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spk00: et des directives vous seront données à ce moment. Nous désirons vous rappeler que cette conférence est enregistrée aujourd'hui le 6 juin 2024. 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 Yann Lapointe, Director, Investor Relations and Treasury. J'aimerais maintenant céder la parole à Yann Lapointe, Directeur Relations avec les Investisseurs et Trésorerie. Mr. Lapointe, please go ahead.
spk08: 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 slide 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 Saint-Jean, Senior Advisor, Corporate Communications, for more information. We have with us today our President and Chief Executive Officer, Thomas Morin, and our Executive Vice President and Chief Financial Officer, Donald Le Cabadier. As referenced on slide two, 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 now like to turn the call over to our President and CEO, Thomas Marais.
spk02: Thank you, Yann, and good morning to everyone. We are pleased to report a third quarter in a row of improved profitability, largely due to our cross-production initiatives and a favorable product mix. First, our 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 their quick and effective execution of this important program. Second, our continued focus on optimizing our product mix has contributed to improve our margins in both of our main sectors. In our packaging sector, while destocking remained an issue in our medical business, and with a challenging comparable last year, we achieved a record performance. Demand in our non-food businesses remains low, 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 recycle-ready packaging, the rollout of our cutting-edge BOP line in Farnburg, a 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 Pack Global, and we are particularly pleased with the direct customer recognition received from Procter & Gamble, with the Partner Excellence Award, and from Coca-Cola Canada, the 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 room for 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 homes. We look forward to the further expansion of radar in British Columbia and radar entry in Newfoundland, both in the month of July. Finally, I'm encouraged by the continuous growth in our ISM activities. 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 turn it over to you, Donald.
spk01: Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on slide five of the earnings call presentation. For the second quarter of 2024, we reported revenues of $683.2 million, an 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 the last 12 months, partially offset by exchange rate fluctuations and a higher interest rate on our floating red 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 six 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 and 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 was $23.1 million lower than last year and in line with our full year guidance of around $135 million. Despite the impact in the strengthening of the U.S. dollar at the end of the quarter, we're maintaining our net debt ratio to two 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 the 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.
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 clavier téléphonique. Une tonalité se fera entendre confirmant votre demande. Les questions seront prises dans l'ordre que seront été acheminées. Veuillez également vous assurer de décrocher le récepteur de votre appareil téléphonique si vous utilisez la fonction à main libre avant d'appuyer sur les touches. Un moment si vous voulez pour votre première question. 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 are received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please for your first question. Your first question comes from Amir Patel from CIBC Capital Markets. Please go ahead.
spk05: 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 see to lap the negative comps that you're experiencing in the medical market.
spk02: Thank you, Amir, 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, 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 part of this year, say around 2%, I would guess. That's where we see it. 2%, okay.
spk05: 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 at least this year?
spk01: 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's one that, you know, we're really close. It's a small one, but too early to tell because it depends. You know, we feel we're 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 million by the end of 2025 and confident we can close some this year.
spk05: Okay. Fair enough. That's all I had for now. I'll get back in the queue. Thanks.
spk00: Your next question comes from Adam Shine from National Bank Financial. Please go ahead.
spk03: Thanks a lot. Good morning. Tomorrow, obviously, a good first year. A 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?
spk02: 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 improves 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.
spk03: Perfect. Thanks for that. And we go back to the potential volume improvement in packaging that you alluded 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 is that part of the equation here or are there other things afoot to sort of see better volumes in h2 yeah good uh yeah you remember very well what i said the um what i would say on q2 when we looked at q2 specifically
spk02: the the core of our activities really helped very well and it's a tough comparable to last year as you remember last year was was pretty high so core of our of our segments uh including the product mix i've talked about health strongly the uh and that's certainly on account of what we just commented on the uh the improved and enhanced uh retailer promotional election the 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.
spk03: Okay. Thanks for that. Appreciate it. I'll queue up again.
spk00: Your next question comes from Matt Uriaghi from Scotiabank. Please go ahead.
spk09: Great. Merci d'avoir pris mes questions. I 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?
spk02: You already add 1% to my number, Maher. That's very kind of you. I think so far we believe it includes it. 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.
spk09: 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?
spk02: Things have changed, my view, not so much in terms of volume, but in terms of product offerings. What you need to factor in, Mael, is the change in the product offering we have in the retail services and printing activity, and that's 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.
spk01: And maybe just to complete on radar, last year we had started the radar rollout in Montreal. So year over year, in two, three, Montreal will have no impact, and now it's more the rest of Quebec that will be impacted by radar. Yeah, that is some phasing. Yeah, right.
