Q3 2023 Transcontinental Inc Earnings Call
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This sets up type of event well welcome to the TC transcontinental third quarter of fiscal 2023 results conference call. During the presentation. All participants will be in listen only mode. Afterwards, we will conduct a question answer session and instructions will be provided at that time.
A reminder, this conference is being recorded today September seven 2023.
I would like to turn the conference over to Jan to appoint director Investor Relations and Treasury.
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Thank you Joanne and good morning, everyone.
Welcome to Comstock is third quarter of fiscal 'twenty to 'twenty three earnings call.
Before we begin please note that the press release, the MD&A, along with financial statements and related notes as well as the slides supporting managements remarks are all available on our website.
W. W. W. P C P C under the Investor Relations section.
A replay of this conference call will also be available on our website shortly after the call.
Please note that this conference call is intended for the financial community media are in listen only mode and should cause.
And patients for more information.
We have with US today are president and Chief Executive Officer, Tom on logging and.
And our executive Vice President and Chief Financial Officer.
Okay.
As referenced on slide two some of the financial measures discussed over the course of this conference call are non ifr if.
You can refer to the MD&A for a complete definition and reconciliation of these measures to ifr.
In addition, this conference calls my also contain forward looking statements.
They are based on the current expectations of management and information available as of today and being default numerous risks and uncertainties known and unknown there.
The risks uncertainties and other factors that could influence actual results are described in the fiscal 2022 annual MD&A and annual information form.
And thank you Jen and good morning to everyone and thank you for joining the call.
Three months as fast since our last call, which was actually my first day as is or what I'm pleased to be with you again today.
At that time I do think these chair ease a bit.
Should we do a full priorities number one was to grow organically and profitably second is to deliver a strong return on assets third is to reduce that debt and fourth is to commercialize sustainable products.
But I think the organization on these four priorities has been the focus of my first 90 days and I'm happy to report that the team has responded very well.
We took quick actions to adjust to market conditions, which were more challenging in Q4 and Q3 of them dissipated.
Actions enabled us to improve our conversion rate mitigating the impact of lower volume on our profitability.
We also made good progress on working capital by continuing to reduce it in batteries.
A key component for us to drive that down.
Following my agenda was all sorts of <unk> senior management structure and create a leaner more focused and more agile team aligned to deliver on our four priorities.
This was done quickly and a new executive team was announced mid August and is now fully hands on.
Also went on the road to better understand our printing business visiting our plants meeting our teams and our customers.
Just say that I mean price by the engagement of our leaders and coworkers to quite a few of our assets and the strength of the relationship with our customers.
This has enabled me to see more clearly the potential of our premium business and this includes a more traditional activities.
All in all I am satisfied with the work accomplished and confident that these actions taken this quarter and this year, we will also benefit us in the long term.
Now going back to our results starting with safety.
Our year to date incident rate has decreased by 23% compared to last year, which is obviously a major achievement by the team although significant work remains to achieve and injury free workplace. This is obviously a big step in the right direction.
Turning now to our sectors and starting with packaging like our peers, we werent affected by market dynamics that continue to have with continued destocking as well as a softening demand due to the economic context, but despite these lower volumes and thanks to our actions profits were in line with last year.
In terms of commercializing system, an assistant in minutes, while generating profitable growth and better return on assets. Let me give you an update on our recycling strategy and come back of course, some investments we've announced on August one second.
First we took a step back to review our recycling operations and took the strategy decision to move recycling directly into western production facilities by.
By bringing recycling closer to end markets, we are reducing costs and we are better positioned to commercialized products with Pcr content.
This evolution, we will be closing in Montreal recycling efficiency at the end of this month.
Second we've announced a major investment in a new film line to be installed in our Spartanburg, South Carolina facility.
This new offering.
The game changer for our industry. Unfortunately transcontinental.
The superior typically served as Jim will give us a competitive edge and as a consequence will enable us to gain share as the market evolves towards more system integration.
