Transcontinental (TCL.A) has announced improved profitability for the third consecutive quarter during its earnings call, attributing the success to strategic cost reduction initiatives and a favorable product mix. Despite a decline in second-quarter revenues, the company has reported a slight increase in adjusted EBITDA and expects continued growth in packaging volumes. The positive outlook is further supported by the planned expansion of the Radar program and the introduction of a share repurchase plan.
Key Takeaways
- Transcontinental achieved improved profitability for the third consecutive quarter.
- The company expects $30 million in cost savings by the end of the fiscal year.
- A 2% growth in packaging volumes is anticipated in the second half of the year.
- Radar program to expand to British Columbia and Newfoundland in July.
- Second-quarter revenues decreased by 8.6%, while adjusted EBITDA increased by 1%.
- The Packaging (NYSE:PKG) sector's adjusted EBITDA rose by 5.6%.
- Transcontinental plans to repurchase up to 5% of its shares.
Company Outlook
- Transcontinental is confident in its fiscal 2024 outlook, expecting stable adjusted EBITDA in the Print sector.
- Deals worth at least $100 million are expected to close by the end of 2025.
- The company aims to maintain a leverage level below 2% and continue reducing debt while implementing a share buyback program.
Bearish Highlights
- Revenues for the Retail Services and Printing sector showed a decrease.
- The Medical division was impacted by overstocking, which may take several quarters to adjust.
Bullish Highlights
- The company witnessed a significant improvement in margins within the Packaging business.
- Executives expressed confidence in maintaining a 16% baseline margin for the rest of the year.
- A positive working capital inflow is expected by the end of the fiscal year.
Misses
- The company does not anticipate recovering all the working capital investment made in previous years.
Q&A Highlights
- Thomas Morin discussed the challenges in future margin discussions due to potential price fluctuations.
- The legacy printing business represents a third of the company, while the retail part, including ISM and digital services, constitutes about two-thirds.
- The medical vertical is expected to recover after a period of overstock adjustment.
- The company is focusing on improving working capital management in response to changes in the business environment.
Full transcript - None (TCLAF) Q2 2024:
Operator: [Foreign Language] Welcome to TC Transcontinental Second Quarter of Fiscal Year 2024 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session, and instructions will be provided at that time. As a reminder, this conference is being recorded today, June 6, 2024. I would like to turn the conference over to Yan Lapointe, Director Investor Relations and Treasury. [Foreign Language] Mr. Lapointe, please go ahead.
Yan Lapointe: Thank you, Julie. And good morning everyone on the call. Welcome to Transcontinental's Second Quarter of Fiscal 2024 Earnings Call. Before we begin, please note that our quarterly report, including financial statements and related notes, as well as the slides supporting management's remarks are available on our website at www.tc.tc 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 contact Nathalie St-Jean, Senior Adviser, Corporate Communications for more information. We have with us today are President and Chief Executive Officer, Thomas Morin; and our Executive Vice President and Chief Financial Officer, Donald LeCavalier. As referenced on Slide 2, some of the financial measures discussed over the course of this conference call are non-IFRS. You can refer to the MD&A for a complete definition and reconciliation of these measures to IFRS. In addition, this conference call might also contain 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 the fiscal 2023 annual MD&A and in the annual information form. With that, I would like to turn the call over to our President and CEO, Thomas Morin.
