Q1 2022 Transcontinental Inc Earnings Call

March 8, 2022

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Operator: Welcome to the TC Transcontinental first quarter of fiscal 2022 results conference call.

During the presentation all participants are in a listen only mode.

Are in a listen only mode.

Operator: Afterwards, we will conduct a question and answer session and instructions will be provided at that time.

Operator: As reminder, this conference is being recorded today March 8, 2022.

Operator: I would like to turn the conference over to Yan Lapointe, Director of Investor Relations.

Yeah in the plane, but I feel in fact, they investees out each of that point. Please go ahead.

>>Yan Lapointe - Head of IR: Thank you.

>>Yan Lapointe - Head of IR: Good afternoon, everyone.

>>Yan Lapointe - Head of IR: Welcome to [Transcontinental] first quarter 2022 results conference call.

First quarter 2022 results conference call.

>>Yan Lapointe - Head of IR: Before we begin, I'd like to highlight the earnings call presentation, the press release, and the MD&A along with complete financial statements and related notes that were issued earlier today are all available on our website.

>>Yan Lapointe - Head of IR: [inaudible] under the relations section.

The relations section.

>>Yan Lapointe - Head of IR: A replay of this conference call will also be available on our website after the call.

Would be available on our website after the call.

>>Yan Lapointe - Head of IR: We have with us today are president and Chief Executive Officer, Peter Brues, and our Chief Financial Officer, Donald LeCavalier.

Okay.

>>Yan Lapointe - Head of IR: Before I turn the call over to management, I would like to specify that this conference call is intended for the financial community.

>>Yan Lapointe - Head of IR: Media are in listen-only mode and should contact not anything shop senior advisor corporate communication for more information or interview requests.

>>Yan Lapointe - Head of IR: Please be reminded that some of the financial measures discussed the vertical of course of this conference call are non [IFRS]. You can refer to the MD&A for a complete definition and reconciliation of such measures to [IFRS.]

In addition, this conference call also contains forward looking statements.

These statements are based on the current expectations of management and information available as of today and involve numerous risks and uncertainties known and unknown.

The risks uncertainties and other factors that could influence actual results are described in the fiscal 2021 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, Peter Brues.

Peter Brues: Thanks, Yan.

Good afternoon, and thanks for joining our call.

First, from a safety perspective, we were pleased to see a 7% decrease in the number of injuries in the quarter.

In terms of COVID, we continue to take measures to keep our workers safe and ensure that no outbreak started in our plants.

In contrast to previous COVID variants, omicron's impacts on our operations was significant.

In December and January, we had about the same number of COVID absences as we experienced in the previous 19 months of the pandemic.

These absences limited our ability to grow our sale.

And operate efficiently.

In this challenging context.

I am proud of the way our organization communicated openly with our customers.

It is in adverse situations, where direct communication and working together to solve issues build stronger bonds.

I am convinced these relationships position our business for future growth.

That said, our financial results were below our expectations.

Well, we did see smaller organic growth in packaging, labor shortages limited and our capacity and ability to respond to increased demand.

This inability to supply combined with labor inefficiencies.

And a lag in the pass-through of inflationary increases had a negative impact on the business's financial performance.

In print.

Although the virus did impact retail decisions to augment the in-store marketing and advertising Flyers, the business grew organically three 5%.

This demonstrates the underlying growth characteristics of our in store marketing and book segments.

This growth compensated for labor related operating inefficiencies and resulted in a solid financial performance.

Our media business had another quarter with solid sales and profit growth.

Despite a tough quarter, as I speak to you today the demand remains solid. The level of COVID absences has reduced the predawn micron levels and the pass through of inflationary increases in packaging is being well executed.

All of which causes us to remain confident in the prospects of all three businesses and with that, I'll hand it over to Donald.

>>Donald LeCavalier - CFO: Thank you, Peter. Now turning to slide five of the earnings call presentation.

For the first quarter, we reported consolidated revenues of $696 million.

An increase of $68 million or 11% versus last year.

