Q3 2022 Transcontinental Inc Earnings Call
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Welcome to the TC transcontinental third quarter fiscal 2022 results conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct the question and answer session and instructions will be provided at that time as a reminder, this conference is being recorded today September seven 2000.
And in 'twenty two.
And I would like to turn the conference over to Mr. Young Lapointe director of Investor Relations, Jim, but I might not let that whole atmosphere.
Director of Atlassian, because I've asked Dr. Michelle point. Please go ahead.
Thank you Sylvie.
And good afternoon, everyone.
Welcome to our third quarter of fiscal 2022 earnings call.
Before we begin please note that the press release, the MD&A, along with complete financial statements and related notes as well as the slides supporting managements remarks are all available on our website.
Www Dot piece teed up under the Investor Relations section.
A replay of this conference call will also be available on our website shortly after the call.
We have with US today are president and Chief Executive Officer, Peter Bruce.
And our Chief Financial Officer.
Got it.
But before I turn the call over to management I would like to specify that this conference call is intended for the financial community.
If you are in listen only mode and should contact Natalie.
Advisor corporate communication for more information.
Please be reminded that some of the financial measures discussed over the course of this conference call are nanay apart.
You can refer to the MD&A for a complete definition and reconciliation of these measures to ifr.
In addition, this conference call might also contains 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 our fiscal 'twenty or 'twenty, one annual MD&A and the annual information form and in the latest quarterly report.
With that I would now like to turn the call over to our President and CEO Peter Brook.
Thanks Shannon.
There's a lot to us.
Okay.
Good afternoon, and thanks for joining our call.
First from a safety perspective, we were pleased to see our 12 months rolling injury rate decreased by 15%.
Our team is committed to creating a culture to achieve an injury free workplace.
Second we have announced today the retirement of Bryan Murray after an outstanding career at Juicy.
Brian I know you're on the line is not cool.
On her on behalf of her family and the Board joins me in thanking you for an exceptional contribution over more than four decades, you're a truly great leader.
With Brian's retirement comes the opportunity to grow three talented leaders.
<unk> October 31st Nick Cannon pad Brailey, and she hasn't been all shop will take on expanded printing sector leadership roles reporting to me and joining the company as Executive Management Committee.
These changes will allow me to work more closely with the print team and support their drive to profitably grow our business.
Turning to Q3 financial results, we continue to improve.
Despite the triple challenges of inflation and supply chain issues and a tight labor market. We saw an increase in both revenues and profits I'm proud of the actions taken by the team to improve our financial performance.
And our packaging sector.
We continue to invest in new equipment and innovation to offer sustainable solutions to our customers additional volume as well as our actions to offset cost increases contributed to significant organic growth and profits.
Sales were up in all of our businesses, except our Latin American activities, which were affected by the Ukrainian conflict negative impact on the banana industry.
And our printing sector organic growth was again driven mainly by our in store marketing book printing and pre media activities.
While the sector experienced inflationary increases these were felt more strongly in our distribution business.
And our media sector.
We had a strong increase in both revenues and profits.
This increase was due to the timing of the FTE transaction combined with the seasonality of the business.
In closing our financial position remains solid we have no major debt maturities until 2025.
This gives us the flexibility to pursue our disciplined approach to profitable growth.
I appreciate the team's work to improve our performance and I'm confident that we're on the right path for Q4 and are setting the foundation for future success.
Now I'll hand, it over to that out.
Peter.
First I would like to Echo your words about Brian .
Standing leadership and I wish him the best in his retirement.
Moving to consolidated numbers on slide five of the earnings call presentation.
For the third quarter of 2022, we reported revenues of 747 $8 million, an increase of 20% versus the same period last year.
This revenue growth was driven by price increases following the pass through of higher raw material inflationary costs to our customers.
The acquisitions of Hs, Crocker and banner plush and packaging BJ Pgi.
Retail and printing.