Thomas Morin: Thank you, Yan, and good morning to everyone. We are pleased to report a third quarter in a row of improved profitability, largely due to our cost reduction initiatives and a favorable product mix. First, a program to improve our profitability and financial situation, which we announced in December, is progressing well. We expect to reach $30 million in the run rate savings by the end of this fiscal year, close to a two-year objective of $40 million. I commend our team for the quick and effective execution of this important program. Second, I continue to focus on optimizing our product mix has contributed to improve our margins in both of our main sectors. In our packaging sector, while de-stocking remained an issue in our medical business and with the challenging comparable last year, we achieved a record performance. Demand in our non-food businesses remains slow, but we are starting to see an improvement in demand in most of our markets, which should drive modest overall top-line growth in the second half of the year. In-line with the need to accelerate the commercialization of recycled ready packaging, the rollout of our cutting-edge BOP line in Spartanburg, but first in North America, is going well in accordance with our plan, and it is now in its commissioning phase. Over the last few months, the quality of our work was highlighted by our peers and customers. We have received a number of awards for the Flexible Packaging Association and Pac Global. And we are particularly pleased with the direct customer recognition received from Procter and Gamble with a Partner of Excellence Award and from Coca Cola Canada, a supplier of the year 2023 for direct materials. Now turning to Retail Services and Printing. We are renaming the sector to reflect the evolution of our business. Of course newspapers, books, magazines and other specialty printing remain an important part of our operations. That said most of our activities today serve a wide range of retailers and brands, from the production of digital and print advertising content to the design and manufacturing of in store retail environments, our extended service offering covers far more than the sector's former name indicated, and it has [grown for] (ph) growth. We are proud to have served a great number of retailers over the years and look forward to helping them deliver even more value and better shopping experiences to customers. Reviewing the second quarter, we as well as our clients are pleased with the successful rollout of Radar in Quebec, complete at the end of April to 3.6 million [forms] (ph). We look forward to the further expansion of radar in British Columbia and radar's entry in Newfoundland, both in the month of July. Finally, I'm encouraged by the continuous growth in our ISM activity. Tomorrow, June 7, marks the one year into the job for me. And while much remains to be done, I am pleased with the direction we have taken and proud of the accomplishments of our teams in delivering on our priorities. On that note, I'll turn it over to you Donald.
Donald LeCavalier: Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on Slide 5 of the earnings call presentation. For the second quarter of 2024, we reported revenues of $683.2 million, a 8.6% decrease in revenues versus the same period last year. This decline was caused by lower volume in both our main sectors. Regarding profitability, despite the lower volume, we delivered a strong quarter with consolidated adjusted EBITDA of $110.1 million a 1% improvement versus a solid Q2 last year. This increase was mainly due to cost reduction initiatives related to the profitability improvement program and also a favorable product mix, partially offset by lower volumes. These three elements, cost reductions, mix and volume impacted both our main sectors during the quarter. Financial expense decreased by $0.8 million to $14.4 million mainly due to a lower debt level following strong cash flow generation in this last 12 months, partially offset by exchange rate fluctuations and a higher interest rate on our floating rate debt. Adjusted income tax increased by $0.6 million to $12.5 million and represented an effective tax rate of 21.6%. This led to an adjusted earnings per share of $0.52 a $0.07 or 15.6% increase compared to the same quarter last year. Now moving to Slide 6 for the sector review. In Packaging, we generated revenues of $412.4 million compared to $444.2 million last year. The $31.8 million decrease is mainly due to the lower volume caused by a slowdown in demand, in particular in the medical market. In terms of profitability, despite a strong performance last year, adjusted EBITDA in Packaging grew by 5.6% to $71.2 million. This solid performance led to a 17.3% EBITDA margin, a 210 basis point improvement versus last year. Cost reduction initiative and favorable product mix supported the margin growth. This is also the third consecutive quarter of margin improvement for the sector. Moving to the Retail Services and Printing sector on Slide 7. Revenues decreased by 10.8% to $266.3 million. This was mainly due to the lower volume in flyer printing activities, related to the end of Publisac in Quebec and also lower volume in magazine and book printing. Retail Services and Printings adjusted EBITDA was $47.1 million for the quarter. Excluding the $1 million impact from exchange rates, earnings decreased organically by $1.9 million as the lower volume was mostly offset by our cost reduction initiative and the favorable effect of the rollout of Radar. Adjusted EBITDA margin grew 90 basis points to 17.7%, as a result of cost reduction initiative and the favorable effect of the rollout of Radar. Now turning to cash flow. We generated $73 million from operating activities compared to $105 million in the previous year following the strong working capital benefit from inventory reduction in Q2 last year. Our CapEx at $30.1 million were $23.1 million lower than last year and in-line with our full year guidance of around $135 million. Despite the impact in the streaming of the US Dollar, at the end of the quarter, we maintain our net debt ratio to 2 times. We are confident that our leverage ratio will decrease materially in the second half of the year, in-line with the significant cash flow that we expect to generate over the next two quarters. In this context, we believe we are in a good position to launch subject to the TSX approval a normal course issuer bid to repurchase up to 5% of our shares. We believe this decision is a good use of capital, while we continue to reduce our net debt. Looking ahead, we are improving our outlook for fiscal 2024. We now expect our Print sector to deliver a stable adjusted EBITDA in fiscal 2024 compared to fiscal 2023. At the consolidated level, we therefore expect to grow the adjusted EBITDA in this fiscal year to reflect a strong performance year-to-date. We are very pleased with the traction we are seeing from our profitability and financial position improvement program. We expect to reach a run rate of $30 million in savings by the end of this fiscal year. We are also cautiously optimistic about closing the sale of one or two buildings by the end of the calendar year and continue to be confident to reach $100 million in sale of real estate assets by the end of fiscal 2025. On that note, we will now proceed with the question period.
