Q3 2021 Transcontinental Inc Earnings Call
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Welcome to the TC transcontinental third quarter of fiscal 2021 results conference call during.
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 eight 2021.
I would like to turn the conference over to Jan Lapointe Director Investor Relations, Jennifer not fettered alcohol I am not quite de facto flashy on Iraq.
Though we cannot quite please go ahead.
Thank you Julien.
Afternoon, everyone on the line and thank you for joining the call.
Welcome to Pizza cough cold snap <unk> third quarter 2021 results conference call before we begin you can find the press release, the presentation and the MD&A with complete financial statements and related notes on our website under our Investor Relations section.
A replay of this conference call will also be available on our website after the call.
We have with US today are president and Chief Executive Officer, housewife, or D and our Chief Financial Officer, Don on that Kevin.
Before I turn the call over to management I would like to specify that this conference call is intended for the financial community.
I mean, the Rins are in listen only mode and should contact Natalie St. John Senior adviser of corporate communications.
Information oriented your request.
Please be reminded that some of the financial measures discussed over the course of this conference call are non ifr. If you can refer to stayed to the MD&A for a complete definition and reconciliation of such measures twice.
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 2020 annual MD&A and in the latest annual information form.
With that I would now like to turn the call over to our president and CEO.
Thank you Jan and good afternoon, everyone.
Last quarter, we delivered another solid performance across our three sectors. Despite the challenging environment, particularly in the context of the pandemic and higher resin prices. Our teams continued to perform very well.
Slide four gives an overview of our performance for the third quarter and.
In packaging, we recorded organic growth of revenues of $42.0 million, mainly as a result of higher resin prices.
Same time revenues were negatively impacted by a similar amount of currency conversion impact of $41.0 million stemming from a stronger Canadian dollar.
Excluding the resin impact organic growth was flat for the quarter.
Unfortunately, our revenues did not met our expectations.
This is mainly due to delays in installing new equipment caused by supply chain issues with our equipment suppliers.
In this situation limited our ability to ramp up production on new contracts already awarded to T. C.
Good news is that these new equipment R&R operational and we are working through the backlog while we.
To recover some of those missed revenue in the fourth quarter. It is in our next fiscal year that we expect the full benefit from this new volume.
Demand for sustainable products remains very strong.
Which bodes well for our long term growth outlook.
New products have been the block contracts with customers have been signed and are being negotiated and investments have been made in equipment installed this position us well to deliver organic growth again in 2022.
Moving to profitability.
Proud of our operational results.
Let me explain to you why.
EBITDA was negatively impacted by three factors.
First short term contractual lags and passing through higher resin prices to our customers.
Second the stronger Canadian dollar and toured the wage subsidy, we received for our Canadian operations and packaging last year.
Excluding these three items, which impacted EBITDA by more than $25 million in Q3 alone EBITDA for this quarter is higher than last year.
This is a strong performance considering that last year was the highest ever quarterly profit we recorded in this sector.
Assuming the resin prices.
<unk> I expect their impact to be lower in the fourth quarter before potentially turning positive in 2022.
And print as expected with the gradual reopening of the Canadian economy, we saw strong organic revenue growth in the third quarter compared with last year, which was more impacted by the pandemic. We expect this growth to continue for the quarters to come not only in our traditional.
Offering, but especially in our growth markets like in store marketing and books.
Yeah.
As for profitability adjusted.
EBITDA declined by $12.0 million.
If we remove the impact of the Canadian wage subsidy, which was $20 million lower compared to Q3 of last year. The sector would have reported that profitability improvement of over $10 million for the quarter.
This is a solid performance and again reflects our ability to operate with efficiency and control of our cost.
This translate into an adjusted EBITDA margin of close to 20% when excluding the subsidy and improvement of 180 basis points versus the same quarter last year.
Our media sector. Once again had an excellent quarter with strong revenue and EBITDA growth. This business continue to have a great overall performance.
At the consolidated level, we continued to generate strong free cash flow.
That we use to reduce our net debt and invest in our future growth through Capex and M&A.
Moving to slide five.
Last week, we use the opportunity to renew our credit facility to link our cost of capital through four key ESG targets employee safety gender diversity post consumer recycled resin in our packaging products and greenhouse gas emissions.
So opens the door to future, a fortunate teas and sustainable financing and furthers our own corporate social responsibility objectives.
During the quarter. We also made good progress in sustainable packaging as we continue to invest in innovation and product development and our recycle ready portfolio, we have design and produce new sustainable films for pet food and frozen food applications. These new films R&R prequalified for a store drop off.
