Q2 2022 Transcontinental Inc Earnings Call
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Welcome to the TC transcontinental second quarter of fiscal 2022 results conference call.
During the presentation, all participants will be in listen only mode.
Afterwards, we will conduct the question answer session and instructions will be provided at that time.
As a reminder, this conference is being recorded today June eight 2022.
I'd like to turn the conference over to young director Investor Relations.
And I said it like a hawk.
Right, Yeah, Yeah, how do I feel good about.
So because of that point. Please go ahead.
Thank you Julie and good afternoon, everyone.
Welcome to the piece of cough cold snap out of second quarter 2022 results conference 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 our prepared remarks are all available on our website.
Under the 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, Peter Bruce and Chief Financial Officer.
Before I turn the call over to management I would like to specify that this conference call is intended for the financial community.
You are in listen only mode and should kind of tackling that.
Senior adviser corporate communication.
Emission or interview requests.
Please be reminded that some of the financial measures discussed over the course of this conference call are non linear for us.
You can refer to the MD&A for a complete definition and reconciliation of such measures.
In addition, this conference call May also contain 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 Bruce.
Thanks, Yeah, good afternoon, and thanks for joining our call.
First from a safety perspective, we were pleased to see our 12 month rolling injury rate decreased by 7%. The team continues to assess manufacturing risks trane co workers and regularly communicate our commitment to an injury free workplace.
In terms of financial results, we were encouraged by the quarter. Following a disappointing Q1, where <unk> had a significant impact on our ability.
Our operations ability to supply and manufacturer efficiently.
And we're a lag in the pass through of inflationary increases had a negative impact on packaging financial performance. The team took actions to improve.
Packaging is Q2 performance was solid.
Benefiting from the team's work to ensure a secure supply of raw materials and open communication with customers. During Q1 struggles sales increased with particularly strong growth in meat and cheese.
Profit increased due to the volume growth. Although this was partially offset by the lag in inflationary cost pass throughs to be clear earnings increase each month and the full benefit of inflationary cost pass throughs will be seen in Q3.
The R&D and commercial teams continue to progress and commercialize recycle ready post consumer recycled and can possible solutions.
We continue to commercialized PCR shrink films across our beverage customer base and.
And recently closed the deal to supplier Fem care packaging with PCR content to a major F. M. C G company.
We can be proud of the solid growth achieved by our print business.
It was disappointing not to see it convert to the bottom line.
As the in store marketing business moved to absorb a 22% organic increase in sales profit was affected by three elements first the team was behind in passing through raw material and freight increases.
The business experienced manufacturing inefficiencies related to Onboarding, new customers and lastly, we grew indirect costs needed to absorb smoothly volume increases anticipated in H two.
Having visited the ISR plants in May I was pleased to see the teams actions to ensure cost have been pass through and to ensure volume growth in Asia too is accretive.
Yes.
Confirming our ability to grow newspaper.
And the Flyers remain a vital part of advertising retail sales, we were pleased to finalize a deal to print two major western Canadian newspapers and to profitably extend a significant agreement with a major retail customer.
Our media business was in line with our expectations.
More time I spend with the team the more impressed I am by the quality of our management and the quality of learning tools, we provide the teachers and students. This is a business we should grow and the acquisition of <unk> further supports our customer offering by expanding our digital portfolio.
In conclusion I appreciate the work the team.
<unk> has done to address the issues, we faced at the beginning of the year as well as the actions we've taken to continue to improve.
It gives me confidence that we're well positioned for the second half of the year.
And now I'll hand, it over to Dino. Thank you Peter moving to consolidated numbers on slide five of the earnings call presentation for the second quarter of 2022, we reported revenues of $623 $3 million, an increase of $92 million or 15% versus the last.
Period last year.
This revenue growth was driven by higher volume in our two main sectors and by price increases following the pass through of higher raw material and inflationary costs to our customers and by acquisitions.
Hs Crocker and packaging, pgi retail and printing and call out and media.
On the profitability front consolidated adjusted EBITDA was $103 $6 million for the quarter.
<unk> with $109 $4 million for the same period last year.
This decline of $5 $8 million was mainly due to the Canadian a wage subsidy of seven $5 million received in Q2 last year, partially offset by higher volume in our two main sectors and by the acquisitions I referred to earlier.
Corporate cost declined from a lower share based compensation expense due to the share price.
Despite lower interest rates on our debt financial expenses increased slightly mainly from a currency loss.
The tax rate was 23, 1% leading to adjusted net earnings of <unk> 48.