This revenue growth was driven by price increases in packaging following the pass-through of higher resin cost to our customers by the acquisitions of HS Crawford in the packaging sector, and [BGI] retail in the printing sector.

In addition, we generated organic growth in all three of our sectors.

Currency translation, mainly from the stronger Canadian dollar negatively affected revenues by $8.1 million in the quarter.

On the profitability front, consolidated adjusted EBITDA was at $89 million for the quarter compared with 1.8 million for the same quarter last year.

About half of the difference is due to the Canadian wage subsidy received in Q1 last year, which did not repeat this year.

In addition, we had a significant operational disruption related to the omicron variant in the months of December and January.

Reduce labor availability cost operating inefficiencies that led to lower profitability.

Financial expenses decreased slightly from lower debt versus last year.

The tax rate was 24.3% leading to adjusted net earnings of 35 cents per share for the quarter.

Now moving to slide six for the sector review.

In our packaging sector, we recorded our GAAP revenue growth of $40 million.

While this was mainly due to the pass through of higher resin prices. It also includes volume growth of about 1%.

This growth reflects our efforts to ensure continued supply for our customer in the face of operational disruptions from labors heart a shortage.

[The disruption] limited our revenue growth from generated a higher backlog, but generated a higher backlog. Finally, the November acquisition of H.S. Crocker contributed $15.1 million of revenues.

<unk> generated a higher backlog, but generated out of your backlog finally, the November acquisition of Hs Crocker contributed $15 $1 million of revenues.

As I mentioned earlier, the significant significant disruption from the Omnichannel variant cause inefficiency and incremental cost that had a significant impact on packaging profitability in the quarter.

In addition, we were impacted by the lag in passing through higher cost on many fronts caused by inflation.

We have taken action to solve these challenges and we expect to see positive effects during the remainder of the fiscal year more so in the second half.

On slide seven you can see that our printing sector had another strong quarter with $21 million of revenue growth versus Q1 last year.

The acquisition of [BGI] retail last year contributed $11.2 million of revenue for the quarter.

We also saw strong organic growth, especially in the in store marketing business.

Printing adjusted EBITDA for the quarter was $56.8 million compared to $61.1 million in Q1 2021.

This is a solid performance in a challenging environment considering that the wage subsidy was close to $9 million last year.

The sector's adjusted EBITDA margin for the quarter was up 19.2%, a 10 basis point improvement from last year after excluding the subsidy.

Our media business had a good quarter with both revenue and EBITDA growth.

Corporate expenses were higher than last year related to nonrecurring costs, including a CEO transition and from stock-based compensation.

Turning to cash flow, we generated $87.9 million in cash flow from operating activities before change in noncash items and income tax paid.

We had a significant working capital usage in the quarter of $64.9 million due mainly to higher inventory. We also had a higher cash taxes of [$49.4] million compared to $9.1 million in the prior year.

Our investments in Capex at $34.2 million were in line with last year.

These investments position us to capture growth opportunities and will contribute to the achievement of our 2025 sustainability targets.

Our net debt ratio increased to two three times at the end of the quarter following our capital investments.

The acquisition of H.S. Crocker and working capital requirements and lower EBITDA.

We expect the ratio to decrease back to below two times in the coming quarters.

Given our improving profitability and cash flow generation.

Despite our investments, we continue to maintain a strong financial position with over $350 million of available liquidity at the end of the quarter.

Finally, we distributeed $19.5 million in dividends.

The board decided to maintain the dividend at the current rate of 90 cents per share per year, which represents a yield of 4.5% based on yesterday's closing price.

This decision was based on uncertainty regarding the economy and geopolitical environments.

And the continued risk related to COVID-19.

As for the outlook, we are committed to deliver on full-year fiscal 2022 outlook despite this difficult quarter.

Packaging, we expect to generate organic growth in fiscal 2022.

We expect profitability to improve given the actions we have taken and the reduction in the number of [actions] related to omicron.

This will lead to an increase in adjusted EBITDA moving forward.