Labeled with how to recycle.
This is a plus for our customers, allowing them accelerate the achievement of their sustainable objectives.
Sure.
And our recycling group the LDP resident and we produce from post consumer recycled content in our Montreal facility has also been certified by the association of plastic recyclers and important milestone in our journey towards using more recycled resin.
Our integrated approach to sustainable packaging supports the global efforts towards a circular economy.
The same time that differentiate us from our competitors and supports our growth.
We are currently engaged in many trials with customer not only for our recycle already and compulsive product, but also for our films, including recycled resin.
The engagement in certain case excitement and positive feedback from our customers show us.
What extent sustainability is a key pillar for our future growth.
Give us confidence that we are on the right path and that we have a strong and innovative R&D team to deliver.
In conclusion I want to leave you with three key takeaways.
First our continuous operational excellence and the ability to drive efficiency improvements. Despite the temporary challenges from the lag in passing through resin price increase the exchange rates and the lower wage subsidy, which negatively impacted our overall adjusted EBITDA by around $50 million.
Year to date, our three sector continued to perform well in the quarter.
Second we expect solid organic revenue growth for our three sectors for the quarters to come in all three sectors are well positioned to be solid contributors to our future overall performance.
Finally, our LTE balance sheets, and our ability to generate strong and predictable cash flows for years to come provide us with the flexibility to continue investing to grow organically or through acquisition and all three sectors with that I'll turn it over to Dino.
Thank you Francois and good afternoon.
I will start with the consolidated numbers on slide six.
We reported an increase of five 8% in revenues versus last year.
This was driven by organic growth of $74 million from higher volume in our print and media sectors.
It was also driven by higher pricing and packaging following our diligent management of resin pass through.
The revenue growth was partially offset by a negative currency impact of $40.0 million.
Mainly from the rise of the Canadian dollar versus the U S dollar.
On the profitability front adjusted EBITDA decreased to 101.7 million this year.
Good operational performance in all three sectors was more than offset by three external item detailed earlier.
<unk> subsidy.
The lag in passing through resin price increases and the exchange rates, which negatively impacted the quarter's EBITDA by total total of about $50 million.
As we have seen in previous quarters financial expenses declined slightly in line with lower net debt.
Last week, we extended our credit line to 2026 and linked it to our four sustainability indicators related to ESG issues.
In July we also announced a $250 million debt offering a very good rate.
And the transaction was well oversubscribed.
These actions are a clear demonstration of the confidence by our financial partners and our financial strength, our long term growth strategy and our commitment towards ESG.
Moving to taxes tax rate was 43, 6% in the third quarter in line with our mid <unk> guidance and led to adjusted net earnings of 51 per share for the quarter.
Now moving to slide seven for the sector review.
And our packaging sector organic growth was due to the higher price of resin and it was offset by a stronger Canadian dollar related revenues in line with last year.
Moving to profitability you may remember that at $65 million Q3, 2020, setting a record quarterly profit and packaging.
As we benefited from lower than prices.
<unk> currency exchange and the Canadian wage subsidy.
This year this three external items.
They've impact of about $45 million.
Leading to an adjusted EBITDA of $45.0 million.
Excluding these items our continued focus on efficiency gains will have resulted in EBITDA growth.
Adjusted EBITDA margin was 12, 2% quarter to quarter and would have been at more than 16% just by excluding the temporary lag impact of the resin pass through.
On slide eight you can see that our printing sector. Another very good quarter with 14, 4% organic growth versus Q3 last year, which was more impacted by the pandemic.
Adjusted EBITDA for the quarter was $61.0 million compared to $73.0 million in Q3 2020.
This is a solid performance when we consider that the wage subsidy was $20 million lower than last year.
It also showed that the growth in revenues converted well to the bottom line as we continue to benefit from our cost discipline.
Excluding the wage subsidy.
Adjusted EBITDA margin for the quarter was up 19, 8% compared to 18% last year I wanted to third 80 basis point improvement.
Our EMEA business also had another excellent quarter with double digit revenue and EBITDA growth building on the momentum gained in the last several quarters.
Corporate expenses were higher than last year, mainly to the stock based compensation wage subsidy received last year and nonrecurring costs related to the back of explanation clinics.
Turning to cash flow from operating activities.
<unk> $60.0 million in the quarter.
The variation with last year is mainly due to higher inventory, which was impacted by resin prices and also from lower EBITDA.
In addition tax paid was higher due to the deferral of Kenny here income tax installments last year.
