CA - Transcontinental Inc. (TCLAF) Q4 2023 Earnings Call Transcript
2023-12-13 10:04:09 ET
Transcontinental Inc. (TCLAF)
Q4 2023 Earnings Conference Call
December 13, 2023, 7:30 AM ET
Company Participants
Yan Lapointe - Director, Investor Relations and Treasury
Thomas Morin - President and Chief Executive Officer
Donald LeCavalier - Executive Vice President and Chief Financial Officer
Conference Call Participants
Adam Shine - National Bank Financial
Hamir Patel - CIBC Capital Markets
David McFadden - Cormark Securities
Nevan Yochim - BMO Capital Markets
Presentation
Operator
[Foreign Language] Welcome to the TC Transcontinental Fourth Quarter and Fiscal Year 2023 Results Conference Call. During the presentation, all participants will be in 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, December 13, 2023.
I would like to turn the conference over to Yan Lapointe, Director, Investor Relations and Treasury.
[Foreign Language] Mr. Yan Lapointe, please go ahead.
Yan Lapointe
Thank you, Joel, and good morning, everyone. Welcome to Transcontinental's Fourth Quarter and Fiscal Year 2023 Earnings Call. Before we begin, please note that the press release, the MD&A, along with financial statements and related notes, as well as slides 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. 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 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 LeCavalier. 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 risk, 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 very good morning to everyone. Thank you for joining this quite early call, I must say. I'm pleased to be here with you to discuss our Q4 results, my first full quarter as a CEO. First on safety. We improved again this year as our fiscal 2023 incident rate dropped by another 17% following an improvement of 23% last year.
We still have work to do to achieve an injury-free workplace, and yet we are moving in the right direction. Turning to Q4, we have continued to focus on our four key priorities. Number one, growing organically and profitably. We are pleased with our growth of 3% in adjusted EBITDA despite the decline in our volume.
Number two, delivering a strong return on assets in line with our new program to improve our profitability on our balance sheet, to which I will come back later. We have announced the closing of our Tomah, Wisconsin packaging plant and the transfer of its activities within our network.
I also mentioned during our Q3 call, the closing of our Montreal recycling facility with the integration of our plastic recycling activities directly into our film production plants. And we have announced in early November, the end of Publisac and its gradual replacement by raddar throughout Quebec, as well as the rollout of raddar in Ontario and British Columbia.
On the third, certainly a major highlight of the quarter. We've made great strides on the reduction of our net debt, thanks to improved working capital for the third consecutive quarter and to a lesser extent, the monetization of one of our buildings in Quebec City.
This led to a very solid performance in terms of cash flows. Fourth, commercializing sustainable products. We're progressing well with the installation of our BOPE Line in our Spartanburg facility and we continue to expect to start up production at the back end of spring early next summer.
Now let's turn to our sectors. The packaging group ended the fiscal year on a strong note in Q4, concluding a year of growth. Lower volumes in the quarter were caused by lower demand, certainly due to the economic context, particularly impacting some nonfood segments. And second, by the end of destocking, which we could see early in the quarter.
In our printing sector, we continue to face challenges in our book printing operations and have taken steps to mitigate their impact in 2024. On the other hand, we are encouraged by the favorable opportunities in our retail service businesses as well as the rollout of raddar. And last, our media sector posted a strong performance in the fourth quarter.
So altogether, we're satisfied with these results given the current economic context, which may continue into the New Year. Looking forward, we all agree that we need to do more to deliver higher profitability and we need to generate better return on what we've got. Decisive actions are necessary.
This is why I've put in place an ambitious program to improve the company's earnings per share as well as our balance sheet. This two years program is expected to deliver early impacts in the second half of fiscal 2024 and recurring savings between $20 million and $40 million in fiscal 2025. We have four main categories of actions. The first is to reduce addressable fixed costs across the organization.
The second is to make decisions on less profitable activities with two options, either a quick turnaround or a consolidation. The third is to target a reduction of the cost of goods sold, basically leveraging members of our operational excellence, procurement and R&D teams combined into one project team to deliver savings and fourth, sell real estate assets, which we anticipate to be approximately worth $100 million.
And this is a first step as this is part of a program which can continue beyond the first two years. With increased profitability and a stronger balance sheet, we will be better positioned to grow earning per share.