And called out in media and lastly, higher volume in our three operating sectors.
On the profitability front consolidated adjusted EBITDA grew by eight 4% to one $113 million for the quarter.
Excluding the Canadian wage subsidy up $9 $2 million received it in Q3 last year.
Performance represents a 19% adjusted EBITDA growth the.
The increase.
It was mainly due to the acquisitions the IR volume mentioned earlier and the pass through of inflationary costs. We also benefited from a $2 $3 million positive variation in exchange rates.
Financial expense decreased by <unk> three.
<unk> 3 million to $9 8 million.
<unk> rate was up 29% leading to adjusted net earnings of 57 per share for the quarter compared to 51 for the same quarter last year.
Now moving to slide six for the sector review.
In packaging, we recorded organic revenue growth of $47 $7 million.
This growth was mainly due to the pass through of IR raw material prices and other inflationary cost.
In addition to volume growth of approximately 4%.
This was a strong performance in light of continued supply chain challenges excel.
Except for our Latam business, which was negatively impacted by the war Ukraine, we saw volume increases in all of our markets.
In addition, the acquisition of Hs <unk> and banner plus contributed $20 million of revenues in Q3.
Lastly, positive exchange rates added $11 $4 million.
In terms of profitability adjusted EBITDA and packaging grew by $10 $1 million or 24% as a result of the positive impact of pass through of ire raw material and other costs and also higher volume.
Excluding the positive contribution of $2 $1 million from our acquisitions and one six from our exchange rate adjusted EBITDA grew organically by 15%.
On slide seven you can see that printing at a sixth consecutive quarter of growth with 21 $28 million of organic revenue growth versus Q3 last year.
This increase came from our in store marketing.
Both printing and pre media activities.
These segments generated double digit growth in the quarter shook out seeing the significant opportunities.
As we continue to adapt our portfolio of activities. These segments now represent a third of our sectors revenues.
Finally.
The acquisition of <unk> in Q3 last year and the pass through of higher raw material prices and other cost also contributed to the revenue increase for the quarter.
Printing adjusted EBITDA was $52 $3 million for the quarter.
The decline was essentially due to the $9 $1 million in wage subsidies, we received last year.
Excluding the subsidy adjusted EBITDA for our sector increase with volume growth offsetting the negative impact of inflation.
Higher fuel and labor cost had an important impact on our distribution activities.
The sector adjusted EBITDA margin for the quarter was up 18%, reflecting the dilutive effect of pass through of IRA costs due to inflation.
In our media sector. The highlight was the acquisition of <unk> in June .
This acquisition contributed to a solid quarter with significant revenue and EBITDA growth.
Corporate expenses were lower than last year, due mainly to lower stock based compensation cost.
Turning to cash flow, we generated $113 $4 million in cash flow from operating activities before change in noncash items and income tax paid an increase of <unk> $12 million versus the same quarter last year.
The increase was more than offset by a $47 million of working capital usage due to significant revenue growth.
Cash taxes were at $17 $2 million compared to $10 $3 million last year.
Our investment in Capex at $39 $2 million were lower than the $45 3 million last year, but in line with expectation.
At the end of the quarter, our net debt ratio was at 251 times slightly above the previous quarter at 235 times.
The increase is mainly due to the acquisitions of SP and Burnett Plaza in the quarter.
We continue to expect the ratio to decrease back to around two times in the coming quarters, giving our improving profitability and free cash flow generation.
As a reminder, we have no simply became significant debt maturities before February 2045, thanks to proactive refinancing.
Despite our growth Capex and other investments we continue to maintain a strong financial position with over $310 million of available liquidity at the end of at the end of the quarter.
Finally, we'll distribute at $19 $5 million in dividends to our shareholders.
As for the outlook in packaging, we expect to generate organic growth and improve profitability in fiscal 2022.
And Brent when excluding the 50 <unk> week of 2021, we expect higher revenues in fiscal 2022, following the solid growth from our <unk> footprint and premium activities.