We are pleased with the early interest shown by our many of our key customers.
Now in our printing sector. The measures we took have resulted in significant regarding the savings.
Downside flow volumes continued through the trees and books ever had a challenging quarter, we will continue to adjust cost to volume and take all the measures necessary to protect profitability.
On the positive side, we are pleased with the rollout of our reinvented player Ridder in Montreal in May as well as in Vancouver last month, and we are now distributing over 1 million cookies underwriter every week.
Also in the wake of hygiene source newspaper voting for Metro Atlanta earlier. This year, we are taking on new volume from another newspaper publisher this year media.
This year amidst announcements with Samsung earlier this protection.
In summary, with our key focus on our four priorities and acting with speed and agility I am confident that we are on the right path.
That I will pass it over to you. Thank.
Thank you Tamara and good morning, everyone moving to consolidated numbers on slide five of the earnings call presentation.
Yes.
Five 5% decrease in revenues versus the same period last year.
This was this was mainly driven by lower volume in both our packaging and printing sectors.
Regarding profitability consolidated adjusted EBITDA for the quarter was $107 $9 million.
Four 5% compared to Q3 last year as the improvement in our packaging sector was not sufficient to offset the decline in our printing sector.
We have accelerated the implementation of cost reduction and efficiency measures across the organization and we are encouraged by what we see.
As Don mentioned, we streamlined our management structure to better support our operation and become more agile in a fast changing environment.
These changes in addition to the initiatives implemented at the beginning of the calendar year of improved our cost structure and overall profitability.
Taking together these measures add up to $40 million, which over $20 million coming from the printing sector.
Financial expense increased to $16 1 million, mainly from the impact of higher interest rates on our variable debt.
Adjusted income tax of $10 million was $3 $2 million lower than last year and represented an effective tax rate of 18, 5%.
This resulted in adjusted net earnings of 51.
Sure for the quarter.
Now moving to slide six for our sector review.
In packaging, we generated revenue of $403 $3 million compared with $426 2 million last year down five 4%.
The decline is mainly due to volume being down about 10% from continued customer destocking and recent market softness impacting most segments.
However, we benefit we benefited from a stronger year over year U S dollar.
In terms of profitability, despite a challenging quarter for volume adjusted EBITDA and packaging was up 3% to $53 8 million as favorable exchange rates pricing actions to recover inflation cost savings and efficiency improvements were able to offset volume impact.
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Moving to printing on slide seven revenues decreased by five 6% to $273 7 million.
We continue to pass through of inflationary price increases in the quarter, but we were impacted by lower volume, mainly in our book and Flyer printing activities.
<unk> adjusted EBITDA was $45 $2 million for the quarter compared to $52 3 million last year due to the lower volume in the quarter.
That being said, we are accelerating the implementation of cost reduction measures to better position our cost base for the future.
We have already realized over $20 million in annualized profit improvement initiatives for the sector and the teams continue to enter the Pi and implement new actions the.
The deployment of radar also contributed positively in the quarter.
Corporate expenses were in line with last year at around $10 million.
Now turning to cash flow, we generated $191 million from operating activities, an increase of $60 million versus last year, mainly driven by improved working capital as we continue to make progress on reducing and venture inventors.
Went from a working capital usage of $46 9 million last year to a positive $26 million this year.
This is the second quarter of positive working capital in a row and we continue to be confident in our ability to deliver strong cash flows in the fourth quarter.
Our capex at $44 $1 million are higher than last year, but I've started to decline sequentially.
We continue to expect Capex of about $160 million for the fiscal 2023 net of potential disposal before returning to a lower run rate in fiscal 2024.
While impacting our debt and short term investments such as our new 60 million GOP line recently announced will provide a lasting competitive advantage and should be a key driver key driver of our long term growth.
Despite our investments in Capex, our net debt ratio continues to improve standing at $2 50 times at the end of the quarter, the third quarter compared to $2 63 at the end of January .
The improvement over the last six months is mainly due to higher cash flow generation from positive working capital.
