Q1 2023 Transcontinental Inc Earnings Call

Speaker 1: I develo.

Speaker 2: Madam M.M.M., thank you for being here and for being here at the telephonic conference concerning the results of the first trimester of the 2020 TESSA Transcontinental Conference. In the conference, all participants will receive a

Speaker 2: We are happy to hear that this conference is being recorded today, March 23, 2021.

Speaker 2: Welcome to TC Transcontinental first quarter of fiscal 2023 results conference call.

Speaker 2: During the presentation, all participants will be in a lesson-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, March 8, 2023. I will now turn the conference over to Jan Lapointe, Director, Investor Relations and Treasury.

Speaker 2: I would like to thank the panelists for their time and effort. Mr. Lapointe, please go ahead.

Speaker 3: Thank you, Julie.

Speaker 4: And good afternoon, everyone. Welcome to Transcontinental's first quarter of fiscal 2023 earnings call.

Speaker 4: Before we begin, please note that the press release, DMDNA along with complete financial statements and related notes, as well as the slides supporting management's remarks are all available on our website at www.tc.tc under the investor relations section.

Speaker 4: A replay of this conference call will also be available on our website shortly after the call.

Speaker 4: We have with us today our President and Chief Executive Officer Peter Bruce and our Chief Financial Officer Donna LeCavelli.

Speaker 4: Before I turn the call over to management, I would like to specify that this conference call is intended for the financial community.

Speaker 4: Media are in listen-only mode and should contact Natalie St. Jean, Senior Advisor, Corporate Communications, for more information.

Speaker 4: Please be reminded that some of the financial measures discussed over the course of this call are non-IFRS. Please be reminded that some of the financial measures discussed over the course of this

Speaker 4: You can refer to the NDNA for complete definition and reconciliation of these measures to IFRS.

Speaker 4: In addition, this conference call might also contain forward-looking statements.

Speaker 4: 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.

Speaker 4: actual results are described in the Cisco 2022 Annual in DNA and in the latest annual information form.

Speaker 4: With that, I would now like to turn the call over to our President and CEO , Peter Bruce.

Speaker 4: Thanks, Jan. Good afternoon, everyone. Starting with safety, I'm pleased to report that our focus on safety is generating improved results.

Speaker 5: We're off to a good start with a 21% decrease in recordable injuries compared to last year.

Speaker 5: In terms of financial results, increased profit in packaging for the quarter was more than offset by the impact of lower volumes in printing.

Speaker 5: In this context, I appreciate the speed with which both sectors implemented initiatives that will generate savings of over $15 million in fiscal 2023.

Speaker 5: In packaging, we do not see our usual volume growth. As supply chains have improved and interest rates have gone up, many of our customers have worked to decrease excess inventories.

Speaker 5: and have not ordered their usual volumes.

Speaker 5: With banana customers suffering from volume declines and increased costs, our Latin American business also experienced significant pressure on volume.

Speaker 5: Despite these volume issues, the work the team has done to develop products that create value for our customers and focus on developing low-cost operations resulted in an 11% increase in profit versus last year's first quarter, the sector's fourth consecutive quarter of improvement.

Speaker 5: In print, having worked diligently to increase our prices to reflect inflationary cost increases, the sector experienced significant volume decline in key businesses.

Speaker 5: With six marketing budgets, the pass-through of increased costs resulted in a 10% decrease in retail flyer volume.

Speaker 5: This decrease had an adverse impact on our retail flyer and distribution business's profit.

Speaker 5: Coupled with a key retailer's decision to postpone its in-store marketing renewal work until later this year, Print experienced a $16 million decrease in profitability.

Speaker 5: Our print team has a strong track record of adjusting our cost structure.

Speaker 5: They've already implemented measures to mitigate the impact of lower demand.

Speaker 5: We're seeing the early benefits of our actions and will continue to adjust as necessary.

Speaker 5: Our financial position is solid thanks to our ability to generate significant cash flow and no major debt maturities until 2025. We remain focused on our disciplined approach to profitable growth while maintaining our dividend and reducing our net debt.

Speaker 5: And now over to you, Dan.

Speaker 4: Thank you Peter. Moving to consolidate numbers on slide 5 of the earnings call presentation.

Speaker 5: For the first quarter of 2023, we reported an increase in revenues of $16.4 million, or 2.4%, versus the same period last year.