As we indicated last quarter, we are increasing our investment in capex to drive our growth aspirations with a total of spend of $48.0 million million dollars in the quarter.
Please keep in mind that capex amounts can vary significantly from one quarter to another and this number should not be used as a run rate.
In addition, we also invested $44 million related to the acquisition of <unk> retail in our in our ISR business.
Finally, we distribute $24.0 million in dividends.
Despite the significant growth and investment we made during the quarter. We continued to maintain a very strong financial position with over $800 million of available liquidity at the end of the quarter.
Now for your outlook.
In packaging, assuming stability in resin prices the impact on profitability should be smaller in the fourth quarter.
In terms of revenues now that the new equipment is operational we expect to see organic growth not only for the fourth quarter, but also for 2022 and that excluding the impact of resin prices.
Assuming that the Canadian dollar remained at current level, we expect the exchange rate to continue to be a headwind in the fourth quarter was two.
To a lesser extent that what we saw in Q3.
In print.
Considering our continued gradual reopening of the economy volumes should continue to recover in the fourth quarter.
Corporate costs at the EBITDA level should be around $40 million for the year.
In terms of the use of cash for the year.
In addition to continue looking actively for potential acquisition and all three sectors will continue to invest in our in our organic growth through capex.
To that end, depending on the timing of potential key investments, we are likely to reach over $130 million of capex for the current fiscal year.
As for cash taxes, you can continue to assume around $50 million for the year.
Finally.
As we head into our last quarter I would like to remind you that 2021 is a 53 week fiscal year for us.
Therefore, I have an additional week in the fourth quarter compared to last year.
On that note. We will now proceed with the question period.
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Ladies and gentlemen, we will now conduct a question and answer session. If you have a question. Please press star followed by the number one on your touched on patents one moment. Please for your first question.
And your first question comes from Mark Neville from Scotiabank. Please go ahead. Your line is open.
Hey, good afternoon.
Maybe just first on the margin in packaging.
And I can appreciate the lag.
On the pricing adjustments I'm, just curious is that strictly a timing issue.
Just curious if theres any for your non index customers, if youre getting any pushback on trying to raise price.
No no.
It's mainly.
The resin pass through a little bit last year, we had a little bit of.
Canadian wage subsidy for our three packaging plants, which we don't have any more for packaging, so but the bulk of the.
The difference between last year and this year is the resin price lag true with.
With 12.
Increase in the last 14 months, where paths negotiating with the customer. We just we just passed the true. Unfortunately, our contractual agreement lags built in the contract.
I don't think it's it's a first in the industry I believe that.
There's 12 consecutive 12.
<unk> 12 increase in the last 14 months. So it's mainly the lag in last year.
We were benefiting like I said from the Canadian wage subsidy for a little bit in.
Also last year, the resin was going the other way.
You can believe that at that time, so we had a little bit of that.
Of a boost from that so if you normalized last year.
Around the 16, 17% with Europe normalizing this year, we're around the 16%, 17%, but the lag is huge.
Because it's increase after increase after increase.
And when the lag is two or three months you could see the impact.
<unk> is going to ease up and Q4 as well.
And if not increase yet for Q4 and now we're passing a lot of these.
<unk> that we incurred in Q3 so.
Whirlpool that resin is going to stabilize and eventually go the other way that we could recoup some of that money, but from a margin standpoint, you could assume that its pretty similar to last year. It's hard to believe when last year was 18 and this year is 12, but that's the case.
Yes.
Got it.
Oh, sorry go ahead, yes.
Sorry, maybe to add regarding your question for.
For the index.
All the pasture that we have with most of our clients most of the contracted business is contract by contract and what we have said in the fasteners.
The vast majority of these for three months. So therefore any increase takes at least two months and a half before we can pause this increase through their client, but when Theres 910, 12 months in a row that there was an increase we were always in a catch up and this is why Q3 is stronger because we have like months before and some of it.
Lines of six months or so so you carry those for six months. So this is why it's moving up and last point is that the price increase were steeper.
The end of our second quarter instead of <unk> <unk> per months. So those those apply in the delta for the third quarter.
Okay.
I guess just based on that if we see stabilization.
Tom I get to fiscal Q1 or Q2 of next year.
You should be back sort of in a normalized range GAAP measure.
But.
Yes, I guess, it's risen space stable next year.
For sure year over year comparison, we're not going to have those that we have this year and then.
Hopefully if it goes down then we'll start to benefit so.
B.
It will be positive year over year, but.
Market is very volatile right now.
I wouldn't want to predict anything at this point. So we're just going to keep doing our job in and see where the price.