Debt reduction is our priority and we are committed to a strong free cash flow generation, our net debt should come down to close to two two times in the coming quarters.
In closing through the first nine months of the year. Despite lower volume we have delivered similar adjusted EBITDA than last year.
By driving some special substantial cost savings and efficiency across the organization.
In terms of outlook and packaging, while we expect pressures on volume to persist in the near term, we continue to expect to improve profitability in fiscal 2023.
In grid, we continue to expect lower adjusted EBITDA for fiscal year 2023 from the impact of inflation on volume and cost structures, partially offset by the impact of the ongoing cost reduction initiatives.
We also expect strong performance from our in store marketing activities and a positive impact from radar in the fourth quarter.
We expect corporate costs at EBITDA level to be around $40 million for the year.
Moreover, cash taxes should be around $60 million for the year.
On that note. We will now proceed with the question for you.
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A question. Please press star followed by the one on your telephone you will hear atone acknowledging your request your questions. What we've told in the order. They are received please ensure you lift the handset if you're using a speaker phone before pressing any keys one moment. Please for your first questions.
Is that a moment noncash Joan that Michelle Neal Pepto havoc.
Do you see capital markets. Your first question comes from Amir Patel with CIBC capital markets.
Hi, good morning.
Thomas on the on the packaging side I believe Donald that mentioned that volumes were down 10% in the quarter, how did volumes fare in August and when would you expect volume comps to turn positive again.
Yes. Thank you. Thank you for that question.
A couple of a couple of comments on that.
We anticipate a destocking when we had our call in Q3.
Back three months ago basically.
We actually anticipated some some customers to reducing barriers that told us incentives some warnings.
These came a bit stronger than expected. So obviously, we circle back with them.
Tried throughout its actually pretty focused REIT to be clear.
They all confirm they would have a positive outlook for the year all confirmed that they would grow this year and we would grow with them now.
Now this impact in Q3 combined with the seasonality in some cases the summer he is not.
A high season for for some of the buckets packaging segments. We plan. This was this was larger than anticipated just caused us to reduce costs faster now your question is more forward looking.
We see an uptick in that in the in the month of August starting to recover that was expected.
The question is how long is this going to last.
Is this going to be a.
At the level we were.
<unk> are experiencing last year.
But we see an uptick in that.
In the first month of the fourth quarter going into right direction, we'll see sheet is confirmed.
For the remainder of the year.
Okay, great and sorry, just to clarify that that's the uptick year over year or or sort of sequentially coming off the fiscal Q3.
It is not yet back to last year.
In dollar terms.
I need to double down on the volume piece, but it's certainly better than Q3 for sure no doubt.
Okay Fair enough and then.
And then just turning to the cost side have you seen much benefit yet from the falling.
Spot prices for resin and what kind of tailwind could that be for you in 2024.
Yes, good question.
Two things to say on that first.
We've been reducing significantly our raw materials and varies in the course of Q3 and I would say it started in Q2 as well. So we would expect to see to see flowing through some some production coming from raw materials don't expect much though.
Below the resin price, yes, the spot market has been evolving faster, but the overall resin market doesn't gone down that much yet.
A little bit still so yes, we would that we would expect to see some benefit from that difficult.
To estimate how much.
But certainly going in the right direction, especially now we've reduced our inventories and when that tails.
Okay fair enough, but that's all I have for now I'll turn it over thanks.
Yeah.
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National Bank's financial your next question comes from Adam Shine with National Bank financial.
Thanks, a lot. Good morning can we go back to the first question, maybe just unpack a little bit related to the packaging volumes. So two elements one.
An acceleration sequentially and the Destocking and then you also alluded to softness in volume related to just economic backdrop.
So it's about can we just go back to some of your answers earlier in terms of specifically around destocking.
Do you think destocking.
As a pressure point runs its course by the end of your fiscal 2023 or can it potentially continue into F.
24.
