $104 million in Q2 of last year.
To a 7 million net.
Sure.
This improvement was operational and not due for the kitchen in a wage subsidy.
That's where we see slightly less in the quarter than we did last year.
I'll provide more details on profitability improvement and a sector by sector a review.
How do we have seen in previous quarters.
Quarters financial expenses decline as we continue to reduce our debt and benefited from lower interest rates.
We also are simply a mountain defined a new southern Europe third alone.
Europe's rates below 2%.
This will maintain our liquidity position.
W for lowering our average interest rate.
Ex rate in a quarter was up 24, 4% in line with our mid Twenty's guidance.
This led to adjusted net earnings of 55 cents per share for a quarter.
Compared to.
Income from last.
Last year.
Presenting a 10% increase.
Now moving to slide 7 for a secular with you.
On packaging sector posted another strong quarter.
We generated $17.3 million on organic growth mostly.
Lastly, due to the higher price of resin.
This growth.
On the offset by a stronger Canadian dollar, which drove revenues lower than last year.
Moving to profitability.
As we told you in February resin prices continue to out in February.
Significant negative impact in a quarter.
Through efficiency gains and good and a good mix, we were able to offset almost all of the resin impact delivering very good performance.
Adjusted EBITDA margin was $14.1 per cent for a quarter, but it will not be ignored.
A 16% excluding the lag impact of the resin pass through.
In dollars, excluding risen and ethics adjusted EBITDA would have been higher than last year.
On slide 8 you can see that our printing sector had an exceptional quarter.
Moving to continue.
They make a context.
While our clients, especially the retailers are still impacted by COVID-19 refuge warehouse a slightly.
On the 1 hand, when compared to the 2 pretend they make a months of February and March but on the other end, we had an easier comp for April.
U S returned to internal growth and print bodes very well for the coming quarters.
We were very successful shorter reducing our fixed cost.
And operated very efficiently during the quarter.
This led to an impressive 25% increase in profit.
For the ability from adjusted EBITDA, a $53.9 million last year to $67.3 million this quarter.
This was a very strong operating performance by the sector as we delivered an adjusted EBITDA margin of 22, 5%, excluding the subsidy compare to.
3.9% last year.
460 bps improvement.
Our media business also had an excellent quarter with strong revenue and EBITDA growth.
Building on the momentum gained in the last several quarters.
Corporate expenses.
Where are your than last year, mainly due to the stock based compensation and a pension cost adjustments.
Turning to cash flow from operating activities, we generated $83.3 million.
A bar issue with last year is mainly due to the higher and then 33 day by resin.
70.
In line with our growth aspirations, we continue to invest in Capex with a total expense of 46, $47.6 million in a quarter.
We also distribute at $19.6 million in dividends.
On strike on.
For I think 9 strong cash flow generation and a stronger Canadian dollar contributed for bringing our net debt ratio to 1.7 times, a very healthy level, providing flexibility to execute on our growth strategy.
Excluding the impact of Ifr 16, a ratio.
On slide will close a 1.5 times.
Following the reading improvement by standard <unk> Poor's in February our efforts to deleverage the balance sheet were also recognized by V. I S.
Which changed our outlook from negative to a stable and affirmed our investment grade rating.
Furthermore, at the end of the quarter, we had a total of 600 and a $31 million a available liquidity.
With a strong financial position and our ability to generate stable solid cash flow provide us with flexibility to capture a future growth opportunities for organic growth.
<unk> positions.
As for outlook.
In packaging with resin prices, increasing we will continue to be diligent in managing the pass through for our customers.
Ivor.
All of the lag between the increases from the other suppliers to the pass throughs.
Our customers, we expect a significant negative impact in the third quarter similar to the 1 we saw in the second quarter.
We also expect a stronger Canadian dollar continues to be a headwind.
You may recall, but the U S. Dollar was trading at a loved 135 at the same time last year.
And I'm there for $1.21 per day.
The negative impact is mainly on the conversion of our U S results back into Canadian dollars.
This is partially offset by lower financial expenses on the consolidated level.
Our debt is in U S dollars.
In terms of revenues, we expect solid organic growth and packaging for the year raising our outlook for close to 3%, excluding the impact of resin price.
And for him.
We continue to expect volumes to recover in the second half of 2021, as we face easier comparable.
In terms of profitability, excluding the important impact on the Canadian a wage subsidy program and especially in a third quarter last year, we expect adjusted EBITDA to grow organically for a second half of fiscal 2021.