Speaker 5: This growth was driven by the impact of exchange rates and the acquisitions in our packaging and media sectors.

Speaker 5: Regarding profitability consolidated adjusted EBITDA for the quarter was $84.1 million compared to $89 million in the first quarter of fiscal 2022.

Speaker 5: This decrease was mainly due to a decline in our printing sector, which more than upset increase adjusted a bit in packaging sector.

Speaker 5: Financial expenses increased by $6.9 million to $16.7 million mainly due to higher interest rates and the exchange rates.

Speaker 5: As a reminder, we have no significant death maturities before February 2025 thanks to proactive refinancing.

Speaker 5: Adjusted income tax decreased by $5.8 million due to lower earnings and effective tax rate.

Speaker 5: resulting in adjusted net earnings of 24 cents per share for the quarter.

Speaker 5: Now moving to slide 6 for the sector review.

Speaker 5: In packaging, we recorded revenue of $405.7 million.

Speaker 5: The increase of 5.7% versus last year was mainly due to positive change in exchange rates.

Speaker 5: The pass-through of higher raw material prices and other inflationary costs was upset by a decrease in volume

Speaker 5: due to customer dis-talking and continued pressure in Latin America.

Speaker 5: In terms of profitability, adjusted EBITDA in packaging grew by $7.7 million or 19.8%.

Speaker 5: Excluding the impact of exchange rate adjusted if it does grow organically by 11%.

Speaker 5: This organic growth was mainly due to improved profits from inflationary cost recovery.

Speaker 5: As Peter mentioned, all our segments improve just a little bit except for Latin America operations.

Speaker 5: Moving to printing on slide 7, revenues decreased by 3.1%.

Speaker 5: This decline resulted mainly from about a 10% decrease in retail flyer printing and distribution.

Speaker 5: partially upset by the past rule of inflation re-increases.

Speaker 4: Printings adjusted a bit that was $40.6 million for the quarter compared to $56.8 million last year.

Speaker 5: This decrease is mostly caused by lower volume in retail flower printing and distribution activities.

Speaker 4: Corporate expense were lower than last year due mainly to lower stock-based compensation costs.

Speaker 5: Now turning to cash flow. We generated 12 million dollars from operating activities

Speaker 5: an increase of $18.4 million versus last year due to improved working capital and lower income taxes.

Speaker 5: Our investments in CapEx at $51.2 million is higher than last year due to the timing of some disbursements.

Speaker 5: In fiscal 2023, we expect CapEx to remain elevated as we continue our strategic investments before returning to a lower run rate in fiscal 2024.

Speaker 5: At the end of the first quarter, our net debt ratio was at 2.63 times, a slight increase from 3 months ago due to the sustainability of working capital and significant capex in the quarter.

Speaker 4: We expect the ratio to come close to two times in the coming quarters, giving our pre-cash flow generation.

Speaker 4: In turn of liquidities, $274 million were available at the end of the quarter.

Speaker 5: Standard & Poor's recently reaffirmed our investment grade rating, confirming our solid financial position.

Speaker 5: Finally, we distributed $19.5 million in dividends to our shareholders.

Speaker 5: Thanks to our ability to generate significant cash flows, the Board decided to maintain the dividend at the current rate of 90 cents per share per year.

Speaker 5: This represents an attractive yield of more than 5% based on today's closing price.

Speaker 6: Now moving to the outlook.

Speaker 5: As mentioned by Peter, our team implemented cost reduction initiatives that will generate significant and recurrent savings, improving our financial performance.

Speaker 6: In packaging, we expect volume growth and improved profitability in fiscal 2023.

Speaker 6: However, the economic conditions remain uncertain and could affect the man in the short term.

Speaker 6: and print, we continue to expect growth in our ISM and book printing activities.

Speaker 6: In terms of profitability, we expect lower adjusted EBITDA from the impact on inflation, on volume and cost structure.

Speaker 6: We expect corporate costs at the EBITDA level to be around $40 million for the year.

Speaker 6: However, cash taxes should be at around $60 million.

Speaker 2: On that note, we will now proceed with the question period. Thank you, Madam President. We will now proceed with the question and answer period.

Speaker 2: If you have a question, please put the question on your phone's e-mail. A call will be sent to confirm your request. The question will be answered in the form of an e-mail. Please make sure to check your telephonic receptors. Please call the phone number on your phone's e-mail.

