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[Foreign Language] Welcome to the TC Transcontinental Second Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, June 7, 2018.I would now like to turn the conference over to Shirley Chenny, Adviser, Investor Relations. [Foreign Language] Ms. Chenny, please go ahead.
Thank you, Jessa, and good afternoon. Welcome to TC Transcontinental 2018 Second Quarter Results Conference Call. The press release and MD&A with complete financial statements and related notes were issued earlier today. For those of you who are not on our distribution list, the documents are posted on our website at tc.tc.With us today are: TC Transcontinental's President and Chief Executive Officer, François Olivier; and Chief Financial and Development Officer, Nelson Gentiletti.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 a listen-only mode and should contact Nathalie St-Jean, Senior Adviser 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 a complete definition and reconciliation of such measures to IFRS financial measures.Also this conference call might contain forward-looking statements. Such statements are based on the current expectations of management and information available as of today and inherently involve numerous risks and uncertainties, known and unknown. The risks and uncertainties and other factors that could influence actual results are described in the 2017 Annual MD&A, the latest Annual Information Form and has been updated in the MD&A for the second quarter ended April 29.I would now like to turn the call over to François Olivier.
Thank you, Shirley, and good afternoon, everyone. Before commenting on our second quarter results, let me start by saying that a significant milestone was achieved in our second quarter with the announcement of a transformational acquisition of Coveris Americas. This acquisition represent an historic point in our journey we undertook 4 years ago to position TC for profitable growth. We are now a North American leader in flexible packaging, and our packaging division has now surpassed our printing division in terms of pro forma revenues and number of facilities.We have started the integration process of Coveris Americas, and our initial focus has been on meeting clients and employees. I have already met key customers, which represent close to 35% of sales and 1,300 employees in 7 locations. By the end of June, this will grow to 15 customers, which represent more than 40% of sales and with about 2,300 employees and 14 plants, which is approximately 75% of the workforce. In the coming months, we will continue to integrate our 2 networks of packaging plants and execute on our revenue opportunities and cost synergies.With my fellow colleagues, long-standing and new ones, I look forward to taking part in the integration process of Coveris Americas and making it a success as our exciting journey continues.Now turning to the financial results of the second quarter. We continue to demonstrate that our strategic decisions in our 3 business lines contributed to our strong financial results. On the revenue side, if we exclude the impact of the Hearst agreement announced in December, the sale of some of our newspapers and other media assets and the impact of the exchange rate, our adjusted revenue increased by $7.1 million or 1.5% in the second quarter. On the profitability side, when we also adjust for restructuring cost and impairment of assets, our adjusted operating earnings increased by $5.5 million or 9.1%.Now let me highlight some of the key factors that contributed to our results. In our packaging division, organic sales showed a year-over-year growth of 9% due to increased volume in all of our plants. We saw good contribution from sales in the pet food market, which we entered last year with the deployment of new equipment. Our consumer goods products also posted solid growth in the quarter, driven by stronger demand from customers servicing mostly the food and beverage industry, confectionery as well as coffee and the tea markets. This marks an improvement compared to our first quarter where results were affected by timing issues at one of our plants.We continue to be pleased with the results of our Flexipak acquisition. Furthermore, we are excited about the steps that we are taking to support Flexipak's growth as we will reallocate the operation to our former La Presse newspaper printing plant during our third quarter of 2019. We will effectively more than double the size and the capacity in terms of potential sales of this Montreal operation.As for the Multifilm packaging based in Chicago, which we acquired in early March, the integration is progressing well and provides us opportunities to expand our position in the confectionery market as the company is a leader in high-end candy and chocolate packaging verticals in North America.Turning to our printing division. After 6 consecutive quarters of organic sales growth in our retail-related services, we saw a slight decrease in those revenues this quarter. So far this year, however, revenues from these services have remained stable. We believe that, that offering, mainly printed flyers and the service around it, like our in-store marketing products, remains