In terms of profitability, we expect adjusted EBITDA in fiscal 'twenty two to be similar to fiscal 2021, when excluding the 50 <unk> week and the impact of the wage subsidy last year.
We expect corporate cost at the EBITDA level to be around 40 million for the year.
In terms of capital allocation, we expect Capex in fiscal year 2022 to remain in line with 2021 contingent of the timing of key investments.
Finally, keep in mind that last year at an additional week that will not reoccur this year.
On that note. We will now proceed with the question period.
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Thank you.
Ladies and gentlemen, we will now conduct a question and answer session. If you have a question. Please press star followed by one on your Touchtone phone.
You'll hear a tone acknowledging your request your questions will be pulled in the order they are received.
<unk> you lifted the handset if youre using a speakerphone before placing any keys.
One moment. Please for your first question.
Which will come from Adam Shine at National Bank Financial. Please go ahead.
Thanks, a lot good afternoon, Peter a couple of questions for you starting with the packaging and some of the success you're seeing.
The pass through mechanisms, obviously progress was witnessed in Q2 further momentum into Q3 can you talk about any further progress to be expected going into Q4 and along those lines are you seeing any easing of.
Some of the pressures be it supply chain inflation or or resin.
And obviously acknowledged the fact that some of your inventories are certainly sitting there at higher price points can be passed on but maybe just speak to some of that and then I'll follow up with something on printing.
Sure.
Thanks, Adam.
In terms of pass throughs.
Youre right, we came slides the gate in certain segments.
Of the business in Q1.
And we've worked extremely hard to ensure that not the case the rest of the year.
I would say that in terms of raw materials.
We are in a solid position in terms of being level with where we should be in terms of inflationary cost pass throughs. We have worked with our customers to ensure we're doing that on a timely basis.
If I look at in terms of going forward.
As a general statement.
Raw materials like P/e.
It is not something we guess too but at the same time I anticipate.
Small decline.
Given that there's been capacity two crackers that have come on.
In Q4.
Said another older piece of capacity has been taken out.
And given where we are in the economic cycle.
We expect to see some decrease in the pricing and Youre right. We would have existing inventories that said I think it's important to say that while it's a much smaller portion of our buy.
So less than 30%.
When youre looking at things like foil.
The situation in Europe and energy.
And though you would see <unk> going down the actual converting a foil remains at a high price.
Specialty resin grades continue to go up so it is not.
It's not a simple answer, but our biggest raw materials certainly.
Going down slightly.
Right now.
Okay, and then just turning to printing.
Jens if you adjust for I guess the absence of Qs.
Stepped down a little bit and part of that was certainly the <unk>.
Strength, you saw us at the top line.
As it regards to perhaps some success you were having on the pass through which perhaps compressed margins a little bit and I think as you alluded to.
There were some distribution costs be it fuel that would have.
Added to a bit of pressure there can you talk about that dynamic going into the Q4, and obviously you guys have historically been pretty good in regards to finding efficiencies across the printing sector, but so maybe just speak to that in terms of any stepped up activity related to that going into Q4, and perhaps into next year.
From a print perspective, I think the team's done.
Phenomenal amount of work to ensure.
That inflationary costs are pass through on a timely basis.
You'll also recall that we.
We tend to have based contracts as it relates to our classic businesses of newspaper Flyers.
That we're able to keep paper prices relatively constant for long periods of time.
In terms of that said I think it's important to recognize that.
Inflationary costs are pass through that does increase the cost for our customers certainly retail customers, who are fixed marketing budgets.
I don't expect it to be significant I recognize that that can have an impact on volume going forward.
So I would say to you that the team has done a fashion nominal job and really pleased with the quarter in terms of that from a distribution perspective, you're exactly right.
That debt.
Added labor and Ah and gas costs are such that.
We are less able to cover those costs.