Per share for the quarter.
Now moving to slide six for the sector review.
In packaging, we recorded organic revenue growth of $55 million. This growth was mainly due to the pass through of higher raw material prices and other inflationary costs. In addition to volume growth of about 5%.
In the face of continued supply chain challenges, we remain focused on ensuring continuity of supply and on supporting our customers growth.
<unk> this level of volume growth reflects the solid demand for our products.
Finally, the acquisition of Hs proper early in this fiscal year contributed $19 million of revenues in Q2.
In terms of profitability adjusted EBITDA and packaging grew by $3 $2 million or six 5% as the pricing actions, we have taken allowed us to mitigate higher cost.
The increase also includes higher volume and the contribution of $1 $5 million from the Hs Crocker acquisition.
When compared with Q1 2022, adjusted EBITDA grew by $13 $5 million, highlighting the effects of higher volume and the benefits of the actions we implemented.
On slide seven you can see the printing at our fifth consecutive quarter of organic growth with $15 million of revenue growth versus Q2 last year.
The growth came mainly from our in store marketing and book printing businesses, where we saw double digit growth and to a lesser extent from the pass through of higher raw material prices and other inflationary costs.
In addition, last year's acquisition of <unk> retail contributed $9 million of revenue for the quarter.
Printing adjusted EBITDA for the quarter was $54 $7 million, which was below the $67 $3 million in Q2 2021.
The decline was mainly due to the $7 million in wage subsidy, we received last year and from the lag in recovering inflationary cost increases.
The decline is also related to the additional cost in our in store marketing activities related to on boarding new business and building capacity to further grow.
<unk> adjusted EBITDA margin for the quarter was at 18, 7%.
Turning to cash flow, we generated $106 million in cash flow from operating activities before changes and our noncash items and income taxes paid.
In line with last year at $106 $1 million.
We continue to maintain higher inventory as we prioritize the security of our supply to support our customers' growth.
Consequently, we had a working capital usage in the quarter of $16 $5 million versus a usage of $9 $2 million for the same quarter last year.
Cash taxes were at $15 $1 million compared to $13 6 million in the prior year.
Our investments and Capex at 30, $34 8 million.
We're in line with our expectations.
These investments are key to capturing growth opportunities.
At the end of the quarter, our net debt ratio was at 235 times similar to the previous quarter at 234 times as we use the cash flow from operating activities to finance, our capital investments and the acquisition of <unk> and our media sector.
We continue to expect the ratio to decrease back to around two times in the coming quarters, given our improving profitability and free cash flow generation.
Despite our capex and other investments we continue to maintain a strong financial position with $407 million of available liquidity at the end of the quarter.
Finally, we distribute at $19 6 million in dividends.
As for the outlook, we are starting to benefit from the positive impact of pricing and other actions taken in the last months to improve profitability.
And we are encouraged by the results. We look forward to improved second half of the second year and remain committed to deliver on our fiscal year 2022 outlook.
In packaging, we expect to generate organic growth in fiscal 2022, we also expect profitability to improve in the second half of the year.
And print solid growth is coming from our ISN book printing and pre media activities, and we expect higher revenues and higher adjusted EBITDA and <unk> <unk> in fiscal 2022, when excluding the 50 <unk> week of 2021 and the impact of the wage subsidy.
We expect corporate costs at EBITDA level to be around $40 million for the year.
Regarding the use of cash for the year, we will continue to invest significantly in our future through our Capex program and pursue potential acquisitions.
As mentioned as mentioned last quarter Capex in fiscal year 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 <unk> and we expect cash taxes to be close to $80 million for the year, reflecting the higher than usual cash tax in Q1 2022.
On that note we will not we will now proceed with the question period.
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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 telephone keypad.
One moment. Please for your first question.
Our first question comes from Samir Patel from CIBC capital markets. Please go ahead. Your line is open.
Hi, good afternoon Peter.
Peter on the printing side, just given some of the large cost increases youre, having to pass along to your customers or are you starting to see any signs that those customers might be looking to reduce page count or circulation.
Thanks for the question.
Let's say so first from a print perspective.
Our paper prices are locked in for significant periods of time, so it's not something where we're seeing a huge inflation from that perspective, so when we're talking about inflationary price increases.
And the importance of passing through freight.
It's more in the <unk> book side of the business.
Where.
Where it's not contracted to the same level.
So in terms of changing page count or or changing number of the amount of circulation.
It's not something that's being impacted by.
By any change in pricing.
Hey, Peter Thanks, Thanks, that's helpful.