Speaker 2: Thank you. One moment please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they're received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please for your first question.

Speaker 2: Your first question comes from Adam Shine from National Bank Financial. Please go ahead. You're welcome.

Speaker 7: Thanks a lot. Good afternoon Peter. Can you speak to us at all in terms of any improvement in trend that you might have seen in recent weeks or.

Speaker 7: This is an ongoing continuation of the Q1 trend, at least early in the Q2.

Speaker 5: Adam, are you talking about a specific part of the business or in general?

Speaker 7: Well, both sides, I mean, I guess, you know, talking about the issues that impacted Q1 and whether those have continued into Q2. So specifically, you know, are we still seeing the same level of flyer volume decline in printing and then over on the packaging side.

Speaker 7: you know, are you still seeing the same degree of lat-tem pressure and de-stocking or has you know, some of that eased at all or do you see line of sight to that easing potentially at least, you know, maybe gap in Q2 into Q3. Thanks for clarifying Adam, appreciate it.

Speaker 5: So why don't I start from a packaging perspective. So if I'm looking in packaging, when we talk about the stocking and softness in LATAM, which has continued from last year, we saw a volume decline of 3%. And frankly, if I split that, it's split pretty evenly between the Latin American business and our beverage segment.

Speaker 5: So if I'm looking in packaging, when we talk about the stocking and softness in LATAM, which has continued from last year, we saw a volume decline of 3%. And frankly, if I split that, it's split pretty evenly between the Latin American business and our beverage segment. It's just a varies across countries. And so we saw a volume decline, growth on Abraham's scale and confidence on the wine as well. Our

Speaker 5: If I look at the Latin American business specifically, in terms of from a volume perspective, we know a big portion that relates to the conflict in the Ukraine. And so as a result, we took cost reduction measures.

Speaker 5: that will impact going forward. So it's been very focused on eliminating a significant portion of costs.

Speaker 5: related to the business to put in a better position relative to the volumes we have. I'd say the second thing that's hit that part of the business is that we, given supply chain issues and supply chain specific to Latin America, we have volumes of higher cost raw materials.

Speaker 5: And as volumes have declined, we had an amount of raw material at higher price than you can currently buy today, and that affected us in the quarter. We worked diligently through the quarter to ensure by the end of the quarter that inventory was gone. So I'd say the two things.

Speaker 5: that are important when I think of Latin America is I don't see in the current circumstances in absence of a change in a conflict. I don't see volumes bouncing. I see cost structure being in a better position both from a better inventory cost as well as an adjusted cost base.

Speaker 5: In terms of the beverage side, we saw significant de-stocking. And what I can tell you is at the time we took costs out of the business within the quarter.

Speaker 5: and that were significant. We don't include that when we talk about the 15 million. The reason is we've seen a significant inflow of orders currently. As a result, that cost reduction, the cost taken out.

Speaker 5: from a direct labor standpoint aren't required. But in terms of indirect, we are maintaining them to position us to be more profitable going forward. So we do see in the beverage segment a significant strengthening coming out of last quarter.

Speaker 5: If I look at the history of the business,

Speaker 5: And I look at volumes in general. I'm cautiously optimistic in terms of the way volumes are going, but certainly from a beverage standpoint, things look good. I think we're exceptionally proud in the quarter that every business, with the exception of that lifetime, increased.

Speaker 5: and we're determined to continue that trend.

Speaker 5: trend to the end of the year.

Speaker 5: From a print perspective,

Speaker 5: I would say that, you know, difficult to say, you know, we've had a soft quarter, 10 percent.

Speaker 5: don't anticipate that suddenly jumping back down to low single digits. I think what's key for us is that the team has reacted, as we always have, to take out a significant amount of costs. And the costs, when I talk about the 15 million that's been taken out in our business.

Speaker 5: that's impacting, like that's cost out now, impacting now.

Speaker 5: That doesn't mean the team didn't have other actions to continue to put into into position and execute. I would be disappointed if that number wasn't significantly higher.

Speaker 5: I would also add, if we're looking at the business, when I was talking about the ISM business, we had a significant retail customer that deferred a store refresh that had a really adverse effect on our volume in the quarter. That refresh is back on, coming now.

Speaker 5: And that will have an impact, a strong impact on volume going through the year. And we continue to grow with the relationships that we have from retailers through flyers. We continue to grow that side of the business and we expect it to strengthen through the year. From a newspaper perspective, we closed the Metroland deal.