This program is perfectly aligned with our four key priorities and it is the right thing to do at this point in time, especially in the current macroeconomic context. I strongly believe in it and our team is fully mobilized to execute it smartly and diligently.
Now, over to you, Donald.
Donald LeCavalier
Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on slide six of the earnings call presentation. For the fourth quarter of 2023, we reported a 2.8% decrease in revenues versus the same period last year. This was mainly driven by lower volume in both our packaging and printing sectors.
Regarding profitability, consolidated adjusted EBITDA for the quarter was $145.5 million, an increase of 3.1% thanks to the strong performance in the media sector and positive impact from the share-based compensation. Financial expense increased by $7.8 million to $18.3 million in the fourth quarter of 2023.
This was mainly due to the increase in interest rates and by the effect of exchange rate fluctuations. Adjusted income tax of $17.4 million was $3.1 million lower than last year and represented an effective tax rate of 19.6%. This resulted in adjusted net earnings of $0.0083 per share for the quarter, 5% improvement versus last year.
Now moving to slide seven for a sector review. In packaging, we generated revenue of $420.8 million, down 2.9% versus last year. The decline is mainly due to lower volume from market softness and to a lesser extent, customer destocking early in the quarter.
This was partially offset by stronger US dollar. In terms of profitability, despite lower volume, adjusted EBITDA in packaging remained stable at $61.7 million as favorable exchange rates, cost savings and efficiency improvements did offset the volume impact.
Moving to printing on slide eight. Revenues decreased by 4.8% to $311.3 million. This was mainly due to lower volume in retail flyer and book printing activities. Printing adjusted EBITDA was $61.1 million for the quarter compared to $64.6 million last year. The $3.5 million decline mainly due to lower volume is better than the $7.1 million gap we had in Q3 and an even more significant improvement when comparing with the $16.2 million decline in Q1.
As we are accelerating the implementation of cost reduction measures, we should be better positioned to adapt to volume. Media had a solid quarter compared to last year due in part to the timing of orders between Q3 and Q4. Corporate expenses were positively impacted by three million lower share based compensation expense in Q4 following the stock performance.
Now turning to cash flow. As expected, Q4 2023 was a strong quarter. We generated $246.2 million from operating activities, an increase of $142.7 million versus last year, mainly driven by improved working capital as we continue to make progress on reducing inventories. We also improved receivables with the successful implementation of a new factoring program.
This third consecutive quarter of positive working capital supported our significant improvement cash flow performance on a full year basis. Our CapEx, at $29 million, was $5.2 million lower than last year and was the lowest quarter over the last two years. In addition to the lower CapEx, we also sold a building in Quebec City for $12 million.
Our solid cash flow performance combined with stable profitability led to a significant improvement in our net debt ratio. We closed the year with the ratio standing at 2.06 times compared to 2.47 times at the end of fiscal 2022. We expect to continue to generate significant cash flow that will allow us to reduce our net debt, but the seasonability of working capital, the ratio will likely increase early in the fiscal year 2024.
In closing, we finished the year strong to deliver a stable EBITDA on a full year despite significant volume headwinds. We achieved this by driving, by driven substantial cost saving and efficiencies across the organization, but this is not enough. This is why we are implementing a new program to improve profitability by reducing structural cost as outlined by Thomas.
This way, we are building a more resilient organization. In terms of outlook, in packaging, while we expect pressures on volume to persist in the near term, we expect improved profitability in fiscal 2024 compared to fiscal 2023. In print, despite the benefits from the ongoing cost reduction initiatives, we expect lower adjusted EBITDA for the fiscal year 2024 from lower volume.
We expect corporate cost at EBITDA level to be close to $40 million for the year. This is around $10 million higher since fiscal 2023 benefited from lower share-based compensation from the stock price performance.
Taking into account this headwind and the challenging economic environment, we expect consolidated EBITDA in fiscal 2024 to be at least in line with 2023, as the improvement in packaging should more than offset the decline in print, highlighting the benefits of our diversification into flexible packaging.
Finally, savings from our profitability improvement program are likely to start to materialize late in fiscal 2024 and therefore will add a more meaningful impact in fiscal 2025. In terms of capital allocation, we expect CapEx to decrease to around $135 million in fiscal year 2024, with heavier weight in the first half of the year as we conclude our strategic investments and assisted sustainability before returning to a lower run rate in fiscal 2025.
