Transcontinental Inc.

Q3 2022 Earnings Conference Call

9/7/2022

spk00: Mesdames et messieurs, merci d'avoir patienté et bienvenue à la conférence téléphonique concernant les résultats du troisième trimestre de l'exercice 2022 de TC Transcontinental. Pendant la conférence, tous les participants seront en mode d'écoute seulement. Une période de questions suivra la présentation et des directives vous seront données à ce moment. Nous désirons vous rappeler que cette conférence est enregistrée aujourd'hui le 7 septembre 2022. Welcome to the TC Transcontinental third quarter of 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 7, 2022. And I would like to turn the conference over to Monsieur Yann Lapointe, Director, Investor Relations. I would now like to give the floor to Mr. Yann Lapointe, Director, Relations with Investors. Mr. Lapointe, please go ahead.
spk03: Thank you, Sylvie, and good afternoon, everyone. Welcome to our third quarter 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 slide supporting management's remarks, are all 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. We have with us today our President and Chief Executive Officer, Peter Bruce, and our Chief Financial Officer, Donald LeCavalier. But before I turn the call over to management, I would like to specify that this conference call is intended for the financial community. Media are in listen-only mode and should contact Nathalie Saint-Jacques, Senior Advisor, Corporate Communications, for more information. Please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. You can refer to the MD&A for 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 expectation of management and information available as of today, and they involve numerous risks and uncertainties, known and unknown. The risk, uncertainties, and other factors that could influence actual results are described in the fiscal 2021 annual MD&A, in 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 Bruce. Thanks, Jeanette.
spk06: Good afternoon and thanks for joining our call. First, from a safety perspective, we were pleased to see our 12-month rolling injury rate decrease by 15%. Our team is committed to creating a culture to achieve an injury-free workplace. Second, we have announced today the retirement of Brian Reed after an outstanding career at TC. Brian, I know you're on the line. Isabelle Marcoux 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. Effective October 31st, Nick Cannon, Pat Braley, and Pierre Delenchant will take on expanded printing sector leadership roles, reporting to me, and joining the company's executive management committee. These changes will allow me to work more closely with the print team and support their drive to properly grow our business. Turning to Q3 financial results, we continue to improve. Despite the triple challenges of inflation, 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. In 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's negative impact on the banana industry. In 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 most strongly in our distribution business. In our media sector, we had a strong increase in both revenues and profits. This increase was due to the timing of the RP 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 are on the right path for Q4 and are setting the foundation for future success. And now, I'll hand it over to Dan Al.
spk04: Thank you, Peter. First, I would like to echo your words about Brian and his outstanding 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 review 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 Bannaplast in packaging, BGI Retail in printing, FP and Scolab in media. And lastly, higher volume in our three operating sectors. On the profitability front, consolidated adjusted EBITDA grew by 8.4% to $113 million for the quarter. Excluding the Canadian wage subsidy of $9.2 million received in Q3 last year, this performance represents a 19% adjusted EBITDA growth. The increase was mainly due to the acquisitions, the higher 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 The tax rate was at 20.9%, leading to adjusted net earnings of 57 cents per share for the quarter compared to 51 cents 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 higher raw material prices and other inflationary costs, in addition to volume growth of approximately 4%. This is a strong performance in light of continued supply chain challenges. Except for Latam business, which was negatively impacted by the war in Ukraine, we saw volume increases in all our markets. In addition, the acquisitions of HS Crocker and Banaplas contributed $20 million of revenues in Q3. Lastly, positive exchange rates added $11.4 million. In terms of profitability, adjusted EBITDA in packaging grew by $10.1 million, or 24%, as a result of the positive impact of pass-through of higher raw material and other costs and also higher volume. Excluding the positive contribution of $2.1 million from our acquisitions and 1.6 from our exchange rate, adjusted EBITDA grew organically by 15%. On slide 7, you can see the printing at a sixth consecutive quarter of growth with $28 