In print, we expect volumes to continue to recover we also expect to see continued growth in our in store marketing, both printing and other growth activities.

This gives us confidence that we should see higher revenues in fiscal 2022 when excluding the extra week of 2021.

In terms of profitability, we expect an increase in adjusted EBITDA for fiscal year 2022 compared to 2021.

This include exclude the impact of the wage subsidy and the additional week in 2021.

We expect corporate cost at the EBITDA level to be around $40 million for the year. Despite the higher amount in the first quarter.

Regarding the use of cash for the year as we said last quarter, we will continue to pursue potential acquisitions and invest significantly in our future through our Capex program.

Capex in fiscal year of 2022 is likely to be similar to 2021 contingent on the timing of key investments.

We expect our tax rate will continue to be in the mid 20. We now expect cash taxes to be closer to $80 million for the year, reflecting the higher than usual cash tax in Q1.

On that note. We will now proceed with the question period.

Matthew that Amgen Michelle.

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So they took it twice he didn't even know how I feel about how they finance lab yay. Thank you one moment, please 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 Touchtone phone.

Please for your first question.

One moment please for our first question. And our first question will come from Drew McReynolds from RBC capital markets. Please go ahead. Your line is open.

Drew McReynolds: Thank you very much and good afternoon.

A couple for me.

Obviously, a tough quarter so [inaudible]. For everyone across the board.

Oh I'm sorry go ahead.

For everyone across the board.

I guess, keeping it at a high level.

Maybe starting with you Peter or maybe Donald.

You alluded the packaging margins.

In that 16% to 17% range.

And I think everyone was certainly well aware of kind of the margin dynamics here in the near term just wanted to kind of confirm giving all of the moving parts here.

All of the well.

In terms of headwinds and what you endured through the quarter, do you see any change to kind of medium term target that you've spoken about?

Quarter do you see any change to.

That kind of medium term.

Again at the 17% level and then secondly over to printing.

You've spoken about again at the 17% level and then secondly over to printing.

Maybe if you can provide an update on just flyer volumes and dynamics, there. Again, probably an unusual quarter, giving somebody new restrictions, but you know where do we stand in terms of the outlook on the flyer side? Thank you.

Unknown Speaker: Yes, first on the margin side.

As we said many times last year.

The impact of the [risen] increase in again this quarter, we have a huge impact on the top line.

And if they get back on the bottom line, but still we have an impact this quarter. That plays against us regarding margins.

To say when we will be back at 16 will be an equivalent of making a call when the [rise in] price will go back to what it was like 18 months ago. And this is not something that we know that we are aware of to date and we won't make calls on that. But it will be all.

It will be harder and harder to see when the 16% is available what were looking forward for us now it's smart of growing EBITDA. And this is where obviously the margin is not the level we wanted in Q1, but at the end of the day is the EBIT dollars are not at the level we want in Q1.

In terms of on the printing side.

We're happy with the result that we added in Q1, but we definitely see still see some impact and we saw the impact on the omicron on the printing side also. And this is mainly on the flyer side and even on the [ISM] side.

[ISM] was good in this quarter, but without omicron, we will assure that [ISM] would have been better.

Because there were still some delays and where we have to deal with that. We had employees who had difficulties to get into the store. So we were affected on that side on the bid date, obviously, we're good overall versus last year.

But excluding omicron, I'm sure we would have been in a better position today.

Drew McReynolds: And if I can, if I could just a follow up. Just on.

Just a follow up.

Yeah.

Just on <unk>.

It's great to see you reiterate fiscal 2022 outlook.

I know with a lot of things going on globally and a lot of inflationary pressures.

He's going on globally in a lot of inflationary pressures.

It's just bringing you know.

A recession in the narrative.

Obviously, not just for your industry, but across all industries.

Can you just remind us, Donald or Peter.

We see a relatively resilient printing revenue base through the year with some transcon relative to printing peers, just remind us on the relative resilience.

On the packaging side just given.

[inaudible] Essentially a new business going through a little bit of a tougher economic cycle potentially.