Maybe just one for for <unk> in the Q2. It was highlighted that there was some investment spending related to the ramp upwards.
Newer ASM contracts nothing called out for Q3. So can we just confirm that there was no sort of investment related.
Buckets of spending of any materiality.
Worth highlighting.
We saw da Vinci in Q3, better better margin on this part of the business and that was the plan. So Q1 was tougher because a lot of the new business started who came in Q1, we invested in Q2 to be able to face a very busy fall season, and we like what we saw during the third quarter. So yes.
Yes.
Okay. Thanks, I'll leave it at that I appreciate it.
Thanks, Scott Thank you Mitch.
The question. The next question will be from Gabrielle Nicholson at CIBC World markets. Please go ahead.
Hi, everyone. Thanks for taking my questions. My first one here is for Peter in regards to using Canada post for probably sack deliveries going forward. How much do you anticipate the cost of delivery will increase and how do you think that will impact margins.
And then I'll follow up after that.
And thanks for your question I think first I would start by sand and we remain committed to the flyer.
I said last call, but I think it's worth repeating that the sustainability of the product and the circular nature of the product is important.
Over 90% of the product as part of the circular economy. When we look at its impact and the saving that has on families very inflationary periods I think it's important.
550, <unk> hundred dollars.
For our family of year.
And then it's the most efficient marketing tool for our retail customers. So we remain committed.
And the team is looking at all kinds of alternatives going forward and I know, they're working exceptionally hard.
And we're not committed to a single alternative.
So what I would tell you is we're working hard and I'm confident in our ability to serve our customers and consumers needs well into the future.
Okay, great. Thank you.
And then second turning to the other segment do you expect to see similar a similar level of contribution from the E. R. P. I acquisition in Q4 as we saw in Q3.
Yeah.
We need to model that.
The <unk> system.
The beauty is is aligned with our current media business and you can see that third and fourth quarter represented a very high volume of EBITDA. So therefore, yes, we're very satisfied with the numbers in Q3.
The dollar amount of lives that they will be 12 months like the month. The first month, we had following the acquisition of SP will be aligned with the current business that we have an indication.
Okay, great. Thank you and then last one here for for I don't know.
Given the M&A activity, we've seen this year, how are you thinking about capex going into 2023.
Well, we're still working on our plan. So there is nothing establish yet for sure we have commitment regarding some of the important investment we're making right now for the sustainability side of the business.
Well we of course are aware of the current pandemic conjecture, and we will make the right decision to protect the balance sheet, but at the same time, we will make the right decision to go to grow to grow the business. So.
We've been active you're right in the last 15 months or so with five acquisition with acquisition.
But.
The markets well.
Create some opportunities, but we'll do it with the same discipline with it in the past having in mind the current file.
Economy condition in the market right now.
Okay. Thanks, very much I'll turn it over.
Thank you.
Betsy.
Your next question comes from Mark No at Scotia Bank. Please go ahead.
Hey, good afternoon, guys. Thanks for the time.
Maybe just follow up on all the price increase.
Metairie.
In terms of raw materials raw materials, I guess inflation in general.
Are there more is there still more price increases that you're pushing through or passenger or need to pass through or at this point or are they largely put in place.
I would say inflation continues to rise and and in terms of so in terms of general inflation yet.
And in terms of Theres, some raw materials that have continued to go up where there would be.
Pass through that remains required.
And that said as I was saying.
Adam earlier.
Our biggest raw material is currently leveling off or declining, but there do remain increases that needs to go through.
Got it.
And I guess just in terms of.
The margin percentage.
I guess I'm less concerned about the percentages or dollar amount, but just I guess just by way of Bath, just given all the inflation thats gone through the business.
Should we the merger percentage should we think about a slightly lower percentage than where it was the business was maybe two years ago, just again, just give us a path.
Oh for sure or shirt business.
I guess third quarter, if you look at packaging right now, we increase or better bye.