million of organic revenue growth versus Q3 last year. This increase came from our in-store marketing, book printing and pre-media activities. These segments generated double-digit growth in the quarter, showcasing the significant opportunities. As we continue to adapt our portfolio of activities, these segments now represent a third of the sector's revenues. Finally, the acquisition of BGI in Q3 last year and the pass-through of higher raw material prices and other costs 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 the sector increased with volume growth offsetting the negative impact of inflation. Higher fuel and labor costs had an important impact on our distribution activities. The sector adjusted EBITDA margin for the quarter was at 18%, reflecting the dilutive effect of pass-through of higher costs due to inflation. In our media sector, The highlight was the acquisition of RP 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 costs. Turning to cash flow, we generated $113.4 million in cash flow from operating activities before change in non-cash items and income tax paid. an increase of $12 million versus the same quarter last year. The increase was more than offset by 47 million 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 expectations. At the end of the quarter, our net debt ratio was at 2.51 times, slightly above the previous quarter at 2.35 times. The increase is mainly due to the acquisitions of ERPI and Bannaplast 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 significant debt maturities before February 2025, 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 the quarter. Finally, we distributed $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. In print, when excluding the 53rd week of 2021, we expect higher revenues in fiscal 2022, following the solid growth from our ISM, book printing, and pre-media activities. In terms of profitability, we expect adjusted EBITDA in fiscal 2022 to be similar to fiscal 2021 when excluding the 53rd week and the impact of the wage subsidy last year. We expect corporate costs 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. Keep in mind that last year had an additional week that will not reoccur this year. On that note, we will now proceed with the question period.
spk00: Merci. Mesdames et messieurs, nous allons maintenant procéder à la période de questions et réponses. Si vous avez une question, veuillez appuyer sur les touches étoiles suivies du 1 sur votre téléphone à clavier. Une tonalité se fera entendre confirmant votre demande. Les questions seront prises dans l'ordre qu'elles auront été acheminées. Veuillez également vous assurer de décrocher le récepteur de votre appareil téléphonique si vous utilisez la fonction mains libres avant d'appuyer sur les touches. Un moment, s'il vous plaît, pour la première question. Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press the star followed by 1 on your touch-tone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please ensure you lift the hands up if you are using a speakerphone, before pressing any keys. One moment, please, for your first question, which will come from Adam Schein at National Bank Financial. Please go ahead.
spk01: Thanks a lot. Good afternoon. Peter, a couple of questions for you, starting with the packaging and some of the success you're seeing on the pass-through mechanisms. Obviously, progress was witnessed in Q2, further momentum in the Q3 key. You talk about Any further progress to be expected going into Q4? And along those lines, you know, are you seeing any easing of some of the pressures, be it supply chain inflation or resin? And obviously, I acknowledge the fact that, you know, some of your inventories are certainly sitting there at higher price points to be passed on. But maybe just speak to, you know, some of that, and then I'll follow up with something on printing.
spk06: Sure. Thanks, Adam. Hearing from you. In terms of pass-throughs, you're right. We came slow out the gate in certain segments of the business in Q1, and we've worked extremely hard to ensure that's 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 costs, 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 PE is not something we guess to, but at the same time, I anticipate a small decline given that there's been capacity to crackers that have come on That 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 you're 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 you're looking at things like FOIL, given the situation in Europe and energy, even though you'd see LME going down, the actual converting of foil remains at a high price. Specialty resin grades continue to go up. So it's not a simple answer, but our biggest raw material is certainly going down slightly right now.
spk01: Okay. And just turning to printing, margins, if you adjust for I guess the absence of queues stepped down a little bit, and part of that was certainly the strength you saw at the top line in 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. So maybe just speak to that in terms of any stepped up activity related to that going into Q4 and perhaps into next year.