On the volume side as it relates to the economic dynamic are you similarly see.
Uptake or at least sequential improvement related to that factor as well and then I'll circle back with another question.
Yes, Thank you Adam.
Lets be very specific when we had some supply issues all of the industry everybody has grown their environment. So we grew our raw materials inventories at customers grew their packaging and varies everybody that in the course of the last two years.
We ended up both our customers and our sales with way too much and varies as the supply chain resumed to a better better service levels.
And when we had these discussions with them we were talking about about a month too much issue if you're counting the number of days. It would have been about 30 days to many in terms of inventories. This has led to a reduction in the summer and the numbers are the reduction has been pretty quick so to your question.
I believe.
Adjustments has been done with the customers, we're working with I wouldn't make this a general statement across the industry, but as far as our TC transcontinental is concerned I would say most of our customers have reduced.
Pretty much the level of inventories to the right level, which is about a month set of environments.
So that's what that's what I believe will drive a better or more.
I would say a normal demand in the forthcoming months.
The thing, which we which is difficult to estimate is the impact of inflation.
Our customers are passed onto the market. So like we did all of our customers. Our first significant amount of inflation. This year to the market on this at some point may have an impact on demand too early to say Adam.
But that's something we obviously actively discussed with them so far and as I said all of them report steady demand and don't expect to see a reduction in volume.
But at this point in time, that's still to be to be demonstrated.
Okay. No I appreciate the added color if we go back to what are the additional.
Additional comments.
In terms of outlook you did allude to the fact that <unk> should grow which is helping you beat.
<unk> alluded to in recent quarters, but you sort of come off the idea of that book.
He is going to grow and obviously you saw pressure in book in Q3 can you just speak to what exactly transpired early in <unk> and whether indeed that book.
Pressure continues into Q4.
Yes, I mean, we will cover that detours with Donald.
So on <unk>, one quick word.
And taken which is strong.
The pipeline is strong so it's really promising so I confirm what obviously donaldson.
On the book side, it's been a bit of a roller coaster, we were very busy until a few months back and then we saw the demand reduced obviously the this is something we are investigating.
Adjusting our cost as we speak obviously to take care of that now.
Jim has been very quickly identifying some some potential growth opportunities in books, So thats, where the focuses on now Adam.
We have a good asset base as I said.
Good team, we know from liquidity standpoint.
Where we should be playing so it's all about going and hunt again, which is where the team is focusing on as we speak now how long is it going to take.
I'm not too sure yet but for sure they're awesome.
Okay. Thank you for that I appreciate it.
Okay.
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Your next question comes from drew Mcreynolds with RBC. Please go ahead.
Yeah. Thanks, Thanks very much.
Adam kind of ticked off a few of mine that just two then on the radar I pause or get out just can you give us a little bit more granularity on what you're seeing since.
That launch in May and how.
It's contributing to results relative to what type of effect.
Used to and then secondly.
Back to packaging, maybe for you Thomas obviously, a lot of investment going into sustainability.
Can recyclability efforts do you expect.
Our flow through to crystallizing that investment to kick in in fiscal 2024.
And how confident are you in in terms of kind of gaining market share within.
Within the segments that you are competing.
Thank you.
Yes drew I'll take the one on radar are first the most important thing for us on the radar was the importance of securing our our print product.
We had a quick turnaround in Montreal facing this situation and we were really proud of.
How quick we were able to react to that and now as you can see we are starting to do some radar product Hauswirth Vancouver. So that's very important for us so far to clients I. Appreciate this alteration.
Great feedback that for first quarter of doing business with radar in Montreal. So this is very interesting in terms of number obviously, we won't disclose any numbers regarding the impact on the bottom line, but what I can tell you is that distribution distribution in Montreal for US was the operating loss before radar now behind us. So that's a good news.
Yes, and I think it's been it's been very impressive dispute at which the team developed a product having enough to connection with customers and stakeholders the way its been.
Vancouver example was done within a month that's pretty impressive.
Alright.
