© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
[Foreign Language] Welcome to the TC Transcontinental First Quarter 2020 Results Conference call. [Operator Instructions] As a reminder, this conference is being recorded today, February 27, 2020. I would now like to turn the conference over to Yan Lapointe, Director in Investor Relations.[Foreign Language] Mr. Lapointe, please go ahead.
Thank you, Gabriel, and good afternoon, everyone. Welcome to TC Transcontinental's First Quarter of 2020 Results Conference Call. The press release and the MD&A with complete financial statements and related notes were issued earlier today and are available on our website at tc.tc. With us today are TC Transcontinental's President and Chief Executive Officer, François Olivier; and Chief Financial Officer, Donald LeCavalier.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 St-Jean, Senior Advisor, Corporate Communications, for more information or interview requests. Please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. Please refer to the MD&A for complete definition and reconciliation of such measures to IFRS financial measures. In addition, this conference call might 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 2019 annual MD&A and in the latest annual information form.I would now like to turn the call over to François Olivier.
Thank you, Yan, and good afternoon, everyone. Looking at the results, we had a good first quarter with the business generating margin improvement and solid cash flow. In our Packaging Sector, margins improved year-over-year, and we are confident in our ability to progressively increase them again throughout the year. In our Printing Sector, as we had guided in our last earnings call, the rate of decline in revenues returned to a more normal level, and we increased profitability with the cost initiatives we put in place last year. Let's now review the operations in more detail. In the Packaging Sector, revenues were impacted by a volume reduction in our paper business, which we sold to Hood Packaging towards the end of the quarter and by lower resin prices. Excluding these elements, organic decline would have been only 0.7%. This is mainly related to our Latin America segment which is expected to improve in the second half of the year. We continue to expect organic growth in 2020.As mentioned in the past, we have a very strong R&D team and best-in-class innovation processes and capabilities, all focused on innovating to ensure we exceed customer expectations. As we saw last year, we expected margin improvement from synergies to flow gradually quarter after quarter. We completed the installation of our new extrusion equipment in Whitby, Ontario, in January, and we expect related savings in the coming quarters. The synergies and efficiency gains will be incremental to higher profitability from the adoption of the IFRS 16 accounting standard. In the Printing Sector, we are seeing positive impact of the measures we took last year to protect our profitability. We completed the closure of our Brampton and PEI facilities during the quarter. We also started to implement new measures to reduce our indirect costs. We remain proactive in managing our cost structure. In our retailer-related services, as we mentioned on our last call, we saw a lower rate of decline in volume compared with last year. I've said it before, I will repeat it again, flyers remain a relevant and effective marketing tool to bring people to the store and to help Canadians save money like no other media. As for our Publisac, we have established a dialogue with the city of Montréal, and we are hopeful reasonable solutions can be found. We are seeing strong growth in our book, our pre-media and our in-store marketing verticals so far in 2020. We are investing both organically and through acquisitions in these verticals to capitalize on this growth. The integration of our 2 recent acquisitions and in-store marketing, Holland & Crosby and Artisan Complete is progressing very well. In the last 5 years, we have built an in-store marketing business which now generate about $140 million in revenue annually and a market with good long-term outlook. Over the last several years, we have derisked our portfolio by increasing the share of revenues coming from growing markets. Only 3 years ago, newspaper printing represented more than 20% of our manufacturing revenue and print. This year, it should be only around 10%. This is another reason why we remain confident in our ability to continue to generate strong cash flow from our Printing Sector for years to come. In addition to our financial performance, we have made significant progress in the last few months in building our sustainability approach, especially as this relates to effectively managing plastic packaging throughout this life cycle. We announced today the creation of a new recycling group within our Packaging Sector to vertically integrate the recycling of plastics in our production chain and ultimately ensure a stable supply of recycled plastic. This group will enable us to differentiate ourselves by accelerating the development of our eco-responsible packaging products containing recycled plastic. This will help us create a truly circular economy for plastic that will bring further benefits for the environment and for the communities.We also announced earlier this week a partnership with the Canadian government and other leading companies to develop a task force to create a circular economy for plastics in Canada. Sustainability is now more important than ever before, and these investments will become a key competitive advantage for years to come. In conclusion, I'm pleased with the progress in our transformation. We are well positioned to create long-term value. And with that, I'll turn the call over to Donald.