On a recent acquisition of <unk> retail, which offer a significant synergy.
Both in terms of revenues and costs should contribute positively going forward.
Corporate costs at the EBITDA level should be close to $40 million for the year due in part to the higher than usual stock based compensation expense.
In terms.
Of use of cash for the year. In addition to continue looking for potential acquisitions. We're also looking to accelerate our organic growth through capex.
Is that a N depending on the timing of a potential key investments, we are likely to exceed a $100 million a planned capex for 2020.
1.
That's for a cash taxes, you can continue to assume around $50 million $50 million for the year.
On that note. We will now proceed with a question for you.
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I assumed it went up on me after a soon thank you for a moment. Please ladies and gentlemen, we will now conduct a question and answer session. If you have a question. Please press star followed by a 1 on you touched on a phone you will hear a tone acknowledging a request you quest.
<unk> will be pulled in Georgia received please ensure you lift the handset if youre using a speakerphone.
1 before pressing any Keith 1 moment. Please for your first question.
Pontiac assumed Gander mountain available to Scotiabank for your first question will come from Mark Neville with Scotiabank. Please go ahead.
Hi, good afternoon, thanks for taking the questions.
Maybe just first on resins.
Speaker for this we understand.
On a similar type impact in fiscal Q3 things start to recover in Q4 as you raise price and presumably sometime next year early next year sort of back to.
Pre inflationary type margin that sort of way to think about it.
Yeah, Yeah, we had some.
A raise in April and May that.
We still need to a that we all know that we're digesting right. Now is we're paying more in a we're gonna be a book to pass some of that increase in June and July to our customers. So yeah, a Q3 will be impacted negatively by a raise of.
<unk> of April and May.
And after that yeah in Q4.
There is no further range and then things should start to ease up in all of our growth.
Book to Bill that you should.
Should start to.
<unk> seen more.
But we still have the headwind of the extra.
But you know this is just transferring or a U S business into Canadian dollars for it.
Can you dig a cooperation so.
Yeah, and then obviously, there's further increase a envelope for that further a hip but obviously if there is some decrease then we should regain some of that money that.
Strength that we gave away.
And a loss last year or so so yes. That's you got that right do tree is a loss.
If there's no further raises the last quarter, where we should have a negative impact on things should start to turn.
<unk> for Q4 in that.
A year what were secretly praying for this.
As for some decrease both us and our customers are.
Would enjoy a seeing some decrease but it's hard to predict if it's going to come or not.
And is there.
Any pushback.
From customers.
In terms of raising price, presumably not cause it's industry wide, but I'm just curious in a.
I guess, a second part for the question was there any issues that a sourcing material.
Oh, but I wouldn't say push back on a sense, they're not a happy but I think we all live in a very inflationary world not only risen but is growing up.
So a like for most of our customer a we have a formula that is pre agreed in the contractual agreements. So they understand the game. So I don't know the answer they would be up a bit there IP, but no there they are not.
<unk> back and our industry operates at a very high a capacity levels. So.
You know with some of the vertical we're in we are still very busy and and a R. A badger customer on time, so those who a field that is not unfair.
We deliver other people that are that are willing to.
True.
2 acknowledged that the price is going up and we're just frankly interest passing a true we're not looking to gain from that.
In terms of a.
Is there a problem getting material and some of the area.
Of a global supply chain.
It's it's still very tight.
So the fact that we are a good suppliers and a good relationship was a was really tested on my last 6 months because.
In some areas of a what.
We buy on the outside the supply chain is still a very tight and we are still in an environment where a.
A.
It seems that inflation is still a is still present, but a but so far we've been able to manage that appropriately.
It depends on a mark maybe just.
Just a complete response.
For on Q4.
So youre right that if there's no more increase it should stabilize but.
For model purposes, you for margin.
Obviously, we're on and in fact, because we sell at a higher price we had a profit but.
It will say on the margin when you compare to Q4 of last year.
Yeah, Okay and.
That'll be the FX impact is it is it purely translation or is there any impact on a percentage.
<unk> margin.
It's purely a let's do a.
Please my answer but for.
The bulk is just purely.
Translation for flexible business as is <unk>.
As we look at all of a <unk> in our results in U S. But because we were listed in Canada, we need to convert a debt at the end of.
For the quarter and then.