Is it going to go.
Very volatile right now, it's very hard to predict.
Okay.
And with the customers that are not contractually indexed.
Is there any pushback from them in terms of you.
We're past the pushback, we're passing it through.
A lot of our plants are.
Very very.
Busy so if they don't want to take the increase then.
They would need to have their product manufactured by somebody else. That's basically for the most part part position after 12 consecutive.
You could negotiate the fifth one increase in a year or even two but when Europe to 12.14 months.
Europe has negotiating youre, just passing it through and if people don't like it.
No thats it.
It is what it is.
Yeah, No understood maybe just one last question I'm just curious.
The recent hurricane if there was any impact on the business or ability to source revenue.
Yes.
Obviously.
There is one particular.
Type of resin that we use for barrier in our cheese and meat.
Vertical which is.
The two combine our largest vertical in our portfolio.
There's one type of resin that is <unk>.
To get right now because of the.
An accident in one of our supplier of our two suppliers. So this risen it's pretty tight right now, but <unk> found ways to.
Modify their product offering to be able to service their customer but.
Yes, there are some types of residents that are hard to get through right now, but we find ways to to.
To serve our customer and we don't at this point anticipate suffering from that.
For the moment.
Okay. Thank you for taking my questions.
Thanks.
Your next question comes from Adam Shine from National Bank Financial. Please go ahead. Your line is open.
Thanks, a lot could afternoon Francois on the.
Packaging sort of growth front, notwithstanding the extra week benefit you in the Q4, you've come off I guess two quarters now of let's call. It flat to muted growth obviously some of the factor in this quarter was clearly related to the delayed production ramp can you speak at all to.
What the growth profile looks like given that you are ramping up on new equipment, obviously sounds like you've been adding some new contracts new mandates. So as we think about growth that otherwise on an organic basis might be I don't know, 2% to 3% type range.
You see a better line of sight for something above that level going into next year.
Yeah.
For this year last time are all along I said, 2% to 3% last quarter.
And expect our machine equipments require having issue installing the machine for lack of plc to run these machines that are highly automated.
So this delay was not planned so for this year were.
We're still.
In the zone.
Think of two or 3%, but now maybe closer to two because.
The volume was qualified volume was ready to come to Tc.
But because of our.
Installation issue, we couldnt handle the additional volume.
Customer was willing to give us. So obviously this volume some of it is loss.
<unk> two.
They add to their food with film and they kept ordering from their incumbent supplier. So some of that.
As loss. So that's why I'm, saying are the three that I was hoping for last call. This maybe more of a two.
The good news is the equipment will be running is running now.
And it'll be around I think less than what we had hoped for in Q4, but it will around so we expect organic growth in Q4, and when it's all said and done we should be pretty close to 2% comp.
The end of the year. So we expect organic growth in Q4 and packaging as for next year.
No.
All of our budget presentation, and what I can tell you is what I look at.
With what we have in front of us is probably very similar to.
This year expecting a 2% to 3% organic growth for next year is probably what we.
We will confirm in Q4.
Great I appreciate that and just.
Building a little bit on the earlier question that I think focus a bit more on what customers were doing whether or not they were resisting on resin price increases. The question isn't so much there it's more along the lines of.
Our customers, whether it's on the printing side or the or the packaging side are they changing behaviors in any particular way with a positive.
Or negative effect on you guys in terms of lessons learned from Covid through the pandemic.
Any anything evolving out there, whether it's pushback or opportunities for additional business.
I think no I think most of our customers including us.
We are in and then Lynch inflationary environment.
Our customer are are now used to receive this call not only from us but from all of their supplier, whether it's freight whether it's energy whether it's.
And then our customers, which in the packaging, which are the food people out.
Ability or they're passing that through there.
The retailer as you can see the price of the basket of food.
North America is also going up so.
It is an environment, where we have those discussion.
People are expecting it as far as changing.
<unk> Europe because of Covid.
I don't see any change in packaging so far.
People needs packaged food in and what we do flexible as the most efficient.
Packaging in many areas in print.
Obviously.
We're very much tied to retail so as soon as COVID-19.
Limit the number of visits to the store unless people into the store and retail slowdown we're slowing down with it.
No I think that Covid for PC in terms of our core print business.
I'm going to turn out to be positive why I'm, saying that is that most retailers that we deal with.
<unk> realized that one of their key competitive advantage is their brick and mortar store.
There are certainly new wood.
<unk> strategic focus from a lot of CEO and a lot of Canadian retailer on their store.
The fact that we have billions of dollars of inventory.