Question was on the on the investment in sustainability and how fast can we expect to see this flowing through.
Our growth agenda, obviously this is a.
A key milestone not only for four TC transcontinental, but also I believe four for the strict simple packaging industry.
Dubuque film provides a great deal of benefits.
Yes, we have a specific a specific event on that because there is a long list of things we can share.
Grid these product is from from.
Performance perspective, all the way down through to the total cost of ownership for customers.
The process and the agenda, so that we clear the.
The line will be operational in spring next year.
The big machine.
We expect to pool their first rolls of film sometimes in March April and start to commercialization right. After that now we obviously are already working at qualifying with.
With customers with great deal of success as we speak so the question becomes how fast is going to be delivering growth.
So obviously part of our plan, we will do that otherwise.
Difficult to tell you exactly to date should we have an impact in 'twenty four I think the first thing will be to secure and replace the current non recyclable films, we buy today by this film.
This will bring benefits.
But not necessarily.
Visible benefits in the first year.
I think it's prudent to say that now in the long term obviously.
This is delivering a significant amount of additional volume, which she's already something we offer I don't see slide and already working on with our customers. So we're already working on share gains if you will.
And it's done.
Customers.
That's great. Thanks for the added color.
That's one question Castillo gain did David Mcfadden.
<unk> Securities. Your next question comes from David Mcfadden with Cormack Securities. Please go ahead.
Oh, great. Thank you yeah, a couple of questions.
So when we look at the packaging business it seems as though.
The organic decline in Q3 was primarily a destocking again, it's over now is that that cracked it wasn't really that much.
Economic Kevin is one.
One time Destocking that does that.
Is that correct.
When I look at the $41 million to be extremely specific I would say clearly I don't see slide two thirds of that is just okay. That's very clear. This is something we could share with customers and we could definitely double double check all the rest it's smaller accounts smaller smaller customers is difficult to say.
Whether this is a.
This is activity related to one thing we know though is that there is no shareholder loss very little no customer loss. So I would say amongst the 40 million to be clearly specific call it $30 million for short Destocking.
Period, Okay.
Okay.
Media finished yet to be fully understood.
Okay.
And when do you characterize your packaging business as being pretty recession resilient.
Yeah, Okay, yeah. So.
I would say I would be very specific on that.
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I would say more than 90% of what we do is packaging food. If you will so this for sure is resilient there is still some activities we do in the industrial market, which is not a recession.
Resilient and that's a minor share of what we do.
The rest is food and pharmaceuticals, and medical related so dish has proven to be resilient.
But.
To be prudent David is that I agree that it's recession proof, but with inflation inflation going on right now, especially at the grocery.
Doing packaging for food so we'll.
The numbers of items that people will buy.
We will remain the same in the next months, if inflation and keep pushing in that direction. That's something that we're following closely and obviously, we have discussion as I mentioned earlier.
Clients, but this is something to consider so if there's a recession, but there is the impact of inflation and as you know.
Regarding the price at the grocery it's very fortunate right now.
So this is something to consider also.
Okay.
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So.
When you look at your free cash flow obviously.
Turning to.
We have some of that working capital invested over the last couple of years.
Thank you and that's it.
Close to 290, maybe.
Do you think you could get a lot of that.
And do you think you did get a lot of that back.
Well, obviously, if you look at price as far as an example of there isn't it's not it's not at the level. It was before we invested that 200 million. So so that will remain negative.
Negative impact, but for sure as our clients are doing and this is what we've been doing in the last two quarters, we don't need as much in <unk> that we need it.
The supply chain issues, so that we're getting back.
And we're still going to push and I think we can do we did a good job so far but we're not satisfied and we're going to push for Q4.
Everyone is aware, it's an organization that 2024, we wanted to push it in that direction because as you know our priorities, it's pay down debt and that's an easy way to pay down debt.
Yeah exactly.
So just on the book.
I am just kind of wondering.
What is driving or whats that drove the results in Q3 on the book size, it's not surprising weakness there.