I guess I'm curious, though.
Newsprint side, how long does that contractual protection last because we have seen in the spot market, a very significant move higher and in pricing for graphic papers.
Yes, good question.
Period will be renegotiating that in the new year.
So we're positioned to continue the year well.
And in terms of general inflationary increases.
They adjust to contractually, but it depends on the timing of customer contracts.
Okay. Great. Thanks, that's helpful and just last question I had was again about some of the pass throughs across across the business are there any caps on inflation in some of those arrangements.
If so how meaningful are those and what's the sort of timing as to when you can maybe adjust those.
At renewal.
So yes, there can be caps.
On the rates.
And currently as we renegotiate contracts, we're really looking at those caps and reviewing them to make sure that they reflect the current environment.
Without the caps are mostly on the printing side of the business by the few thing of their contract.
We did talk in deposits about the pass through clauses that we have in contract on the packaging side. Most of the data caps will therefore increase the only impact we will receive will be related to the timing of months before we can pass this increase to the volume.
Okay, great. Thanks, Thanks, Rob that's all I had I'll get back in the queue.
Thanks.
Our next question comes from Mark Neville from Scotiabank. Please go ahead. Your line is open.
Hey, good afternoon.
In terms of the pricing adjustments and packaging.
I was just curious trying to get a sense of where you're at.
You're sort of fully fully caught up.
Sure.
And you sort of see the full benefit fiscal Q3 or if this takes a couple of more months sort of its a Q4 event just trying to get a sense of where.
Thats all.
So yes.
There are a lot of raw materials, but we're focus let's first talk from our polyethylene perspective, and polyethylene went up significant loss last year.
Big flat for a bit declined slightly and now has gone up slightly.
And in the last two months is kind of maintaining flat.
So from a polyethylene perspective, you can look at it is its been absorbed by the business and fully pass through and as we move on into Q3s.
We're good.
What we saw in Q1 that was important is that a non contract fuel side of our business.
And a specific segment, we havent passed through significant.
Significant increases we had seen in polyester.
Team was behind in doing that.
So there was action taken at the end of the quarter.
To move at all.
Part of that benefit.
In the current quarter, but we will see the full benefit of reacting to that in Q3.
I would also add from an inflation now we've been talking about raw materials from a packaging perspective, and contrast of print wear.
There can be a CPI index in most contracts in packaging you don't usually see.
Increases for outside raw material inflationary increases and what we have been doing is moving into the market and doing outside of contract inflationary cost increases.
The results of which we saw partial benefit.
In Q2, and we will see full benefit of that in Q3.
Okay.
These cost increases.
Outside of raw materials, I assume you mean freight labor energy.
Yeah.
Would that be.
I'm, just curious sort of basis.
It's fairly easy environment to push that through but just sort of curious as customer reaction.
I think that.
I think first what I'd say is that.
For all of US both customers and ourselves we havent seen inflation like this in 40 years.
So I think as a result.
We initially were slower than we would've liked to react to it I think customers are also experiencing.
The same inflationary environment and as you and I experienced when we go to the grocery store.
You can see that our end customers are pushing through inflationary increases to the consumer.
Yes.
Got it.
Maybe just in terms of you mentioned in the prepared remarks Peterson.
New contracts in print.
I'm just curious.
Will they all be incremental.
If there are some rough numbers you could maybe help us with in terms of <unk>.
Sales dollars or anything that you can help us with there sure.
Sure. So so first the reason I talk to are twofold. One is that when I started working with the team.
I really felt that we should be the last people standing.
From a newspaper and Flyer perspective in Canada.
Of an exceptionally strong base.
And for me.
We arent a lot of our strategy was to be the last people standing and we're not the last people standing and so the challenge to the team has been we still have the opportunity to grow newspaper instead of talking about something that's shrinking and so the reason I highlighted getting a couple of newspapers.
They are important newspapers and we secured base business in addition to growing.
And the materiality of it frankly is is not substantial.
That said, it's an indicator to the team of what we're capable of doing so yes its accretive.
But it's measured in under $5 million in EBITDA.
That said.
It indicates our capability of continuing to grow and it reminds the team of the importance of growing.
From a retail perspective, we're talking about an account that's that's more than a $100 million of years $100 million a year in sales.
And we were able to profitably grow with the account.
Okay.
Thank you.
Our next question comes from Adam Shine from National Bank Financial. Please go ahead. Your line is open.
Thanks, a lot and good afternoon.
Obviously Q1.