As for cash taxes, it should be around $50 million in fiscal year 2024. On that note, we will now proceed with the question period.
Question-and-Answer Session
Operator
[Foreign Language] Thank you. One moment please. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instruction] One moment please for your first question.
[Foreign Language] Your first question comes from Adam Shine with National Bank Financial. Please go ahead.
Adam Shine
Thanks a lot. Good morning. Thomas, obviously a very strong quarter, a good end to the year. Focusing first on the improvement program, a couple of questions. One is, can you elaborate a little bit further on the various buckets? Obviously the real estate one is clearly obvious, but the context here being is, number two, the quick turnaround or consolidation of less profitable activities, more of a sort of unknown, more of a variable, whereas more of the heavy lifting will come from the fixed costs and costs of goods sold reduction efforts. And to the extent that the fixed costs and cost of goods sold come down, can you speak to some specific key initiatives that might be planned and how perhaps you might allocate the $20 million to $40 million of potential savings coming from those particular buckets? And then just another question related to the program is does that offer you any particular line of sight to perhaps reinvesting some of those savings, which perhaps speaks to some of the range in terms of the anticipated savings? Is that part of the thought process? And then a follow-up later for Donald. Thanks.
Thomas Morin
That's a very vast question, Adam, you shared with me, and thank you for the nice words. A couple of things I would say on this. The cost of goods sold reduction is obviously the largest potential. This is not a surprise. We have a 50% cost of goods sold in our top line, obviously. So any saving on that generates a -- generates nice multiple. The -- when it comes to fixed costs and the underperforming activities, I'd like to add something to what we communicated. It is not really meant to address potential volume movements. This is really to strengthen our performance, really. So what we're looking at is few sites which we will try to turn around. It's a very few number, but we will make quicker decisions if it is to be done. And then the -- what else? Your question was, should we reinvest some of this into growth? We'll be in a better position for sure. We'll be when this is achieved, we'll be more competitive, obviously, having an improved manufacturing network, and I would say an improved cost of goods sold. So we can decide at this point in time what we would do with this, right.
Adam Shine
Okay. All right. I appreciate that. Donald, you touched on the leverage at just under 2.1 times. There was a goal to get down to around the two times level at some point in F'24. Obviously, you acknowledge that there's some working capital timing issues at the start of the New Year. But nevertheless, it does look like, based on the outlook and some of the evolving initiatives that Thomas is referencing, that you could potentially have a leverage down below 1.5 times within the end of this two year program. And I think that's even before factoring in the real estate sales. So can you just speak to maybe some of the particular priorities moving forward? Do you step into the buyback that's been a bit quiet in recent quarters? Is there the prospect of examining dividend increases? And as it relates to M&A, maybe you can elaborate further as to what the pipeline potentially looks like. Thanks.
Donald LeCavalier
Yeah. Well, yes, we're glad, first to be very close to two. That was the target. And obviously being under two in fiscal '24, you can look at the free cash flow we will generate, including the $135 million CapEx. And even without selling real estate, yes, we will be under two. As far as being at 1.5 in 2025. Obviously, that will depend on the timing of the real estate transaction. But we expect that the CapEx program in 2025 should be -- will be lower than the $135 million. So you can make the calculation and see that the free cash flow will be very strong in 2025. In terms of priorities, we stick to the four priorities, and the third one is to pay down the debt. So that's for sure the priorities for fiscal 2024. And that will put us in a position where like we were before COVID is where we're in a position to make acquisition. But we need to do this program first, pay down the debt, increase the EBITDA, and then we'll see where we go. But for this time today, the priority is to pay down the debt.
Adam Shine
Okay. Got it. I appreciate that. I'll queue up again. Thank you.
Operator
[Foreign Language] Your next question comes from Hamir Patel with CIBC Capital Markets. Please go ahead.
Hamir Patel
Hi. Good morning. Thomas, I wanted to follow up on the cost reduction program. How much of the $20 million to $40 million savings would you expect to actually realize in fiscal 2025? It sounds like most of those benefits are going to be building over that year.
Thomas Morin
Yeah. So thank you for the question, and good morning, by the way. You're right. Given some of the actions we've been talking about, some will have quicker impacts than others. As I previously said, the largest one is addressing the cost of goods sold. This takes longer, as you can imagine. So that's why we believe the full run rate will be in 2025. Probably some first signs in the back end of 2024.