central to Canadian retailers' merchandising strategies. In-store marketing products are also important to nonretailers as this third quarter, a new customer entered a 3-year deal with TC, representing $30 million of revenues over the contractual period. On a run-rate basis, this new business brings our in-store marketing product yearly revenue over $75 million. We are still working on potential new opportunities, and we feel confident that we will reach our long-term goal of $100 million of revenue in this vertical.As for our nonretailer-related business, which represents 40% of our printing division revenues, volume continued to be affected by persistent adverse factors in the advertising market and also due to the end of the printing of The Globe and Mail in the Maritimes of La Presse in Montreal and of the San Francisco Chronicle as of April 1. This decline in volume was partially offset by additional volume coming from our marketing product service offering. Our team continued to take steps to lower our cost as we benefited from the previously announced closure of our Transcontinental Métropolitain newspaper printing plant.Also following the Hearst agreement, we transferred the retail volume from our Fremont California facility to our Vancouver printing plant, and we started the process to relocate some equipment to our Canadian retail printing platform. This equipment will allow us to increase the efficiency in our retail manufacturing platform and to contribute -- and will contribute to reducing our costs during 2019.On the media side, we are very pleased with the results of the sales process of our local newspapers, and as of today, we only have one local newspaper remaining to be sold.Regarding our business and education portfolio, it continued to deliver stable results this quarter.In conclusion, regarding our packaging division, we have started the integration process of our transformational acquisition of Coveris Americas. We remain committed to our robust integration plan. In the short to medium term, we will continue to build on what is now our largest division through organic sales growth, and we will deliver on our synergies target. On the printing side, measures are continuously being taken to further optimize our platform, and our teams are diligently working on adjusting our cost base to volumes. For our Media Sector, we expect activities in the business and education portfolio to continue to deliver stable results.With that, I will turn it over to Nelson.
Thank you, François, and good afternoon.Let me start by providing you with an update regarding the process of executing on our cost savings synergies related to our Coveris Americas acquisition.We have identified about USD 20 million of cost savings to be realized over the first 24 months post-closing, of which $10 million are expected to be realized in the first 12 months. These cost savings synergies relate mainly to the procurement of raw materials, in-sourcing of film production and prepress and plate-making operations. Although we are at the early stage of our integration process, we believe that we are in line to realize our targets.Our last part we go to is regarding disclosure. We currently present the financials of our packaging division combined with our printing division. As of the third quarter, we will present the financial results of our packaging and printing businesses separately.Before I comment on our cash flow and provide you with more color on our expectations for the second half of this fiscal year, let me take a few minutes to go over the agreement we signed with Hearst last December, as this deal brings some complexity in our financial disclosure. In the first half of the year, this agreement will add to a onetime noncash gain as we accelerated the recognition of more than CAD 100 million in deferred revenues. This represents the unamortized deferred revenue from the onetime cash payment of USD 200 million we received in 2013 as compensation to amend the original contract. As of April 1 of this year, we stopped printing the San Francisco Chronicle, and therefore, we will no longer have any deferred revenues. Consequently, we will experience a decrease in revenues of approximately $25 million, and a decrease in operating earnings of approximately $7 million or $10 million in EBITDA in the second half of 2018 compared to the same period last year. This will have minimal impact on our cash flow as almost all of this shortfall is noncash.The negative impact of the Hearst agreement in fiscal 2019, using an exchange rate of $1.30, will be approximately $37 million in revenues, $20 million at the EBIT level and $22 million at the EBITDA level. Again, the majority of the impact will be noncash.Now turning to our cash flow in the second quarter. Net change in cash amounted to an outflow of close to $16 million, and we closed the quarter with $298 million in cash. About $56 million, which includes $17 million of tax payment, came from operations. Also we received close to $21 million from the sale of some of our printing equipment to Hearst as well as from the sale of 2 buildings. We invested $43 million for acquisitions and allocated $13 million to CapEx. We also distributed $16 