spk06: From a print perspective, I think the team's done a phenomenal amount of work to ensure that that inflationary costs are passed through on a timely basis. You'll also recall that we tend to have base contracts as it relates to our classic business of newspaper and 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 As inflationary costs are passed through, that does increase the cost for our customers, certainly retail customers who have fixed marketing budgets. And while 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 phenomenal job and really pleased with the quarter in terms of that. From a distribution perspective, you're exactly right. that added labor and gas costs are such that we're less able to cover those costs.
spk01: Maybe just one for Danald. In the Q2, it was highlighted that there was some investment spending related to the ramp-up on some newer ISM contracts. Nothing called out for Q3, so can we just confirm that there were no sort of investment-related buckets of spending of any materiality that's worth highlighting?
spk04: We saw, depending on Q3, better margins on this part of the business, and that was the plan. So Q1 was tougher because a lot of the new business started to come 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, yeah.
spk01: Okay, thanks. I'll leave it at that. Appreciate it.
spk00: Thank you. Merci. La prochaine question, the next question will be from Gabriel Nicholson at CIBC World Market. Please go ahead.
spk02: Hi, everyone. Thanks for taking my questions. My first one here is for Peter. In regards to using Canada Post for Publisac deliveries going forward, how much do you anticipate the cost of delivery will increase, and how do you think that will impact margins? And I'll follow up after that.
spk06: Thanks for your question. I think first I'd start by saying that We remain committed to the flyer. I think it's the 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 is part of the circular economy. When we look at its impact and the savings it has on families during inflationary periods, I think it's important. I'm talking $500 to $1,500 for a family a year. And then it's the most efficient marketing tool for retail customers. So we remain committed, and the team's looking at all kinds of alternatives going forward. I know they're working exceptionally hard, and we're not committed to a single alternative. So what I'd say to you is we're working hard, and I'm confident in our ability to serve our customers' and consumers' needs well into the future.
spk02: Okay, great. Thank you. And then second, turning to the other segment, do you expect to see a similar level of contribution from the ERPI acquisition in Q4 as we saw in Q3?
spk04: We need to model that ERPI's seasonability is is aligned with our current media business. And you can see that third and fourth quarter represent a very high volume of EBITDA. So therefore, yes, we're very satisfied with the numbers in Q3. But don't analyze that there will be 12 months like the first month we had following acquisition of FP. It will be aligned with the current business that we have in education.
spk02: Okay, noted. Great, thank you. And then last one here for Donald. Given the M&A activity we've seen this year, how are you thinking about CapEx going into 2023?
spk04: Well, we're still working on a plan, so there's nothing established yet for sure. We have commitment regarding some of the important investments we're making right now for the sustainability side of the business. But we, of course, are aware of the current economic conjecture, and we will make the right decision to protect the balance sheets. but at the same time we will make the right decision to grow the business. So we've been active, you're right, in the last 15 months or so with five acquisitions, good acquisitions, but the market will create some opportunities, but we'll do it with the same discipline we did in the past, having in mind the current economic condition in the market right now.
spk02: Okay, thanks very much. I'll turn it over.
spk00: Thank you. Merci. La prochaine question, your next question comes from Mark Nettle at Scotiabank. Please go ahead.
spk08: Hey, good afternoon, guys. Thanks for the time. Maybe just to follow up on all the price increase commentary. In terms of raw materials, non-raw materials, just I guess inflation in general, Are there still more price increases that you're pushing through or passing through or need to pass through, or at this point are they largely put in place?
spk06: I'd say inflation continues to rise. In terms of general inflation, yes, and in terms of there are 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 to Adam earlier, our biggest raw material is currently leveling off or declining, but there do remain increases that need to go through.
spk05: Got it.
spk08: I guess just in terms of margin percentage, I guess I'm less concerned about the percentage of dollar amount, but just, I guess just by way of math, just given all the inflation that's gone through the business, I mean, should we, the margin percentage, should we think about a slightly lower percentage than where it was, the business was maybe two years ago? Just, again, just given the math.