I think I think Tom gave some color or in Europe , but what I can add on that is that booked.
We talk a lot about the destocking on the on the on the packaging side, but this is something.
Also on the book side.
Before like last year have you been at.
At the beginning of this year, but mostly last year weather compared to last year.
Supply chain wasn't issue on book, Israel was a closed market.
Publisher, we're ordering it.
<unk>, our best now Theyre doing is theyre, just pushing dollars ventures, maybe less books are re right now because we're postponing.
And package that in this quarter overall book year to date is still of events versus last year or so.
That's good so we're still believe that book is a growing business for us, but it was a tough quarter and operating we have to do some adjustment also.
Mhm.
Okay.
Right. Thank you.
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Stephen Macleod.
M O capital Youre.
Your next question comes from Stephen Macleod with BMO capitals.
Your line is open.
Great. Thank you sorry about that I was on mute.
Thank you good morning.
Great question, so far so great color. So far so thank you just a couple of follow ups for me.
Just on the packaging side I just had two questions.
Are you are you largely through.
The Destocking impact and then secondly on packaging are you still seeing the ability or having the ability or needing to put through price increases.
Right.
Stocking I think recovered some some ground or readiness.
And I will repeat that I think we've seen the bulk of it.
Now again to be confirmed.
Because there was a combination of Susan that Jim just stocking in Q3, so we need to see both the reversed in Q4.
So far we see some of it maybe not full of it so to be continued as a discussion at least on the Destocking I think we are starting to return to some corner, we need to confirm that.
As far as the ability to pass on price increases I mean, we've done we've done most of what we had to do.
In line with our customers and contracts.
The inflation of our input costs.
And there is not decreasing but not increasing anymore. That's what I can see today. There are a few pockets here and there, but nothing really that would cause us to have to pass on the increases to customers at this stage I don't see.
Don't see things at least in the near term I don't see things that would cause us to have this discussion.
Okay. That's great. Thank you and I did dial on late so I apologize to you.
Already colored with Donald.
So it's good recruiting.
Thank you.
And then sort of sticking on packaging and putting all those moving parts together.
How do you see volumes.
How do you see volumes and maybe organic growth.
Evolving in Q4, and how would you expect to see a similar level of margin pressure.
So on Q4, I would like to rewind the tape.
So Q4 versus Q3 should see you should see a better sales volume just because of seasonality and less of a destocking. As we said two question really we have is Q4 versus last year. Because if you remind you should remember last year was a period of time, where customers were stocking heavily.
And so that we can compare apples to apples okay.
To make it to make it very clear now moving forward.
As you've seen we are investing in to see a trusted ensign until a lot of capacity for support for specific markets, we've talked about sustainability.
Sustainability, there are other market segments, where we invested and this is done in line with the customer contracts and agreements. So we always been favoring customer backed investment and these fleets to organic growth. So to your question. This is our traffic to our and this is what we've done and therefore, we expect to see.
Growth coming in in.
In those specific market segments.
And maybe Steve to too high when you mentioned the margin pressure.
Yes, we do have margin pressure, but when we compared to last year I would say the margin are going in a better direction than last year and actually when you compare our Q3 versus our Q1, where we had the same top line the margin was way better than the.
All of the cost efficiency that we've put in place at the beginning of Q1 on the packaging side and some price increase to cover inflation.
Are there is a resulting in that right now so yes margin pressure, but at least it's going in the right direction compared to fiscal 2022.
Right.
Okay. That's great. Thank you very much.
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As a reminder, if you are using a speaker phone please lift the handset before pressing any keys.
In the south pit of other Castillo, Michigan that point there are no further questions at this time.
Okay. Thank you everyone for joining on the call today, and we look forward to speaking to you soon thanks.
Does that mean in Houston to tell them in that take off that off promotional G suite of Patheon.
Not a question ladies and gentlemen, this concludes the conference call for today. Thank you for participating please disconnect your lines.
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