Sitting in hundreds of locations across Canada.
<unk> advantage for e-commerce so.
That's what we feel is that COVID-19 as a refocus of lot of retailer on their store strategy. If you think of Tc.
We're the number one partner to bring people into the store, we help the retailer bring people into the store and the number one tool for retailers in Canada, bringing people to the store remain printing requires and then our strategy about ASM in store marketing as once the people are in the store they want to have a reset.
And then to have a better experience and we are the one.
Helping them, having the store.
And then when they leave the store, where the one doing personalized offer with a lot of direct mail personalized program with retailers. So this renewed interest around building a retailer strategy around their brick and mortar and this E Commerce world.
As well to our overall strategy.
Print at Tc.
The reason I just mentioned so the only area, where I think the COVID-19 have accelerated with decrease of secular decline.
Printing is in the magazine.
We see a lot of magazine publisher diminishing the number of.
Okay.
The time that they come out paper price in the magazine is going up so we see there.
They've in fact.
Covid, but I want to remind you that.
Magazine printing for transcontinental printing is now quite.
Quite.
Quite small so not a big embark on our overall visits so brought a lot of color, but that's.
That's my answer.
I appreciate it I'll leave it there thank you very much.
Thanks, Adam.
I'm, calling in for a quick closing question. So late 12, CB Palo Niemela once again to ask a question. Please press star followed by the number one.
Your next question will come from drew Mcreynolds from RBC. Please go ahead. Your line is open.
Thanks, very much good afternoon.
Maybe extending Adam's.
Question, a little bit in terms of the.
The reopening dynamics in the quarter.
Maybe you can just kind of drill down into how demand on the printing and packaging kind of evolved through the quarter.
And assuming sustained reopening.
How that continues here in Q4 on a full quarter kind of a run rate basis.
And then secondly, just on the wage subsidies, maybe if you don't know.
I think you had $9 million in <unk>.
Q3 at $36 million last year, just when do we pencil in here for Q4. Thank you.
Yeah.
On the print.
We're pretty much tied to.
The economy.
No.
When retailers reopening we're going off with it. So this quarter, we were 14% up to last year and revenue in print.
That converted in about $10 million more profit so a good performance from our team we have.
Expect that to continue because our comparable in Q4.
Whats more severely impact than what we're going through right now.
Obviously, if this fourth wave with these variance is more severe than we think and then more restriction.
Hi on the economy, we will suffer but it looks like the vaccination rates in Canada.
And I've got a re close the economy so.
We expect to continue to have the same kind of growth and lift in print because the comparable from last year.
Lower and then retailer are reopening.
Starting to go back to what I call the regular marketing program and.
And they want to have people into their store. So obviously that would be good also for ISI am offerings. So we expect.
Revenue to be better in Q4 <unk>.
For next year, obviously, we've made acquisition and ISN when we have a lot of opportunity to grow.
Sam We've made investment as you know in our book capacity and this strategy is working very well so we anticipate that to continue.
Next year, so, yes, we expect revenue to be.
To be continued to be strong but.
The pandemic is the wildcard in terms of packaging.
I can say that last year.
In Q3, we had some.
Category like the meat and cheese.
Record volume because if you remember last year, we were in the spring as you work.
Retail store shelves are empty and people who are grabbing stopped so we were producing a lot.
A good quarter this quarter like the demand is very strong, but not as crazy as last year in those areas.
Still very good so not a lot of impact.
From the Covid on our packaging business.
20% is about our industrial portfolio. This is starting to coming back to normal I don't see that slowing down. So I would say that in packaging, we are back to normal and what's going to drive our organic growth is our sustainable product offering and the ability to introduce that mark.
This is really the driver will be a growth of the future.
And so that less of the COVID-19 impact on our packaging business.
In Europe for a subsidy Youre right last year was 36 in Q4 2000 lots during the third quarter I should say.
And more north of $14 million in the fourth quarter, and we don't expect to have that kind of money.
Subsidy in the fourth quarter.
Actually its going down as we speak so probably less than 60% of what we receive in the third quarter. So a few millions but.
I think much of that I think more important.
Thank you. Thank you both for that.
And this time Blippy, that's all the questions I missed the point there are no further questions at this time.
Thank you for joining us on the call today and I look forward to speaking to you soon.
Madame Jimmi Sue just kind of mean that teleconference choppy now.
Powerpc Pascal ladies and gentlemen. This concludes today's conference call. Thank you for your partners. Thank you for participating please disconnect your lines.
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The House has ended this call Goodbye Lenny Matt a question so it looks.