A large amount of $1 and you see the margin that is almost flat. So that's not an issue with the mix of product the biggest issuing our guidance is the impact on the inflation.
So if you look over the last two years with the increase we have on raw material and all other.
Price increase we are linked to inflation.
For Oh.
More than 100 basis points.
Margins increase.
Yes.
To your question.
Sorry, you said 100, roughly 100 basis points for operation.
At least if I compared to last year, we're probably more than 100, and if we go back to two years that will be another side, but obviously to make it significant for sure remember we were at.
These forward closer to 15%, it's not like to change the mix of product that much into that.
Level, so the biggest impact.
<unk>, an increase of raw material.
Yes, yes.
In terms of the outlook.
Correct me, if I'm wrong, but I think the expectations for print being.
Being flattish.
Down a bit from prior I think prior was that it would grow and as I.
I guess my question is is the difference there just again all the inflationary cost distribution would that explain the difference.
I think the way you should look at it as well.
When we look at the pass through of inflationary cost that could have an impact.
On the.
The fire side of the business.
In terms of volume.
And obviously the distribution side of the business in terms of costs.
Okay got it alright.
Alright, Thanks, a lot.
Well, thank you Marci <unk> at Cowen <unk> Company. Please go ahead.
It was all right.
So Lucy Sousa, let folks youll, mainly because the cost you guys have thought of other please relay to us ladies and gentlemen, if there are any additional questions. At this time. Please press star followed by one as a reminder, if you're using a speaker phone. Please lift the handset before pressing any keys.
The question. Your next question will be from Stephen Macleod at BMO capital markets. Please go ahead.
Thank you good afternoon guys.
The number of my questions have been answered. So thank you for the color just a couple of things I wanted to follow up on <unk>.
Firstly in the packaging business just to just to pull on the thread around margins a bit more here.
Do you think given where inflation is and how much pricing pass through you could sort of get back into that 15%, 16% margin range pushing into 2023 or potentially 'twenty 'twenty four.
Oh.
As I said, if you look at the increase of cost we had in the last two years that we were able to.
To pass price increase that you will have to have a large decrease in I won't comment on what will happen in 2023 to get back to I will see the normal margin is back to before inflation. So.
It could happen, but I won't predict what happened is as I said, it's a large FX, so it'll be something related to raw material as opposed to some change in mix.
If we're looking at as it relates like our objectives, our profit growth and we try to stay away from setting a percent targets target on something.
Or is that much and affects the denominator so strongly.
Right Okay. Okay.
Okay No that's helpful.
And then just turning to the other media and other segment.
Nice nice contribution in the quarter.
The full consolidated numbers and.
I'm just curious if.
Would you would you expect that.
As you roll into next year barring no major changes in.
And in the acquisition landscape would you expect to continue to drive margins higher at the newly acquired.
Contributor for that business.
Well, obviously this acquisition is a very good acquisition before the acquisition that we did with immediate group. This year, we're very very happy.
I think with those acquisition complete our offer that was important for us. So we're sure we have now much better portfolio of products.
First will be to make sure to integrate this important acquisition and then grow the margin is always something that we will work with the team. So hopefully we'll be successful doing that.
But the most important thing regarding this acquisition was to complete our portfolio in Quebec. That's the main reason why we did this acquisition.
Okay. That's great. Thank you.
And maybe just one more I don't think I heard it in your prepared remarks than all but I'm just wondering if you could.
Hmm.
Confirm that the tax rate expectation would be sort of mid twenties for this year and I think previously you'd expected cash taxes in the $80 million range are those still reasonable assumptions.
Yes.
Okay. That's great. Thank you very much.
Thank you Marci.
Some people have Walter Castile Masella point, there are no further questions at this time.
Well. Thank you everyone for joining us on the call today, and we look forward to speaking to you soon.
My Damson, Misuses, gentlemen, Labelle coffeehouse brewed with LG <unk>.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating please disconnect your lines.
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