Speaker 5: and that will have a positive impact on the business as we move through the year. And then I'd also add that we're adding book capacity. Right now equipment is arriving.

Speaker 5: And being installed that will have an impact as the year continues. So.

Speaker 5: ISM anticipate strengthening, book strengthening, newspaper strengthening as we move through the year.

Speaker 7: Thanks for that color. If I could just ask one quick question related to the margin in printing. You know, in the past and pursuant to your earlier remarks about historically being able to sort of adjust the cost base to reflect some of the, or at least to mitigate some of the top line pressures. I mean, our assumption. I think it's been that, you know, the margin, you know, could stay.

Speaker 7: at 19 per cent per last year or maybe even higher.

Speaker 7: given where things are and acknowledging obviously the savings you've alluded to and expectations of more to come, do we need to think about a resetting of that margin expectation a couple of points lower than 19% or you know there's still optimism of getting back to that level.

Speaker 6: a lot of cost to our customer. So if you look at the drop of 5% that we had in a quarter, about close to 2% of that drop is coming just by inflation. So that's part of it. And we also have a part of it coming from ISM that as Peter mentioned, we expect that business comes back. So the remaining is linked to what we call the renew business and as Peter has said, as I-

Speaker 8: continue.

Speaker 7: Okay, I appreciate that. Thanks a lot.

Speaker 2: Thanks, Anne. Your next question comes from Amir Patel from CIBC Capital Markets. Please go ahead. Hi, everyone.

Speaker 9: Hi, good afternoon. Peter, your outlook was pointing to year-over-year EBITDA growth in packaging, but decline in print. How would you expect overall EBITDA to fare? I think I'll put some takes between the two.

Speaker 6: Well, we don't give forecasts. We hopefully will respect what the strategy of our group is, is that to replace the printing business with a packaging business growing. So that's the direction we're going as a strategy and that's what we expect.

Speaker 6: to happen in the future regarding that.

Speaker 6: to happen in the future regarding that. So that's the color I can give you on that side.

Speaker 9: Okay, thanks. And then just turning to growth, I just wonder if you could share what you're seeing on the M&A pipeline front and if you've seen any moderation in multiples with maybe less private equity competition. From an M&A perspective,

Speaker 5: right now I'd say there's, I would say it's the heat that had been in the market would be diminished given current circumstances in terms of interest rate etc. So just, I think you can see there are fewer businesses being sold.

Speaker 9: Certainly, competition for assets is different. Thanks, Peter. Lastly, I was just wondering if you could speak to some of the new products that you have coming to market in packaging, and specifically, if there's anything to note on the coffee living side. I'd say that the I'd say that

Speaker 5: Notable things beyond that would be from a post-consumer recycled content in films We've seen a significant beverage company launch all turn all of its packaging Having to have PCR content now

Speaker 5: That's resulting in us having the ability to increase volume with them. We also see another significant beverage customer increasing its volume with us and being interested in going the way of PCR. We also have been successful.

Speaker 5: with a major US retailer and we are the first organization that's commercial with a PCR content film for poultry. And then we've had a successful launch with a major FMCG launching its Semcare line. And we've had our start with a major graphical bilingual. And now we know that all of the cumulative drugs have been transferred and we are doing that by consequences

Speaker 5: and doing 50% PCR content so that they can claim the significant content and position them for success. So we've had some significant wins and we continue to work with our customers to...

Speaker 5: position them to have products that their customers can be proud of.

Speaker 5: that consumers can be proud of. And as legislation moves in the US to increase the taxes on items that aren't recyclable, we want to position them to be in a position to avoid those taxes.

Speaker 9: Okay, great. Thanks. Appreciate all the details there. That's all I had. I'll turn it over.

Speaker 2: Thank you very much, Amer.

Speaker 2: Your next question comes from Steven McLeod from BMO Capital Markets. Please go ahead. Thank you. Good evening.

Speaker 10: Lots of great color here so far, so thank you. I just wanted to follow up on a couple things. Just in the printing business, is it fair to assume that, would you expect to see a lot of the volume headwinds to be isolated to the first half of the year? Or do you expect that it is likely to continue through the year?

Speaker 5: I think it's early to say. I think that what we've seen historically is that we saw volumes be significant around Black Friday and in April . What we're certainly seeing now is that those volume spikes.