spk04: For sure, for sure. This is, and I guess third quarter, if you look at packaging right now, we increased a bit by, you know, a large amount of the dollars and you see the margin that's almost flat. So that's not an issue with the mix of product. The biggest issue regarding that is the impact on inflation. So if you look over the last two years with the increase we had on raw material and all other price increase we had linked to inflation, that has played for more than 100 basis points of margin decrease. So yes, to your question.
spk08: Yeah, sorry, Donald, you said roughly 100 basis points from inflation?
spk04: At least if I compare to last year, we're probably more than 100. And if we go back to two years, That would be another exercise, but it will be significant for sure. Remember, before we were close to the 15%. It's not like we changed the mix of product that much since we were at that level. So the biggest, biggest impact is inflation and increase of raw material.
spk08: Yeah. In terms of the outlook, correct me if I'm wrong, but I think the expectations for print Being flat, it's down a bit from prior. I think prior was that it would grow. I guess my question is, is the difference there just, again, all the inflationary costs and distribution? Would that explain the difference?
spk06: I think the way you should look at it is when we look at the pass-through of inflationary costs, that could have an impact on the flyer side of the business in terms of volume. and obviously the distribution side of the business in terms of costs. Got it.
spk05: All right. Thanks a lot.
spk00: Thank you. Merci. Mesdames et messieurs, encore une fois, si vous avez des questions supplémentaires, veuillez s'il vous plaît appuyer sur les touches étoiles 1. Si vous utilisez la fonction main libre, veuillez décrocher le récepteur avant d'appuyer sur les touches. Ladies and gentlemen, if there are any additional questions at this time, please press star followed by 1. As a reminder, if you're using a speakerphone, please lift the handset before pressing any keys. La prochaine question, your next question will be from Stephen McLeod at BMO Capital Markets. Please go ahead.
spk07: Thank you. Good afternoon, guys. A number of my questions have been answered, so thank you for the color. Just a couple of things I wanted to follow up on. Firstly, in the packaging business, just to pull on the thread around margins a bit more here, Do you think, given where inflation is and how much price you've passed through, you could sort of get back into that 15%, 16% margin range, pushing into 2023 or potentially 2024?
spk04: Well, 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. And I won't comment on what will happen in 2023 to get back to, I will say, normal margin back to before inflation. So it could happen, but I won't predict that it will happen. As I said, it's a large impact.
spk06: So it'll be something related to raw material as opposed to some change in mix. So if we're looking at it as it relates, like our objectives are profit growth. And we try to stay away from, you know, setting a percent target on something that varies that much and affects the denominator so strongly.
spk07: Right. Okay. Okay, no, that's helpful. And then just turning to the other media and other segment, yeah, nice contribution in the quarter to the full consolidated numbers. And, you know, I'm just curious if – Would you expect that as you roll into next year, barring no major changes in the acquisition landscape, would you expect to continue to drive margins higher at the newly acquired contributor for that business?
spk05: Well, obviously, this acquisition is a very good acquisition.
spk04: But both acquisitions that we did with the media group this year were very good. a re-IP with those acquisitions, complete our offer. That was important for us, so we're sure we have now a 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.
spk07: Okay. That's great. Thank you. And then maybe just one more. I don't think I heard it in your prepared remarks, Donald, but I'm just wondering if you could confirm that the tax rate expectation would be sort of mid-20s for this year, and I think previously you'd expected cash taxes in the $80 million range. Are those still reasonable assumptions?
spk05: Yeah. Yes.
spk07: Okay. That's great. Thank you very much.
spk00: Thank you. Merci. Et il ne semble plus avoir de questions. Monsieur Lapointe, there are no further questions at this time.
spk03: Thank you, everyone, for joining us on the call today, and we look forward to speaking to you soon.
spk00: Mesdames et messieurs, ceci termine l'appel conférence pour aujourd'hui. Merci de votre participation. Vous pouvez maintenant raccrocher. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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