<unk> had a lot of pent up demand. It seems like you work through a lot of the backlog I guess is a better expression into the Q2 <unk> can you speak to some of the evolving demand going into the second half to sort of line of sight.
Perhaps the presumption.
Is that maybe not necessarily 5% volte.
Volume growth in the in the <unk>, but certainly something.
Nicely robust in the low single digits, and then I'll follow up with something.
So so yes, yes, yes, there was a backlog and so in certain segments coming out of Q1.
And we continue to see a backlog.
That said I think to say that we'll continue at 5% I wouldn't want to put you on that journey, I think saying that we'd be at 2% to 3% makes more sense going forward.
But really pleased.
With the work the team has done.
The interactions they have with our struggles in Q1, the directness direct communication with our customers that that was excellent.
And the result is we're being compensated by continuing to see increased volume. So still a lot of work ahead of us So I don't want to portend.
That it's an easy environment in terms of having access to raw materials in terms of absorbing the growth. We currently see.
And.
No.
We expect to continue to see growth the rest of the year and I think the team has positioned itself well to grow.
How much of a dynamic is shrimp inflation.
In terms of the business and you need to perhaps adjust to.
Changes in sizes of packaging that are being demanded by by certain customers certainly not all.
We.
This isn't something of significance that would be impacting our business. So right now.
Our focus is primarily on.
Moving to sustainable solutions, but in terms of downgrading of package I mean, we're always working to down gauge of package, but in terms of actually shrinking the scale and seeing that as being a negative impact on our business is not something that we're seeing today.
Okay, and just lastly in terms of <unk>, obviously, we had some news flow during the period, but maybe you could just talk to sort of the volumes continuing the distribution continuing and perhaps any.
So next steps potentially maybe a little premature nonetheless, but.
Any quick comments around could be sac.
Sure.
No.
It could be affecting our distribution of suppliers in Quebec.
And there was a.
City called Mirror Bill.
Outside of Montreal.
Sure.
They suggested.
Put in legislation.
Requiring customers to more consumers to opt into in order to receive Flyers, we are challenged in court.
The court favor against us.
We will be appealing that.
And what date in the next few days, we will appeal that decision.
That said what I am extremely proud of is that the team. The decision was made on a Wednesday.
And the team was able to supply our customers.
Flyers to consumers without any delay the following week. So there was no change in our service.
And it was completely smooth and I think it's something the team should be exceptionally proud of.
If I look at it going forward and legislation that's been put in place in Montreal.
The team had been challenged.
To grow our flyer business.
Given that the flyer is exceptionally important as a marketing tool to our customers and in an inflationary environment is exceptionally important to consumers.
And so the team had been challenge when we look across Canada outside of Quebec, We've seen a decline in fliers as we've seen the newspaper distribution decline.
And so the challenge for US has been well, we don't want to bid.
Become.
Massive distribution company across Canada, we do want to make sure our customers have the ability to to get Flyers to consumers.
Wherever they may be.
Because it's key to them.
So the team has been working for for over <unk>.
12 months now on how we can increase.
Distribution outside of Quebec.
And the work that they've done.
<unk> us really well.
As we look for alternatives should we need alternatives typically sac.
We're well positioned.
Two continuing to continue providing the service to our customers. So.
Really pleased about what happened in <unk>.
Really pleased.
At the progress the teams do it.
And we are committed to ensuring that our customers will continue to be in a position to flyers to consumers and consumers will have access to this important.
Okay.
Thanks, a lot Peter I appreciate it.
Our next question comes from Scott <unk> from Cormack Securities. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my question.
In your prepared remarks, you talked about the packaging segment experienced a 5% volume growth from new business.
Just taking a little bit deeper into this how is the pass through mechanism on this new business and.
You also talked about some of.
So on the pass through of this inflationary costs being passed onto the customer at the end of the quarter. So can we expect to see the packaging segment sort of returned to normalized EBITDA margin level in the 14% to 15% range in the back half of the year.
Maybe just to make sure when you had mentioned as Donald's speaking to the volume of 5% in the past when.
When we said volume about 5% this is excluding fast stream so.
It's pure organic growth over the past few years.
Part of the 5%. So this is real organic growth.
And Brian .
Yes, okay.
Yes.
Regarding margin before I, let theater.
Finishing up for your question.
If you look at the impact of all the increases we had to put on the pricing regarding inflation of raw material increases.
Margin it will be it.
It will be tougher to evaluate the margin in the future quarter because it does play with obviously all the increases we are adding to our client in the reported margin is not the best way that we track growth it will be a pure EBITDA my comments, when we say we should be better than last year was regarding the <unk>.