spk09: Okay, great. Now, just turning on the cost side, definitely strong performance in the second quarter. How much additional cost control we could look at or could see on the packaging side, still not visible yet in results?
spk02: 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 at the end of this fiscal year, so there is another 10 to go for. And this is not specific to packaging. 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're 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.
spk09: Great. And Thomas, you know, 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're seeing less volatility on the earnings side in your reported results, but maybe you can tell us a little bit more if that project has run its course and achieved its goal?
spk02: Yeah, good question. 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're using this to reduce this volatility, if you will, but more importantly, to improve our profitability. That's what 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, Max.
spk09: Okay, thank you. Maybe one last question on the buyback that you discussed earlier. We're 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 a an overall goal, but what is the level of leverage that you think the business long-term should trend to? We'll make the math work on the other side to see how much extra cash you have for the buyback.
spk01: We always said that We, you know, other than following acquisition, we want to be below two. It's important for us, it's important for the board, and that's what we're 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 encourages us that we will be in a great position regarding debt to EBITDA by the end of this fiscal year. So we, you know, instead of saying what is the target, 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 gaps. So Transcontinental historically has been a very good company to produce a lot of free cash flow, and that's the direction we're going. 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.
spk07: Great. Thank you very much.
spk00: Your next question comes from Stephen McLeod from BMO Capital Markets. Please go ahead.
spk04: Thank you. Good morning, everyone. Lots of great colors so far, so thank you. Just a couple of things. When I looked at the packaging margin in Q2, obviously quite robust, that 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.
spk01: Well, we won't see the disclosed 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 you see the decrease on sales and 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 capital. and it's working as we speak.
spk04: Right. Okay, great. And then just, you know, looking forward here, we previously talked about sort of, you know, I think like a 16% margin level being a good place to be, potentially aspirationally on the packaging business. You know, just curious, like how do you feel about your margins for the balance of the year? And is that 16% baseline, you know, all else equal a higher number now? when you think about the long-term margin profile of the packaging business?
spk01: 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 a couple of years ago with the large impact of the risen 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 year. know six quarters for for packaging and this is what we want to maintain as far as merit margin 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 yeah okay that makes sense thank you um and then maybe just turning to the print of the uh the new retail or newly named retail and printing services or retail services of printing sorry um
spk04: Can you just remind us sort of where you sit in terms of the revenue breakdown between, I guess, what we would consider to be, you know, legacy printing or traditional printing and the ISM and sort of retail-focused businesses that are providing some offsets and offsetting growth?
spk01: Well, you know, just maybe to say that what's legacy printing represent? close to a third of the business as we speak right now, which is mainly newspaper, magazine, and book. And ISM, you know, is now part of what we call the retail part. So ISM and everything regarding the flyer that is now radar, but is way more than radar. There's also the digital. We're working in the pre-media part of the business. So it does represent roughly two-thirds of the business.
spk07: Okay, that's... That's great.
spk04: Thanks so much, guys. Appreciate it.
spk02: Thank you.
spk00: Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. As a reminder, if you're using a speakerphone, please leave the handset before pressing any keys. Your next question comes from David McFadgen from Carmark Securities. Please go ahead.
spk06: Okay, great. A couple of questions. To start on the medical vertical, is this vertical just going through a short-term impact or is this a permanent impairment?
spk02: We believe it is. It depends what you mean by short term. That's always the same thing. What happened in medical is this has been overstocked 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.
spk06: So it seemed that, to me it seemed that, you know, the business is kind of right size, and once it's right size, then it probably grows again, no?
spk01: Agreed.
spk06: Okay. And that could maybe be another couple quarters. to get to the right size.
spk02: That's the best estimate at this point in time. We're obviously having extremely regular connections with our customers so that we monitor this with them. Okay.
spk06: 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?
spk01: Yeah, we expect to be a 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 was very solid, coming from a few years of being very negative on the working cap, but we're trending in the direction to get better again this year.
spk06: 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 that back or probably not going to get to that level, but you still expect some inflow?
spk01: Yeah, well, to be exactly back where we were before will 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 we've 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 gap, so... We have a 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?
spk06: Okay. All right. Okay, thank you.
spk07: All right.
spk00: Il ne semble plus y avoir de questions en ce moment. Mr. Lapointe, there are no further questions at this time. Thank you, everyone, for joining us on the call today, and we look forward to speaking to you soon. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.
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