Operator: [Foreign Language] Thank you. One moment please. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets. Please go ahead.
Hamir Patel: Hi, good morning. Thomas you pointed to seeing improvement in some packaging end markets here in the third quarter. Are you able to quantify the volume trends you're seeing there? Maybe which areas are the strongest? And when would you expect to lap the negative comps that you're experiencing in the medical market?
Thomas Morin: Yes. Thank you, Hamir, and good morning. The trends are picking up at the back end of Q2 in most of our end segments in packaging. The one that remains low is medical as we said. The -- and we believe this will continue certainly in Q3 for this very segment. The rest, our expectations and that covers basically all the rest should yield about low single digit growth in the second quarter of this year, say around 2%, I would guess. That's where we see it.
Hamir Patel: 2%, okay. That's helpful. And you highlighted in terms of the real estate sales expectation to monetize one or two buildings later this year. Are you able to quantify the potential proceeds of what's remaining this at least this year?
Thomas Morin: Well, as I said, for 2025, we expect to -- by the end of 2025, at least $100 million for those that we might close this year. There is one that we are really close. It is a small one, but too early to tell because it depends. We feel we are in good position and we want to make sure we are at the right time in the market. So to be confirmed, but as I said overall, we expect [$100] (ph) million by the end of 2025 and confident we can close some this year.
Hamir Patel: Okay. Fair enough. That's all I had for now. I'll get back in the queue. Thanks.
Operator: Your next question comes from Adam Shine from National Bank Financial. Please go ahead.
Adam Shine: Thanks a lot. Good morning, Thomas. Obviously, a good first year. Couple of questions. Where's some of the traction or faster traction that you're seeing in regards to the profitability improvement, which clearly is moving ahead of expectations, it appears?
Thomas Morin: Thank you, Adam, and good morning. It's a combination of two things, Adam. We've been working on product mix improvement for some time now. It's not something new. Back some quarters ago, we were talking about commercial excellence, understanding the value some of our products bring. And we've been pushing those products month after month. So there is a mix improvement here, and that is true for both businesses, for packaging and the Retail Services and Printing. So that's one element of it. The second element of it is obviously the reduction of our cost base, which we've been accelerating since December as we could share with you. And then when you combine the two together, this is where the margin improved on both ends. Now the big chunk of effort we've done is on fixed costs and SG&A. So this obviously yields some straightforward bottom-line impacts.
Adam Shine: Perfect. Thanks for that. And when we go back to the potential volume improvement in Packaging that you're alluding to, I think you talked previously on the last call that you were hoping to see sort of retailers doing a bit more promotional activity to stimulate food demand, is that part of the equation here or there other things afoot to sort of see better volumes in H2?
Thomas Morin: Yes. Good yes, you remember very well what I said. The what I would say on Q2, when we look at Q2 specifically, the core of our activities really helped very well. And it's a tough comparable to last year. As you remember, last year was pretty high. So core of our segments, including the product mix I've talked about, held strongly. And that's certainly on account of what we just commented on, the improved and enhanced retailer promotional activity. The non-food core segments really suffered in Q2, a bit the same as in Q1. So we've addressed this and we've been active on the market to develop and grow some relationship with new or existing customers. And that's also what yields what we believe a better second half.
Adam Shine: Okay. Thanks for that. Appreciate it. I'll queue up again.
Operator: Your next question comes from Maher Yaghi from Scotiabank. Please go ahead.
Maher Yaghi: Great. Just wanted to ask you just a clarification on your earlier comment regarding packaging growth in the second half. Is that the 2% to 3% that you talked about, is that including medical or excluding medical?
Thomas Morin: You already add 1% to my number, Maher. That's very kind of you. Yes, I think it is -- so far we believe it includes it. The medical is not a big segment for us, but yet impactful from a decline as we speak. We factor that low activity for the rest of the year.
Maher Yaghi: Okay, great. Thanks for that. So in terms of the printing side, you were facing quite a heavy comp tough comps in the second quarter. It does look like we're still in that 5% to 6%, 7% range in terms of decline year-on-year. Is that what you're looking at in the second half potentially or things have changed?