Thank you, François, and good afternoon. While our adjusted EBITDA number is in line with last year, it does not fully reflect the improvement in profitability in both the Printing and Packaging sectors, and our value creation activities on the M&A front. We have a strong portfolio of business supported by a solid financial position. Looking at our segmented results. Revenues for the Packaging Sector declined by $23.5 million in Q1 2020. This includes the negative impact of $2.9 million for FX and $1.6 million net for acquisition and disposals. The large majority of the organic decline is linked to the lower volume in our paper operations, which were sold towards the end of the quarter and to lower resin prices. The remaining organic decline of less than 1% is mainly due to our Latin American business, which was still impacted by the legislative change we mentioned in last quarter. We continue to expect growth in this business in the second half of the year. The adjusted EBITDA margin grew by 110 basis points from 11.7% to 12.8%. Excluding IFRS 16, it would have been an improvement of about 60 basis point compared to Q1 2019. We expect profitability to accelerate in the coming quarters from, first, synergies from film in-sourcing. We finalized the installation of the new equipment in Whitby, Ontario, in January, and we should see the impact starting in Q2; second, the sale of paper operations, which add lower margins; and third, organic growth expected in the second half of the year. Now for the Printing Sector, revenue declined by $11 million in the quarter to $326 million. Despite lower revenues, adjusted EBITDA margin grew from 18.7% last year to 20.2%, a 150 basis point improvement, including IFRS 16. This is a direct result of the cost reduction activities we put in place last year that are now bearing fruit and should yield their full impact in 2020. We will continue to work on our cost structure to protect profitability. It's also important to note that the rate of decline in flyer revenues has improved versus last year. Media revenues were lower compared to last year following the sale of certain assets, in line with our strategy, but profitability remained solid. With the educational book business accounting for more of the revenues in media, we will see a little more seasonality with peaks in the summer for the back-to-school season. Corporate expense for the quarter were higher than last year, but in line with our plan. CapEx was down $13 million year-over-year and in line with our annual guidance. Finally, we received the proceeds from the sale of our paper operations to Hood Packaging. We closed the quarter with $425 million of cash, which we used to proactively repay $360 million of long-term debt in February. At the end of the quarter, our net debt ratio stood at 2.3x. Excluding the impact of IFRS 16, the ratio stood at 2x. This means that we reached our initial target several months ahead of our schedule. The strong financial position will provide us with flexibility in terms of capital allocation. Now looking to 2020. We continue to expect modest organic growth in packaging, excluding our paper operations and the impact of resin prices. EBITDA margins should progressively improve during the year, as I mentioned earlier. In our Printing Sector, we should see a continuation of the trends seen in the first quarter. We continue to anticipate growth in our in-store marketing products and book printing verticals. As we saw in Q1, many of the measures we announced in 2019 will contribute to profitability improvement in 2020. For the other segment, we expect corporate costs at EBITDA level to be around $30 million. The impact of variation of the share price on our stock-based compensation expense will be minimal for the remainder of the year -- of the fiscal year due to the implementation of a hedging program. Following the sale of our specialty media assets, we expect good performance in terms of the revenue and profitability for media in 2020, but not enough to offset corporate cost. Following the reduction in our debt levels, we expect our financial expense to decrease even after including the impact of IFRS 16 to around $55 million in 2020. Our effective tax rate should be in the mid-20s range. In terms of use of cash for the year, you can assume CapEx coming down to a more normal level, around $100 million. This exclude potential investments in our recycling group. As for cash tax, for the year, you can assume around $60 million. With our solid financial position and our confidence in our ability to continue to generate solid cash flows, the Board has authorized a 2.3% increase in the dividend. On that note, we will now proceed with the question period.
[Foreign Language] [Operator Instructions] [Foreign Language] First question will come from Adam Shine of National Bank Financial.
Maybe just starting, François, with packaging. You didn't get too much into the specifics of different segments performing in the period, I guess, net-net, they were sort of relatively flattish with obviously as you suggested, the LatAm and the banana issue being the main driver of the negative 0.7 organic decline ex those items. Any further color that you might want to share? And maybe also looking ahead as to how those segments are tracking into the Q2?
Yes. Well, we think the year is probably going to unfold a little bit like last year where we did improve quarter after quarter. So that's what we expect. Obviously, we start from a higher base compared to last year. This portfolio is relatively new for us. So the -- maybe there's a little bit of cyclicality after all, because last year Q1 was our softest quarter and it seems that could be the case again this year. So there might be a little bit of cyclicality. And like I always mentioned in that business, there's a lot of inventory building or you could ship, and it could move from quarter-to-quarter. I would say in the mix, in Q1, our -- maybe our most profitable segment ship a little bit less and our less profitable segment ship a little bit more, and you will see that reverse in the quarters to come. So that's why we're -- we think that the year is going to unfold a little bit similar to last year, where we increased our percentage of profitability quarter-over-quarter for four quarter in a row. We feel that we start from a higher base and that the year is going to unfold similarly this year.