I know you have a gain or a loss right now it's like doing on said, it's a big loss, but its a pure the conversion. So it is what it is what's drag for us or we are we growing in U S dollar or no in a if you factor out there isn't a ourselves in a EBITDA is growing on that's what we're.
We're looking at and that's what we're happy about it.
Well again.
Again completely a slight impact because it actually when it does but I'm doing a detail.
Would you decrease your top line because you are selling in U S and your profit decreases at the same time. So it does play also in the margins on.
Not that a big as debt.
The reason, we're playing into a market or you won't have an impact.
And it is the most important thing is that it's not a cash because obviously, we would generate free cash flow in U S. But we have interest and definitely a U S. So on.
That type of a protected.
Right.
Uh huh.
And if I could ask just 1 more I'm just curious if you could share.
Revenue contribution from T G I.
This is Ted.
Thanks, Rick Thanks for thanks for the time.
I don't know if we shared that a disclosure a doughnut.
Not sure that well.
It's roughly 40% for $40.45.
Additional revenue that's why a.
On a run rate was 40, we get a $20 million customer we're growing double digit besides that and we just take we're about $40 million of revenue. So that's why we say the.
The growth, we're probably past $200 million of revenue in the in store.
For Division right.
Right, Okay, great. Thanks, a lot. Thank you.
Thanks.
And your next question will come from Adam Shine, a National Bank financial Please go ahead.
Thanks, a lot a good afternoon, maybe I can push a little bit more on resin just to get a little clarity around the Q2 numbers. So.
Melee, we just look at the packaging revenue organic growth, which was just shy of 5%.
Thank you guys highlighted in a few places that most of that related to the resin prices and I think Jeremy on.
Organic ex resident in Q1 was like 5% so in the H, 1 you're tracking to 2 and a.
Have you said, so we really are a bit closer to zero just organic ex resin in the Q2 is that a fair place to be.
Yeah.
It's a it's.
A positive bump, but not a whole lot and we knew that because like I told you a an item, there's a adventure or anything.
If a business depending on a ship, but obviously, if we think we're gonna be closer to the top of a range of 3%.
We obviously expect Q3 and Q4.
It could be stronger than 3%.
If we're at 2 and a half.
Hello.
So.
Yeah.
We were expecting that and we gave you guidance stood a tree where at 2 and a half and now we're saying, it's probably going to be much closer to treat into an app. So we expect a Q3 and Q4 to be a.
Pretty good in terms of organic growth in flexible packaging without.
And not be residents yeah, yeah, you've got that right.
And I just want a clarify 1 more thing on resident then jump into a went on on printing so on the EBITDA.
If we look back at Q1 Q1, I think day now you were more specific in regards to <unk>.
<unk> 7 million impact a 150.
From a margin are we looking in this Q2 had an impact that.
Is at or meaningfully above 10 billion at this point.
Is that something that you can maybe provide a little color on that.
On the bridge side, when you're a bridge versus last year, whereas debt level.
Okay around a 10.
Deep dark okay.
On a.
Oh, a lot north I mean got to play prices right, but are you closer to 15 than debt.
Okay with other yes.
Okay. Thank you alright.
Helpful.
And then just in regards to the printing side, which obviously was a real big surprise for the period.
If I reflect back on some of the comments that for a swab might've made back on Q1.
This was a business that seem to be ex subsidies, maybe you guys thinking of a 19% to 20% level and all of a sudden you know obviously you've delivered much above expectation so maybe maybe.
Number 1.
Could you just talk to what might have been incremental in terms of efficiencies and savings that materialized in the Q2 to drive this sort of upside surprise on printing margin and then additionally, just reflecting on prior comments for a swap when we think about a margin.
And this year in printing and I don't want you to be overly specific about it but is it fair to say that an ex subsea margin is actually gravitating closer to 22% this year than necessarily 20% that was previously anticipated.
Yeah.
Or asking me not to be.
Specific.
So I would say that.
You know I mentioned that earlier a win.
When we were forced in a COVID-19 to operate a partially or with minimum people.
I guess, we learned a few things on how we could run on our platform.
For him because some planning on can be shut down on all of that and I think for the most part I think we are operating right now with a much a more.
Leaner organization and then a week.
Move some volume around relocated some equipment shut down some equipment. So.
We operate with a.
A lot more efficiently so whatever volume.
A strong at us.
We'll generate more margin now than it.
It did free pre Covid and we thought were pretty good.