million in dividend and repurchased shares for $6 million.At the end of the quarter, our net indebtedness was $50 million. However, the completion of the acquisition of Coveris Americas led to an increase in our consolidated debt. Consequently, our net indebtedness ratio stood at 2.7x at closing of the transaction.Now to our outlook. In our packaging division, we will benefit from the contribution of our acquisitions, namely Coveris Americas, Multifilm Packaging and Les Industries Flexipak. For the full year, we expect our organic sales growth, excluding Coveris Americas, to be similar to last year, and we expect Coveris Americas revenues to be comparable to those of 2017. In our printing division, we expect revenues from our retailer-related services to remain relatively stable when compared to last year, considering the already announced renewal of our multiyear agreement with Loblaws, which includes incremental revenues and the business we gained from a new customer.The remaining 40% of our printing portfolio should be affected by expected volume declines due to the same trends in the advertising market and due to lower volume in our newspaper printing vertical as we no longer print The Globe and Mail in the Maritimes, Les Affaires newspaper and the San Francisco Chronicle as of April. In terms of profitability, the printing division will continue to benefit from the closure of the Transcontinental Métropolitain plant.In the Media Sector, we expect our business and education portfolio to continue to deliver stable results.For the 2018 P&L, assuming the stock price at the average of the last 5 days, you should model to a full year corporate cost at the EBITDA level of about $23 million. As a reminder, a change of $1 in our stock price impacts our results by close to $1 million. Our full year financial expenses are expected to be about 2x higher than last year as our indebtedness increased due to the acquisition of Coveris Americas.Our effective tax rate is expected to be close to 27%, and in terms of the use of cash for the year including Coveris Americas, you can assume CapEx of around $75 million and cash taxes of $45 million.To conclude, TC Transcontinental continues to put its efforts towards generating profitable growth through a combination of manufacturing cost leadership, focused business verticals, strong customer relationships as well as targeted strategic acquisitions. We expect to continue to generate significant cash flows from all of our operating activities, which should enable us to allocate capital towards reducing our indebtedness and to continue our growth plan.On that note, we will proceed with the question period.
[Foreign Language] [Operator Instructions] Notre première question vient de Mark Neville from Scotiabank.
Just the first question on the Coveris outlook. You're calling for a flattish or similar revenues in '18 to '17. When you bought that business, I think you guided to 1% or 2% organic growth. So I'm just curious, is there any change in your view there? Or is it really just sort of a short-term thing as you integrate the business and just sort of get to know it a bit better?
Yes, that's exactly that, Mark. Like, we don't change the outlook, but we think we -- obviously, we don't think we could grow that platform at the rate we've grown our platform the last year, which was 6%. We still think we could do that 1% or 2%, but we've owned the platform for 30 days. I've met the largest customer. So we think we could do a little bit better than last year. But it's just like we just want to be prudent in how we guide the market. But that -- our 1% or 2% growth in sales over the next 12 months have not really changed, but for the next 6 months, as we become -- running the place, obviously, as you know, the sales cycle is a little bit better. So some of our activities are probably going to show more that we're going to be involved with in, in back end of the year. And I'm not saying that they don't have this platform, but we'd rather be conservative for the first 6 months, then that will likely go about the same as last year.
Okay. That's fair. On the legacy packaging business this quarter, I'm not sure if you gave it, but can you provide an organic growth number this quarter?
Yes, we did provide it in my prepared remarks. Quarter was pretty good. It was -- organic growth stands at 9%. So it was complete with that. If you recall, we had growth in some of our factory in Q1, but we got one big shortfall in one big factory due to delay in ordering. So some of that delay resumed in Q2, as you can see. But what I'm quite pleased is that each and every single plant had organic growth in Q2. All of the plants are above 5% or 6%. So if we're at 9%, some are double-digit growth. I mean, it's all the plants. So it was a very strong quarter organically. And we feel we have some good momentum in the TC platform to end the year around the same place where we ended last year, which was about 6% organic growth. We think we -- if the orders come, the fact that we think they will come, we think we could achieve about the same thing this year with the TC platform.
On that 9%, is pricing a big part of that, just given the rise in resins? Or is it majority of it volume?