And I think on the last call, the Q4 call, you suggested organic growth in package is again skewing to the second half, the growth nonetheless in the year of -- in that 1%, 1.5% zone. I guess, the qualifier is twofold. One being resin, and then also just acknowledging that incremental, I guess, paper contraction rate as it related to weaker volumes there, correct?
Yes. We still think that we could reach 1%, 1.5%. We think that the Q3 and Q4 are probably going to show higher organic growth than Q1 did. We were negative 0.7% with the portfolio that we're moving forward with after the disposal of paper. So we didn't show growth. We were 0.7% negative in Q1. But what we think when the year unfold, we believe that we will be positive organically. It remains to be seen, is it going to be 1% or 1.5% or 0.5%, but we think that we'll be in a positive zone if everything that we have line up and qualified move to our platform as it's supposed to move.
Okay. And just in printing, I mean, obviously, it's -- you've telegraphed that this year is expected to show some lesser declines on the flyer business compared to last year. You did highlight in the Q1, obviously, bigger drops in newspaper and magazines. Clearly, secularly-challenged segments. Did it somehow -- did it come as a bit more of a surprise per se? Or it was to be expected and we should acknowledge that during the rest of this year?
It didn't come as a surprise. As I told you on the last call, everybody cut severely on their flyer usage last year also suffered severely in their business, and they acknowledge that. So most of them, they are back to a more normal level. And for years, everybody was trying to cut too much is having an impact on their business, which shows how the medium is still resilient. So the numbers that we had in Q1 is the number we were expecting. It's hard to predict the volume, but I feel very confident about all the cost measure we put in place for the year. For the most part, they're all put in place. And we believe the year is going to unfold a little bit like Q1. So Q1, we had less volume, about 5%, and we managed to make more money than last year. I think if the market stays where it is, that's what you should expect as a result. Obviously, if people cut more, we will suffer a little bit. If they cut less, then we'll do maybe a -- even a little bit better than Q1. But we think we're going to -- Q1, I think, is a good representation of what the year could look in printing for us in 2020.
And maybe just one last question. I'm curious to hear some of the thought from you and maybe from the Board perspective in regards to the doubling of the buyback. Is that -- I don't want to read too much into it, but is that a reflection of the likelihood that maybe we're not seeing much more M&A in -- over the next couple or 2, 3 quarters? Or is it a reflection of the fact that you truly believe your stock is undervalued, and you're prepared to step it a bit more aggressively than necessarily what we've seen in the past, well, the recent past that is.
Yes. Basically, the main reason is we've been active in the buyback since the beginning of the year or the end of last year, where we were able to. For a good part, when our stock was trading at $13, $14, $15, we were not able to be active because we were in the middle of the paper deal, but as soon as that got -- made public, we started to be active. And we've used just before Christmas about half of our regular program and we used half of it. So that's why we doubled the demand we did at 2 million share because we already bought back 0.5 million, and we didn't feel that having the ability only to buy 0.5 million at today's level was enough for ability to use that tool, if we feel that the stock is undervalued and that we don't have other opportunity to deploy capital. But it's the same old story for us. Number one is to continue to deleverage the company, number two is to make acquisitions. And then if no acquisitions are in the pipeline, yes, you might see us being more active at the level that the trade -- the stock is trading at right now.
[Foreign Language] Your next question will come from the line of Paul Bilenki of TD Securities.
I was hoping just to get a little bit more color on the formation of the recycling group and your plans there. In your press release, you said that you're looking to buy some equipment. Can you help quantify the anticipated spend there? Or any additional sort of color you could provide around that?
Yes. We're already a buyer of recycled resin. We have a group of supplier providing us with this. We already have introduced, in various verticals, flexible packaging that have recycled plastic and it's been a very successful venture for us. And it's growing very, very fast. And a lot of our customers are excited about switching their portfolio from 100% virgin resin packaging to a packaging that will include various percentage of recycled pellets. And we were kind of looking and say, well, we might need 15,000 to 20,000 ton of material more than we thought we would. And we decided that it might -- wouldn't be maybe a good idea to just relying on outside people to supply that to us, that we would have a division that would supply our need internally, maybe not for all that we need. But we've been working very closely with some of their suppliers to design new products. And we feel that owning that part of the process could not only help us secure our supply chain, but also speed up the development of new packaging and introduce that to the market. So that's why we decided to step in. So we're looking to produce at least 15,000 to 20,000 ton of recycled materials, and we intend to do that organically. As you know, in printing, we kind of own a lot of buildings that are empty, so we could deploy some recycling equipment in those building. And then we'll also be looking for M&A as we already have suppliers that we know of that are supplying us. So we intend to be active in both fronts. And we created a team of people to manage this division. And we think we might deploy about, I would say, in the next 12 months, $25 million to get started in that space.