Hamir Patel
Fair enough. Thanks. That's helpful. And then just turning to packaging demand, obviously, is there any sense you have as to where customer inventories sit today, if maybe, they've, perhaps the destocking has gone on for too long? And when you think about the growth rates, any trends across the different categories that you would expect for 2024?
Thomas Morin
Thank you for asking the question. The -- this is obviously a daily discussion with our customers. What I can say is in non-food segments, so namely industrial insulation to some extent as well in the medical piece, there is long -- still long inventories as we speak, whilst in the food segments, which is the bulk of what we do, it's, in my opinion, finished. It's over.
Hamir Patel
Okay, great. Thanks. That's all I had. I'll turn it over.
Operator
[Foreign Language] Your next question comes from David McFadden with Cormark Securities. Please go ahead.
David McFadden
Great. Thank you. A couple of questions. So, first of all, just on the guidance, and I guess the clarification, when you're talking about the printing business, you expect the EBITDA to be down, but then in the guidance, you also say, but then it will be offset by cost savings. So I'm just -- is the EBITDA going to be down or is it going to be flat? What's your expectation for '24?
Donald LeCavalier
I think what we said is that we have headwinds. There's decline in volume, like we're facing in part of this business, and cost saving and initiative we're putting in place will mitigate the decline, but not enough. So we said that the EBITDA should be lower than 2023.
David McFadden
Okay, thank you. And so when you talk about focusing on debt reduction, which I think is a great idea, can you share with us a target leverage ratio that you want to get to that you feel more comfortable with?
Donald LeCavalier
Can you repeat just the beginning of your question, you said this, debt reduction, while the --
David McFadden
Yeah.
Donald LeCavalier
Yeah. Yeah, okay, I get it. So the target for us and as David has been always to be under two, but there's no limit when we're under two. We ain't going to do acquisition or any program, say we target to be two. We feel we're comfortable. This is at the level that the rating agency that us, see that the better position for us is to be below two, to do any acquisition or to grow the company. So now we're getting closer to that. But we didn't fix any target to say, at this level, we will start decreasing the debt. Just before COVID, we had no debt on the balance sheet, and it was good for us because we were able to make the acquisition. So the target is to be below two. And the good news is that we're going in that direction.
David McFadden
Okay. And then when we look at the cash flow statement. Obviously, you guys had a nice working capital inflow this year. And I know prior to that, you invested a lot of money in working capital, so you took some back. Can we expect that you could recover some more cash this year for -- from working capital?
Donald LeCavalier
That's the objective, and that's also part of the program that Thomas spoke about. We do have action on the EBITDA side of the business, but we have action also on the cash side, obviously the one on real estate, but also to look at our CapEx program, and that's what we do right now. And the third one is regarding the working cap. And you're right. Over the last two years, before fiscal 2023, we had to invest north of $200 million in working cap. We gained that half -- about half of it this year. So we're hoping to get the other half back in the next year or 18 months.
David McFadden
Okay, great. And then just a clarification on the CapEx. Did you say it's $135 million That's your expectation for '24.
Donald LeCavalier
Yes.
David McFadden
Okay, so that excludes intangibles, obviously, right?
Donald LeCavalier
That exclude?
David McFadden
The intangibles?
Donald LeCavalier
Yeah. That includes, we add CapEx, which are tangible, that are mostly linked to the media business. So when we say $135 million, it's the whole, the two CapEx, which is -- yeah, so it does include.
David McFadden
It does include your expectation for spending on intangibles?
Donald LeCavalier
Yeah.
David McFadden
Okay, great. And then just a question on the packaging side. So you're talking about lower demand. Most of your business is on the food side. So is that just because with discretionary spending coming under pressure here, people are just opting for lower priced items on the food side? I'm just wondering what's driving that volume weakness here.
Thomas Morin
We haven't seen any significant share of wallet loss. I mean, that's something, of course, we've looked at and see, hey, did we lose some ground? We did not. So obviously, this is a -- this is the performance of our customers. The -- difficult to say, the price points, the promotional activities have been not as high as in the past, in the last quarter for the food segments. So there is still probably an impact of the higher inflation on food. My guess, at this point in time. When we speak to customers, our main customers, they all remain extremely positive when it comes to the midterm, but there is obviously some adjustment in short term.
David McFadden
Okay. All right. Thank you.