Thomas Morin: Things have changed my view, not so much in terms of volume, but in terms of product offering. What you need to factor in, Maher is the change in the product offering we have in the Retail Services and Printing activity. And that is the rollout of Radar, which has an impact obviously on the top-line, and that's reflected in the minus 5%, but also an impact from a product mix standpoint in terms of bottom-line. The other thing is the book segment. If you compare year-over-year, our book activity was actually strong in the first half and much less so in the second half. So when you compare year-over-year, we'll have an easier comparable.
Donald LeCavalier: And maybe just to complete on radar, you last year we had started the radar rollout in Montreal. So year over-year in Q3, Montreal will be will have no impact and now it's more the rest of Quebec that will be impacted by radar.
Thomas Morin: So -- and there is some trading.
Donald LeCavalier: Yes, correct.
Maher Yaghi: Okay, great. Now just turning on the cost side, definitely strong performance in the second. How much additional cost control we could look at or could see on the packaging side still not visible yet on results?
Donald LeCavalier: So our plan as we communicated is to aim at $40 million. We believe we're going to be on a run rate of $30 million at the end of this fiscal year. So there is another $10 million to go forward. And this is not specific to packaging, Maher. It is company-wide, obviously, as we're addressing our fixed costs in particular. That being said, the focus remains the same. Beyond fixed costs, we're looking at the cost of goods sold. We have still some work to be done in there, and that would be more on the packaging side, to your point. And the second thing would be on the underperforming sites. We still have some sites lagging behind, and we are addressing this at the same time. So we believe, say over the two years, we believe we should be in a position to meet our targets of $40 million continuing to work on those three things.
Maher Yaghi: Great. And Thomas a significant part of your initial objective was to reduce volatility on the margin side, on the profitability side that we saw maybe in the past. Can you tell us how you believe the company has repositioned itself so far when it comes to reducing that volatility? Definitely, we are seeing less volatility on the earnings side than your reported results, but maybe you can tell us a little bit more if that project has run its course and achieved its goal.
Thomas Morin: Yes, good question. The well -- there is so much we can control. But what we can control, I think the story is that we have a much better control, obviously on our costs. And we are using this to reduce this volatility if you will, but more importantly to improve our profitability. And that's what's matters as we speak. Moving forward, we've been experiencing in the last three quarters a lower demand, as you all know, and that's not specific to us. We'll see what a better demand can yield in terms of profit moving forward. Volatility will still be there given the demand on the marketplace. But again as I said, everything we can control in the right direction we do. So that's what led to less volatility and improved margins.
Maher Yaghi: Okay. Thank you. Maybe one last question on the buyback that you discussed earlier. We are seeing leverage come down. What is your overall leverage level that you'd like to maintain just for us to understand how much cash you could deploy on the buyback. You mentioned the 5%, but that's kind of an overall goal. But what is the level of leverage that you think that the business long-term should trend to and we'll make the math work on the other side to see how much extra cash you have for the buyback?
Donald LeCavalier: We always said that we other than following acquisition, we want to be below 2%. It's important for us. It's important for the Board. That's what we are aiming by the end of this fiscal year. Also what's good for us is the large part of our huge CapEx program is behind us. So that encourage us that we will be in a great position regarding debt to EBITDA by the end of this fiscal year. So we instead of saying what is the target, we what we can say is that we're confident that we're going in the right direction regarding our priority to reduce the debt. And we feel comfortable to put this program in place while maintaining this direction of going down. And we expect that now we don't have those issues working [gap] (ph). So Transcontinental is directly has been a very good company to produce a lot of free cash flow, and that's the direction we're going. So we're comfortable where we're going on the debt level to conclude on that and we have room to make NCIB and still decrease the debt. That's the strategy.
Maher Yaghi: Great. Thank you very much.
Operator: Your next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.
Stephen MacLeod: Thank you. Good morning. Good morning, everyone. Lots of great color so far, so thank you. A couple of things. When I looked at the packaging margin in Q2, obviously quite robust at north of 17%. Just curious if you can break down on a year-over-year basis, how much of that improvement was driven by mix and how much of that improvement was driven by the cost reductions that you've identified?
Thomas Morin: Well, we won't say the disclosure number, but cost reduction is the big impact and I will say mix is the second impact. That's the way to look at it. But cost reduction, you can see it because if you see the decrease on sales and the large improvement we had on the margin side. Well, margin and EBITDA, which is the most important thing for us, growing the dollars. So cost reduction, for sure had a big impact. But what we're encouraged is the mix is going in the right direction, and this is because we invested CapEx in those plans that are good for us on the margin side, and it is working as we speak.