And would that $25 million be included in that $100 million of CapEx guidance for the year?
Yes. That's part of the $100 million.
[ Hold on, ] that could be organic or that could be acquisitions. So if some of that money could be an acquisition or could be all organic. So you should not assume that it's all organic, and it's all going to be to buy equipment. It could be a mixture of equipment and M&A. So -- but anything we do on equipment would be on top of the $100 million.
[Foreign Language] [Operator Instructions] [Foreign Language] Your next question comes from the line of David McFadgen of Cormark.
Yes, a couple of questions. So François, just on the packaging outlook for the organic growth this year. Is that primarily expected to be driven from an improvement in Latin America? Or are there other factors that you think will drive that organic growth?
There's other factor. Obviously, South America is one of them. It's a $120 million business out of $1.3 billion. So yes, they will contribute, but we expect other group to contribute and to show organic growth towards the second end of the year.
Okay. And then just on Publisac, what's -- maybe you could give us an update on what the latest is there? And is there any idea when this will be resolved? And is it beyond just the timing?
Yes. We don't own the timing on this. The city of Montreal own their process. I think they run a pretty good process. They have all the information. They've been communicating with us. We have a good communication challenge with them. They ask a lot of questions. But as far as their timing and what -- when are they going to come to a conclusion on this is, it's hard to predict, but we're hopeful that with the information we provided that they will come to the right conclusion. But we frankly don't know how long they're going to take. But we are happy with this, that at least we're talking, but it's for them to decide what they want to do.
Okay. And what's the latest with Mirabel?
Mirabel, we're going to go to court with them as we speak in early April. And we are very, very confident that our position will prevail and rapidly.
Okay. And then just on the media business, if I adjust for the businesses that you've sold, it looks like it was down a little bit. I don't know if I've interpreted that correctly. I was wondering if you can provide some color there?
No, I think it's just a timing issue, like the business we sold performed very, very well in November and December, historically, and they showed good profit, and we sold that. And the business we kept is really making most of its revenue in Q3 and Q4. Not a lot of people are buying school textbook in the middle of December. So this business of media that we have now, the profitability now is switching to Q3 and Q4, so that school textbook business is really in Q1 and Q2, we're investing, which means we don't really make money, even some months we're losing money. But when we start to ship the book in Q3 and Q4 then we have profitability. So it's just like a timing, but you guys are well aligned in terms of the profitability, how profitable that business is. But I think now there's more a seasonality where not a lot of profit is made in Q1 and Q2. And the bulk of the total profit is almost done in Q3 and Q4, which was not the case before because the rest of the portfolio we sold at a profile contrary. So that was more balancing the media portfolio. Quarter-to-quarter, it was more even. Now it's displaced towards the end of the year.
Okay. All right. And then just lastly, are you guys at all impacted by this coronavirus?
Not really. In our packaging, all in all, we used to have, a couple of years ago, some of the raw material coming out of China. But with the trade -- kind of trade war that's between the U.S. and China 2 or 2.5 years ago, we moved all of our supply chain out of China to other countries. So -- and our supply chain and packaging were not impacted. And then everything we do is basically packing food that is manufactured in the Americas for the American consumer. So no impact for us in flexible packaging. In print, same thing. Our supply chain is truly North American. Paper is sent by truck to us and it's manufactured very close to our print plant. And in there, we might have some positive impact as in the book business. Some publisher in the U.S. had moved some of their supply chain to China and they are coming back rapidly to North America. That's why in the last 2 quarters, in the last 6 months, we experienced double-digit growth in our book business. So -- in print, it's a positive impact. The only thing we need to watch for is some of the retailer that sells hard goods that are manufactured in China, if they start to have a supply issue for their business, could that have an impact on the amount of items, the advertising flyer, higher page count, potentially, but a lot of our big users are [ fooders. ] And we don't see a big impact for them about this thing. So all in all, I would say so far from what we see is neutral for us to positive.
[Foreign Language] Your next question comes from the line of Drew McReynolds of RBC Capital Markets.
Dave, actually got my final question. So maybe I'll squeeze a couple in here. François, just remind us on the printing side of the business. You've done a great job keeping on top of plant consolidation to maintain your profitability. To what extent are you close to reaching a limit on the ability to consolidate the printing plant platform? And second question, on the newspaper printing side, is there -- are there any kind of contracts here that come up for renewal in the near term? I know I've got a couple in my model that are pretty long duration contracts, but just want to make sure there's nothing imminently coming up in the next few years?