Sure I'll take that one so if you look at packaging and if you look at the segments in which we participate.

They are pretty inflation, they are pretty resistant to that kind of situation.

If you look at things like whether it would be pet food, whether it be cheese et cetera.

Demand doesn't tend to change during a period of recession.

We wouldn't expect an impact on the business from a volume perspective.

Drew McReynolds: Thank you very much.

Operator: Our next question comes from Stephen Macleod from BMO Capital markets. Please go ahead. Your line is open.

Stephen MacLeod: Thank you and good afternoon, everyone.

Just had a couple of questions just on the packaging business. I was wondering if you could quantify sort of the margin.

Just had a couple of questions just on the packaging business I was wondering if you could quantify sort of the margin.

Impact difference between the resin price inflation and the production inefficiencies. Just how much of the year over year decline would have been it would have been attributable to each of those two factors.

The resin price inflation.

And the production inefficiencies just how much of the year over year decline would have been it would have been attributable to each of those two factors.

If you take only the arisen in fact, it's close to 1.5% the impact in the quarter.

Unknown Speaker: Obviously affecting because of the price increase on the sell-side and as I said a bit so there's a kind of a double in five years.

Stephen MacLeod: Right. Okay. So it's still the majority of it would have been the production inefficiencies that you realized.

Unknown Speaker: Yeah, one redemption [inaudible].

Yep. [inaudible] Don't forget there's not only the reason that is increasing right now, there's a lot of things that are increasing so but, yes.

Don't forget there's not only the reason that is increasing right now there's a lot of things that are increasing so but yes.

Right. Okay. That's helpful. Thank you.

Okay.

Okay. That's helpful. Thank you.

And then just on in terms of.

You obviously, you got a lot of price in the quarter.

Roughly I guess of the 12% organic it was kind of what kind of 11% price. I'm just curious as you've seen the resin price come off will have come off a little bit of a sort of stabilize.

Would you expect to realize a certain similar level of pricing into fiscal Q2?

What do you, could you when you said that resin prices decreasing I agree with that for some of the recent price, but what's the impact you are looking for? For Q2?

I was just trying to just trying to gather.

What the pricing impact you would expect to see in Q2 relative to Q1. I was just saying that it was so it looked like it was about 11% price in Q1 I'm just curious how you see that evolving in Q2.

Yeah, what I would say to you is if we look at the pricing.

We start to talk from a P perspective.

I think it's first important to recognize that last year was a year of massive PE increase.

And what we've seen in the beginning of this year at the beginning of a decrease from a [P] perspective.

It's important to understand that to ensure that our customers were well service.

We built inventory.

Over the last year to ensure that we're in a position when raw materials were scarce to be in a position to supply.

And that gives us some advantage and ensured we were in a good position to supply our customers. That said, the disadvantage of that was that we had some more expensive inventories and weren't able to take advantage of a decrease in raw materials a piece specifically.

In this quarter and going forward.

We would see the advantage in future quarters, assuming pricing stays the way it is.

It's also important to know that beyond [PE], we also buy other raw materials, whether that'd be polyester or foil.

And those in contrast increased.

Increase.

Significantly in the latter part of last year.

In the latter part of last year.

And their impact on us in the quarter was significant and the timing of pass throughs.

It was an impact on us in the quarter.

And beyond that, I would add it's important to appreciate that we're in a period of inflation and other items, so whether that's inks, whether that's labor.

Whether it's other consumable products, whether its electricity, we see all of those things going up and they did have an impact on us in the quarter.

So I think what's important to appreciate about the quarter.

Is that we had yet to see the benefit of PE going down.

And. I would say that we have work to do to ensure that we pass through other raw material increases on a timely basis.

I would say that we.

We have work to do to ensure that we pass through other raw material increases on a timely basis.

We have 75% of our packaging business is contracted, the 25% that's non contracted. We need to be acutely aware of increases and ensure that we pass them on a timely basis.

Okay.

Okay. That's that's a lot of great color, Peter. Thank you.