Stephen MacLeod: Right. Okay, great. And then just looking forward here, we previously talked about sort of I think like a 16% margin level being a good place to be potentially aspirationally on the packaging business. Just curious like how do you feel about your margins for the balance of the year and is that 16% baseline, all else equal, a higher number now when you think about the long term margin profile of the Packaging business?
Thomas Morin: Well, first, yes, we're confident for the rest of the year with this baseline. We don't like to talk too much about margin in the future because as we saw in a couple of years ago with the large impact of the recent price going up, that can influence. But the most important thing for us is we grow the EBITDA in dollars, and this is what we've been doing in the last six quarters for packaging, and this is what we want to maintain. As far as [margin] (ph), we think the mix improvement will help, the cost program will help, but hard to say where we'll be two years from now because of what I said.
Stephen MacLeod: Yes. Okay. That makes sense. Thank you. And then maybe just turning to the new retail or newly named retail and printing services retail services and printing, sorry. Can you just remind us sort of where you sit in terms of the revenue breakdown between, I guess what you would consider to be legacy printing or traditional printing and the ISM and sort of retail focused businesses that are providing some offsets, some offsetting growth?
Thomas Morin: Well, just maybe to say that what's legacy printing represent [post] (ph) to a third of the business as we speak right now, which is mainly newspaper, magazine and book. And ISM, is now is part of the what we call the retail part. So ISM and everything regarding the flyer that's now Radar, but it's way more than Radar that is also the digital. We're working in the pre-media part of the business. So it does represent roughly two-third of the business.
Stephen MacLeod: Okay, that's great. Thanks so much guys. Appreciate that.
Thomas Morin: Thank you.
Operator: [Foreign Language] [Operator Instructions] Your next question comes from David McFadgen from Cormark Securities. Please go ahead.
David McFadgen: Okay, great. Couple of questions. Just on the medical vertical, is this vertical just going through a short term impact? Or is this a permanent impairment?
Thomas Morin: We believe it is well, it depends what you mean by short-term. That's always the same thing. The -- what happened in Medical is these are this has been over stocked in, I would say, last year. Last year was strong in the Medical. This is obviously the aftermath of the pandemic. The difference between Medical and the rest of our activities from a customer standpoint is that inventories can last for some time. So we've been talking to all our customers there, and some of them sit on six months, some others on 10. So we believe this is depending on what you mean by short or long term, this can be another couple of quarters. That's our understanding.
David McFadgen: So it seems that to me it would seem that the business is going to right size and once it's right size then it probably grows again, no?
Thomas Morin: Agreed.
David McFadgen: Okay. And that could maybe be another couple of quarters to get to the right size and then --.
Thomas Morin: That's our best estimate at this point in time. We're obviously having extremely regularly connections with our customers so that we monitor this with them.
David McFadgen: Okay. And then I was just looking in the cash flow statement. I believe that you indicated at the beginning of this fiscal year that you thought you would have a working capital inflow similar to what you had last year to recover that big investment that you made a few years ago? I'm just wondering, is that still the expectation?
Donald LeCavalier: Yes. We expect to be positive working cap by the end of fiscal year, and we expect the second half to be positive on that side for sure, yes. Obviously, not as big as what we had last year because last year, we were coming from last year -- was very solid, coming from few years of being very negative on the working cap, but we're trending in the direction to get better again this year.
David McFadgen: Okay. So if you look back a few years and you accumulated that working capital investment is about $200 million but more than that. Do you expect to eventually get all of that back? Or probably not going to get to that level, but you still expect some inflow?
Thomas Morin: Yes. Well, to be exactly back where we were before, we'll be tough because there's still some raw materials that are not at the price it was back then. So that's changed since. So it's hard to say, but we feel that by the end of this fiscal year, all the work was done internally. Obviously, the supply chain now is more secure for us, so we don't have to maintain that much of inventory. But we're really proactive to get better at every part of the working cap. So we have plan going on that we feel comfortable with. But to catch everything back is hard and the business is changing at the same time. The mix for us is changing. So it's hard to compare apple-to-apple what was the situation, I would say, pre COVID.
David McFadgen: Okay. All right. Okay, thank you.
Thomas Morin: All right.
Operator: Mr. Lapointe, there are no further questions at this time.
Yan Lapointe: Thank you everyone for joining us on the call today and we look forward to speaking to you soon.
Operator: [Foreign Language] Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.
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