Before COVID-19 so there's.
Just to say that there's always room for improvement so our cost.
Structure and efficiency is much better. So that's that's that's why them, mainly a margin a higher I would say it also that we're putting a ISN grouped together and we made a press release about moving.
5 building into 1 building in true Brampton has this is ramping up and other acquisition.
In a word.
Volume is coming in on.
You have a huge impact on margin.
Because everything is happening on a same time and a lower cost base more sales.
And then a better product mix that enable you to win more business and you put a.
Our come together.
Our our target.
Target for our ISR business was 15%.
Now we think that day.
We could maybe reach a eventually 20, so so which is similar to print.
Want me not specific on won't be specific but I can value.
After that this year I think our print margin will start with a 2 and its all said and done.
Okay, I think inevitably a well alright ill leave it there and queue up again, thank you.
For you.
So you are calling for instance, a it it sounds like a path I have a useful.
So on the tissue.
She was senior folks.
So on maintenance.
A caution that a September event a peacefully.
Ladies and gentlemen, if there are any additional questions. At this time, Please press star from Taiwan and as a reminder, if you are using a speakerphone. Please lift the handset before pressing on it.
Your next question will come from the line of David Mcfadden of <unk> Securities. Please go ahead.
Oh.
Yeah, Hi, a couple of questions. So can you sort of touched on it but I was just wondering.
Given the strength for any quarter in terms of the EBITDA margin.
As you see the business a tick.
Pick a volume picks up.
These costs that you've taken out a these truly.
Sustainable are you going to have to.
Those class back into just to support a higher revenue.
I know this year, you said that the printing EBITDA margin probably starts with a true but I'm just wondering.
Volume really tough start assuming a picks up.
Is that really sustainable.
Based on the last.
This quarter's results and then secondly, you know.
Where are you guys add on acquisitions I know acquisitions as always.
Something you've done every year and then a path.
It's a comedy actually well on and I was just wondering if that's the other case right.
Yeah.
In terms of a the way.
Wait on printing and is it sustainable I would say not only sustainable we could still improve from where we are.
And a good review, how I feel about that part.
And are you the only thing debt.
And all of that debt.
Excite me about what I called a traditional.
We opened a transcontinental, which is a printing and media business.
In my remarks, I mentioned that this portfolio was about 1 billion treat a few include the media business.
What we just said is that a third of that a third of that.
<unk> is actually growing and I'm not talking about.
Business growing because of the Covid I'm actually talking about in store marketing book printing pre media and our media business, what I just mentioned as a third of our revenue and profit.
More than a third of our EBITDA and it's actually growing on a lot of what I just.
Just mentioned.
For instance, on only growing is growing double digits and in my view is with a market share gain.
And then a little bit of M&A, and a and P. O P. A.
We hope that pretty soon half of our revenue and printing on me.
Is gonna be actually growing. So this is that's what you know <unk>.
Excite me about the traditional business of a transcontinental so yeah, I'm thinking not only sustainable I think we could continue to have a portfolio.
All the people think of the print group a lot.
It was a 15 years ago, but it's a quite a different business and you know for me. If you have more than your business on a business that is growing you're actually a growth business instead of a declining business in terms of the acquisition on what fixed Inc.
Is that we have a fortunate to acquire.
Well, obviously the biggest places is a flexible packaging.
And we're very active and we're looking forward to make acquisition, but the right 1 on the right price and if this market is very competitive right now there's a lot of a private equity money around that space.
Here.
Make it a little bit more complicated for us, but theres still a fortunate ts, but what else show people overlook is we have a opportunity to acquire in our media business, which is a business that derives fantastic return on capital employed actually the best within transcontinental and then a print sector.
Sector with the.
Gross a story that we havent pop a.
We could also make acquisitions. So yes, we are thinking of acquisition and a 3 sector and we are looking at files and the true sectors prints.
Media and packaging.
Okay. Thank you.
Yeah.
And it sounds pretty simple with a casino.
Sure a point there are no further questions at this time.
Well. Thank you all for joining us on a call today and I look forward to speaking to you sit on it.
Ladies and gentlemen.
This concludes today's conference call for today. Thank you all for participating.
Goodbye for now.
So I mean, a favorite coffee a hospital's Hilton Sydney.
Especially on assuming that for coffee.
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Right.
Ladies and gentlemen.
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Yes.
Thank you.
Okay.
Okay.