And then maybe maybe just finally.

You kind of alluded in the press release to significant increase in the demand our backlog.

I'm just curious if there's a way you can sort of frame that for us in terms of

You're seeing that in specific end markets.

And is there a way to sort of quantify what that might potentially mean in terms of volumes?

We see it in specific end markets in both print and packaging.

And what we can say is that that strength gives us great confidence that we will continue to grow.

What we can say is that that strength gives us great confidence that we will continue to grow.

Over the rest of the year.

So we had segments.

Just to give you an idea we went from backlogs of two weeks to 12.

And so we have we're in a position where we know that we have with volumes available and it's up to us to produce them on a timely basis.

Okay, that's great. Well, thank you very much, guys. I appreciate it.

Thank you.

I'm, calling in for our cobalt antisera adjacent to it twice you didn't ask I'll ask.

Again to ask a question. Please press star followed by the number one.

Our next question comes from David McFadgen from Cormack Securities. Please go ahead. Your line is open.

David John McFadgen: Oh, great. Thank you, a couple of questions.

So first of all I'm assuming resin sort of stabilizes here.

Stabilizes here.

Would you be done on the pass-throughs by the end of Q2 or do you see that lingering into Q3 and beyond?

Unknown Speaker: Assuming there are no further increases.

[We would be done] our pass throughs within Q2.

Okay. And with the price of oil skyrocketing. Do you imagine that resin will start to move up again?

And what's the price of oil skyrocketing.

Jim do you imagine that Brendan will start to move up again.

When you look. [inaudible].

Put it into software.

It doesn't really follow oil. It follows natural gas and so we'll see how the Russian situation impact that in terms of the cost. And currently, we haven't seen a significant impact and it's also important to consider that it's also a supply and demand situation.

And the expectation that depends on what happens.

From an economy perspective going forward. Should we go into recession and other areas of the economy not demand resin than resin supply will go up and pricing will adjust accordingly, so I don't want to forecast what's going to happen.

Should we go into recession and other areas of the economy not demand resin than resin supply will will go up and pricing will adjust accordingly, so I don't want to forecast what's going to happen.

But that's the key element.

From a PE perspective.

In terms of things like polyester more attached to oil.

And it has been going up significantly.

Over the past month, and I would expect.

If things continue in the way they are.

That could continue.

Okay. So we're part way through Q2.

So we're part way through Q2.

David John McFadgen: It's the packaging business already back on track now. It's you know most of the omicron absences are behind you. Is that a good way to think about it that sort of back on track now?

Unknown Speaker: But that's the way I would look at it is first.

In terms of from a sales perspective.

No, I would say we're in a much better position to supply. So yes. We're back at a point, where we have the absences at a pre omicron level of our historic COVID level.

So in terms of that. Yes. In terms of the other element, I would say is in terms of getting inflationary cost pass through.

Yes.

In terms of the other element I would say is in terms of getting inflationary cost pass through.

I think that will take us longer.

Then reestablishing our sales pattern.

So I think from a cost perspective, it will take us longer to get to where we expected our business should be.

Okay. So I mean, you talked about backlog being up quite a bit.

So I mean, you talked about backlog being up quite a bit.

So would you expect a 2022 the packaging revenue to be the same as before the Q1 experience?

The same as before the Q1 experience.

You'll make up for it in the back half of the year or do you think that it's probably going to be a bit lower than your expectations prior to this Q1 experience?

Well, we're I'd say at this point in the year, we're confident and we're committed to is ensuring that our profit for the year is better than last year's.

And our expectation is that sales will continue to grow the rest of the year year on year.

Okay. Alright.

Okay. That's it for me, thank you.

Thanks.

In this time to pay off all of the <unk> missile that point there are no further questions at this time.

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

But I'm gonna sad to see come in Latam comprehensive proposal G. Now if he does not put Powerpc peso will provide might now.

Operator: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.

[music].

The host has ended this call goodbye.

Of course, she was less.

Q1 2022 Transcontinental Inc Earnings Call

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