<unk>. This is this is where we're looking forward for the rest of the year I'll, let Peter complete the answer.
So when you ask about the 5%.
I understand the question the 5% growth is as pure organic growth in the 5% growth.
Is it pricing that reflects.
Current raw material price prices and the current inflationary environment.
In terms of the impact of inflationary pass throughs in some of the raw material increases that took place for one one specific segment, where we were slow to move on polyester.
That was done at the beginning of the quarter.
Of Q2.
The full impact of which would only be seen in Q3.
But thats specific to apollo's polyester issue and it's specific to inflationary increases.
Okay. Okay. Thanks, that's helpful and then maybe one for one for Don.
Inventories rising during the quarter is there something to unpack here in terms of stocking up or is it just inflationary.
To avoid any push shortages or and how does this play into your Cogs in the following quarters.
Well it is first inflationary when you got there to last year, because with the huge increase we add and as also that for some product specific product we want to protect ourselves we have a lot of growth on the sales side and we want to make sure that some of our raw materials or other products are available. Therefore, we we build a little more in the inventory.
Is something obviously, we track with the team will make sure that to be as much possible efficient we're confident.
To see some improvement over the rest of the year, but also that will depend on where the pricing on the raw material will go and this is something that we cannot have any view as we speak right now.
Okay.
Okay Alright. Thanks, that's it for me I'll pass the line.
Thanks.
The venetia colgan with Abbvie, because you'll still be in Montana.
Actually so it was CBD and you May go ahead, ladies and gentlemen, if there are any additional questions. At this time. Please press star followed by the number one.
And we do have a question from drew Mcreynolds from RBC capital markets. Please go ahead. Your line is open.
Yes, thanks very much good afternoon.
On the retail flyer side, just with existing major retailers, we havent really talked about just coming out of Covid here in reopening just what some of the trends.
Youre seeing in that core business. So if you can provide an update there that'd be great and then secondly, maybe for you don't know.
I noticed.
In the other revenue category it was certainly well.
Below what I was forecasting and I know, it's not a big number but it does speak to inter segment.
Items.
Impacting that is that something you can just quickly address here or otherwise we can take it offline. Thank you.
I'll start by answering the question in terms of circular volume in terms of the circular volume what I would say to you is it's holding steady.
So.
We haven't seen a significant change.
On year in overall circular sales.
And and.
And we continue when we interact with our customers.
It continues to be a key part of how they view marketing.
And so the interactions with our customers indicate that.
10 full benefit when you use.
Printed flyer as opposed to a digital one.
So the return substantial for them.
And it's something that remains important for them going forward.
As far as far as your question.
It's mainly transaction between our printing group and our media group as you're aware, we print most of our books that.
We publish on the patient side. So it's more transaction for that group during that period, we're still building inventory for an immediate move.
Okay. Okay got it thank you and maybe one last one.
Peter you had.
Called out meat and cheese within packaging is certainly.
A particularly strong category more broadly across the different subcategories that you.
You do packaging in.
Are there any other.
Kind of trends.
To flag on that either either kind of pockets of softness still or are there pockets of strength or is it.
Meat and cheese, particularly strong and then.
Nothing really notable across the rest of the categories.
I guess it was pointed out because it was the most significant.
I'd say that.
Meat and cheese, particularly in sheet is strong.
Beverage remains strong, especially with the work we're doing from a post concert.
Post consumer recycled content.
Strength there.
I'd say, the only only part of the business, where we're experiencing some weakness.
It's from a Latin American perspective.
You'll appreciate.
Given the circumstance in the Ukraine.
That there is.
8% of the world's consumption of bananas is in Russia.
And 25% of an Ecuador does <unk> quarter, a primary exports to Russia 20.
25% of their.
Their production or their exports.
It goes to Russia, and that caused banana prices to be impacted.
And there to be pressure.
On the.
The Latam so the banana banana packaging side of the business. So theres some pressure there.
It's not.
It's not massive but it is something to be aware of so if I'm looking at it from a pure growth perspective that part of the business.
It is relatively flat, where we would've expected more growth.
Got it thanks for that added color. Thank you very much.
And as Tom the Pf Alta Castillo Mr that point there are no further questions at this time.
So thank you everyone for joining us today on our call and we look forward to speaking to you soon.
Madame Jimmi Sue.
Ladies and gentlemen that teleconference ask Paul.
Yes, he does.
How PC Pascal.
Okay.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating you may now disconnect your lines.
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The host has ended this call goodbye.
Hello, everyone.