Speaker 5: are certainly much lower than they were historically. And right now, the key for us is to track volume really closely, work with our customers to understand how we can support them, and adjust our cost base as necessary. So we think we've identified the things we need to do in the short term.

Speaker 5: And if we see that volumes are changing, we'll continue to adjust and we'll adjust as we need to make sure we remain in the strong position we've been historically. And maybe to add just some color on that Q1 last year was

Speaker 6: for print was a good quarter overall. But we started to feel that pressure on the volume at the end of Q4 this year. So comparable to the end of the year might be...

Speaker 10: less harder on that side. Okay, I see. Thank you. And then just continuing on the printing side of things, I just wanted to clarify one thing that you said. You were talking about margins and printing and hoping to get back to normal margin levels with cost savings.

Speaker 10: Would you expect, were you suggesting that that was a longer term target or would you actually suggest to be in that in that sort of historical range in 20 in fiscal 2023?

Speaker 6: Well, I won't make any forecast on the timing of that, but when you look at the history of TSCU, when we had change in the demand, we were reacting with the capacity. Sometimes those actions take more time when it's, you know, you see in the past when you build a plan, sometimes it's removing crews.

Speaker 6: So it will depend on the timing of the action. There's some action already in place, but surely to make a call regarding when in 2023 we will be back to the margin, but still thinking

Speaker 10: Okay, I see. Thank you. And then maybe just finally, just on CapEx, you mentioned that you said that you expect CapEx to continue to be elevated this year. Would you expect CapEx to be roughly in line with where it was in fiscal 2022 for the full year? We have disclosed that the opening of this fiscal year to be, you know, the amount was 140. Right now the U.S.

Speaker 5: The bulk of those expenditures are specifically in segments where we see that we create the most value for customers and our opportunity to grow is important and in investments that support our sustainability program from a product development standpoint.

Speaker 2: If you have any questions, please press the star on the left side of the screen. If you have any questions, please press the star on the right side of the screen.

Speaker 10: wanted to quickly get your thoughts around volumes and packaging excluding Latin America. I know you mentioned the beverage vertical is doing fairly well and you expect that to be positive over your growth in the following quarters but maybe if you can comment on some of the other verticals that will offset the decline in volumes in Latin America.

Speaker 5: Sure. I think first from a Latin American standpoint, I think it's important to recognize that if we're looking at a full year basis, the impact of the remaining have hit us hardest in Q3 and Q4 last year. So as the year progresses, our comparables will be in line.

Speaker 5: are the ones that I talked about, latam and beverage.

Speaker 5: But there was no segment that was jumping. We saw the impact of the stalking across segments, across customers. That said, what I think we can be really proud of is when we look at our EBITDA result.

Speaker 5: It demonstrates the work we've done in ensuring that inflationary cost increases were done. That as we look at our product portfolio, we ensure we're focused on products that create value for our customers and for our shareholders and that we continue to get a cost base.

Speaker 5: that is advantage versus our competition. So, you know, volume is not the reason this quarter is ahead of last year. It's all the hard work behind it. And if I look at the year going forward, I said shrink is much more robust than it was.

Speaker 5: continue doing what it's doing.

Speaker 10: Okay, great. And then maybe if I can just ask a quick follow-up on just the packaging costs. You know, you highlight two portions, a contractual portion and a non-contractual portion for price pass-throughs. But you know, on the non-contractual side, obviously it's much quicker, but on the contractual side.

Speaker 5: 70% of the business is contracted.

Speaker 5: as a general rule of thumb in terms of the packaging business. And generally, you're right that it's quarterly but that can vary with some being shorter, some being longer. And I'd say right now if we're looking at raw materials, you know, polyethylene has declined a bit but it's been relatively flat.

Speaker 5: I'd say the biggest raw material right now moving has been foil, which continues, and people may have seen that tariffs have been imposed on Russia, which will, I would expect, continue to put pressure on foil pricing. And the team understands the importance.

Speaker 5: of making sure that those costs are passed through and that we continue to make sure we find appropriate supply.

Speaker 2: Okay, great. Thanks a lot. I'll pass it on. In the sample of all the questions, Mr. Lapointe, there are no further questions at this time.

Speaker 4: Thank you everyone for joining us on the call today and we look forward to speaking to you soon.

Speaker 2: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.