Thomas Morin
Thank you, David.
Operator
[Foreign Language] [Operator Instruction]
[Foreign Language] Your next question comes from Nevan Yochim with BMO Capital Markets. Please go ahead.
Nevan Yochim
Thanks. Good morning, guys. You have Nevan on for Steve today. Just a question on the cost savings. Wondering if you can talk about how that'll sort of flow through the model in terms of which sectors you'd expect to benefit the greatest like on the margin side.
Thomas Morin
Yeah. I think the -- when we look at it at this point in time, I would say part of it will be corporate costs, obviously, overall structure, fixed costs. And the other part, for the time being, is primarily in the packaging side. This is where we have the bulk of the cost of goods sold, reduction.
Nevan Yochim
Okay, great. And then staying on margins. When we think about 2024, I would expect that you'd have some margin expansion baked into the guidance. Would it be reasonable to expect that that packaging margins are greater than 14% this year or next year?
Donald LeCavalier
It's always -- we always careful to talk about margin because you might remember a couple of years ago, with the material increase of the raw mat that affected us, it diminished our margin by far. So we need to look at this. If the raw mat remains stable like it is right now, when you look at the -- at what we had in terms of margin, at the end of Q4, we were at 14.7 and the average is 13.6. So Thomas has said that we're pushing for the most of the program we're putting in place is on the packaging side. Although a large part of it will come late in fiscal 2024. I'm encouraged to say that '14 should be the target for this fiscal year.
Nevan Yochim
Okay, great. And then maybe the same thing on the printing side. I mean, we're obviously expecting some volume pressure into 2024. I can see that like volumes or margins held in for the most part here in Q4. How would you think about printing margins into next year?
Donald LeCavalier
Yeah. Well, on print, first, what I will say is that we're really glad because when we began the year, we were 5% behind margin 2022. You may recall that we were at 19.2 and we -- our first quarter we're at 14.2, and now we're flat with last year. So that that shows the great work did by the team. But you need to think two things for printing. What's growing right now is the ISM business, which we're very satisfied with the margin growth we have with this business. But obviously, it's not the same margin we have on the renew side of the business. So we're getting better on the ISM renew, we're compensating with cost saving but maintaining the same margin will be more as a challenge for printing group. Having said that, we will need to see the full effect of raddar, but too early to call on that side.
Nevan Yochim
Okay. And then I guess longer term, would it be possible to get back into that 19% to 20% margin range in printing in light of what you just mentioned?
Donald LeCavalier
Well, that depends on two things. The percentage of decrease over the longer term of the renew, which is something that we don't control. But certainly what we control is the ISM part of the business and that we will push and we think we have great opportunity to increase the margin. We did it in the last five years and we still have room to grow it. So I'm not going to make a call on the 19%, but for sure, we will defend those high teens margin for the printing group.
Nevan Yochim
Okay, one last question from me, just on the other segment. Are you able to break out how much of the year-over-year adjusted EBITDA growth in Q4 came from the higher media volumes versus the lower stock-based comp? And then as we start to think about adjusted EBITDA and other for 2024, would we expect that to go back to prior year levels, sort of in the $13 million range? Just trying to get a sense of directionally where you think that's going.
Donald LeCavalier
Well to give you more color regarding media, and as I said in my opening remarks, there was a transfer of business between Q3 and Q4. So if you look at the other, for the media side of the business, I think the base for 2023 represent a good base because we have the full impact of both acquisition we did in the group, the first six months, we had the positive impact coming from acquisition, but now 2023 represented a good benchmark but -- and obviously, we want to grow this business, but you can take that the full year number as a good number for media business. As far as the corporate costs, I mentioned also that they will go probably up to $40 million because of the positive we have from the stock base. And obviously, if the stock base move like move up, it will be a negative impact, so but that's something we discount at the current price today. As far as media in Q4, I will say that in terms of dollars, it's -- the impact is around $5 million positive.
Nevan Yochim
Okay, great. Thanks for answering my questions.
Operator
[Foreign Language] Mr. Lapointe, there are no further questions at this time.
Yan Lapointe
Thank you, Joel, and thank you everyone for joining us on the call today. Look forward to speak to you soon.
Operator
[Foreign Language] Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
For further details see:
Transcontinental Inc. (TCLAF) Q4 2023 Earnings Call Transcript