Yes. In terms of the contract renewal, no change. I mean, we always organized 1 or 2 per year to renew. And retail newspaper, they are all long-term magazine, they're all long term. But in retail, we have a lot of clients, and we usually keep 2 or 3 per year. So when we signed those contracts, we spread the maturities. So it all come at term at the same year. So there's nothing special there. We have a couple of renewals. It's going very, very well. And we don't anticipate any problem or any change there. In terms of our ability to continue to protect profitability despite some volume decrease, I think I'm very encouraged. We have certain segments like pre-media, like book, like in-store marketing that are growing nicely. All of them are growing double digits. So that does tend to help. 5, 6 years ago, our newspaper business was huge. But this business, in the last couple of years, has decreased by more than 50%. So our -- the newspaper are probably the part that are decreasing the most, but now it's less than 10% of our portfolio. So we have some growth parts in the portfolio. And we're having plants with the 2 acquisitions that we made in POP. We added 2 -- 3 plants, and there's a lot of buildings there. So there is ability for us to rationalize and cut costs. And we could continue to do what we've been doing forever. I mean, our strategy is very simple, is that we're going to print what Canada needs to be printed, and we're going to go down right to 1 plant. And as we go down from the 16 we are now, if we end up one day at 1 plant, we're going to see this similar type of thing on the cost that we've done moving from 53 or 54 we had 15 years ago to the 16 we have today. So people always think there will be an end to that. But I think we proved that we can make it happen, and then we will continue to do so.
[Foreign Language] Your next question comes from the line of Mark Neville with Scotiabank.
Maybe just back to the recycling group. I'm just curious, would the plan be to use sort of all that recycled plastic internally? Or is that something you would look to sell to other vendors?
Obviously, if we go organically, the business model will be designed mainly on selling this resin to us because that's what the reason why we are going in. We think there will be a lot of demand for recycled pellets in the years to come. Obviously, if we do M&A and we buy a company that service other customers or other people and other verticals, we will continue to do so. But the main reason why we're going in is to feed our own demand. And that's the rational, but we would not be close to sell to other people.
And is there specific product categories or -- within the business that would be more conducive or would use more -- potentially more recycled resin across the packaging?
Yes. I would say that in our portfolio, we have 2 types of flexible packaging. Some that you would qualify a nonfood grade, like the plastic is not touching the food and then we have plastic that touch the food. It's obviously a lot easier to introduce recycled material in nonfood grade, the nonfood grade part of our portfolio. And that's where we have most of the volume right now. But we have been able to introduce recycled pellets into food grade application. And we see growth in both areas. So -- but it's a lot easier and there's no food contact.
Great. And is this something that -- I think when you're responding to an RFP, you're bidding a contract that the customer sort of puts in the spec? Or is it something where you're going in and saying we have X percent recycled content and it's helping you win new business. I'm just going to guess, just trying to understand if it's push or pull?
So a little bit of both, but most of our large customers have made the same type of pledge that we have made. We have made the pledge that 100% of our portfolio will be recyclable by 2025 and we made pledge that we would use a certain percentage of PCR resin in our whole portfolio. And a lot of our customers have made the same pledge. And us and our customer have made pledge to 2025, and it's 2020. So we got to get going. Sure, they are very interested and listening to ideas or new product that would make them reach the objective that most of them have put out there publicly. So yes, these are discussion. Sometime, they are in the RFQ, but not a lot of time because you're still at a phase where it's specific to each customer. And it's more, I would say, a strategic discussion than an RFQ.
And is this, again, a type of product, the more the recycled content, presumably, you would be a little more costly on your side, maybe, maybe not? But is it something you're also able, I guess, to charge a little bit more for, again, because of that, what it's doing in terms of meeting these pledges?
I think, you said it right; maybe, maybe not. It depends which vertical, it depends of the complexity of the package, it depends if you put 10% recycled content, 30%, 50% or 100%. It depends if it's a 9-layer package or 3-layer package or 1-layer package. So it could be more costly, sometime it's less costly, sometime it's the same. And it's all a balance of what the customer are looking for, like there's the look, there's the speed at what speed it's running, and then there's the cost. And sometime, there's a trade-off between the look, the speed and the cost. And each customer make their own choices, and we try to design the package around their choices. So it could be more or it could be less expensive.
[Foreign Language] There are no further questions at this time. Please continue.
Thank you, everyone, for joining us on the call, and we look forward to speaking with you.
[Foreign Language] Ladies and gentlemen, this concludes the conference for today. You may -- thank you for participating. You may disconnect your lines.