No, no. Majority is volume. If you recall in the last 18 months, we've made a lot of investment in 2 factory. And especially in one, we invested in new technology that we didn't own to serve the pet food market. And we've been securing some business, and now this business is ramping up. So we didn't have much pet food volume last year, and now we're gaining. So it's more like new sales. It's not so much pricing. It's more activities around the pet food market, the confectionery market, the cheese market is very strong as well so it's just more opportunities.
And I guess, just on the resin, it's -- I guess, it's a bit hard to tell what's happening with the margin, but I mean, it looked pretty good to me -- to us. But I'm just curious, is there any -- was there any downward pressure on margin in the quarter because of resin in packaging?
Not so much. Basically for us, we have steadied the number, our margin. We're pretty good this quarter in packaging. And I would say in the last 18 months, we carried a lot of cost installing those assets and owning those assets, and those assets are not being too busy as we were ramping up. And as we start to produce sales, it convert well to the bottom line. So that's more of what's happening in terms of our improved margin for the quarter. And packaging is a new volume on the equipment that was part of that plan that we put forward in the last 18 to 24 months.
[Foreign Language] Adam Shine, National Bank Financial.
In terms of the slight slowdown in retail, François, was this maybe bit of a timing issue? Were customers potentially testing new products? I guess, last year, we saw maybe a catalog, maybe a repeat of that. Anything to elaborate on that?
No. It's really -- if you would have asked me 18 months ago, I would have felt that we would have 6 consecutive quarters of growth in the flyer and retail-related business. I would have think very unlikely. So for the last 6 quarters, we actually had sales growth in retail-related services. And not huge growth, 1% or 2%. And then, this quarter, I think we're minus 1. So we're still in that zone that I have been talking about for the last 6 or 7 years. That business is plus 2 to minus 2. But we just wanted to make the market aware of 2 things: that we have the organic sales growth for 1.5 years in that space and this quarter, we were minus 1. But no change to how the retailers look at the medium. Not a lot of -- no change in their behavior. There's nothing to read on this. And then, we feel when the year is over that we're going to be about the same as last year in those retail-related services. So just nothing to really more than this to talk about. We're still in that zone of plus 2 to minus 2, very stable business.
Okay. Super. One more for -- so maybe more for Nelson. Just in terms of media, you have 92 of 93 publications sold. I don't know if you can or want to give us, let's say, any disclosure around how many of those publications you might still be printing. But maybe a better question is, previously you talked about a run rate of around $100 million of revenues, margin around 22%, 23%. Are we still looking at that now that a good chunk, if not almost all, of this transformation in the media platform has occurred?
Yes. So I mean you have a 2-part question. On the first question, in terms of the Quebec newspapers that we sold, I think we mentioned before, in selling those newspapers, in fact, we did 2 things: One, we signed a multiyear printing agreement with all the newspapers. Of course, what's as important and as profitable is that we signed a distribution agreement. So not only do we print those newspapers, but we also distribute those papers. And for both of those services, we've signed multiyear agreement on an exclusive basis. So I think that's always -- it secures our printing revenues, I mean, our printing revenues and distribution revenues as long as -- and as those papers continue. And on most of those papers, the people that have acquired those papers actually are doing reasonably well. We can tell that based on, obviously, the page counts that we print. So that's one very encouraging for us. But we're also, obviously, pretty happy for the people because we want the people who acquired the papers to be successful. On the second question, which is the remaining media business, which is essentially our educational book publishing business and our business publications, we're around $100 million of revenues. We're slightly north of 20% of EBITDA. And I think as we said, we had a stable quarter, a good quarter. And that business compared to the other media businesses we had is significantly less exposed to traditional advertising, especially on the educational book publishing side. So we feel pretty good about the sustainability of having those 2 businesses, and also think they'll generate good cash flow going forward.
[Foreign Language] [Operator Instructions] David McFadgen from Cormark Securities.
A couple of questions. So first of all, just a clarification. On the packaging revenue, the organic growth was 9% in the quarter. So, obviously, the results in Q2 benefited from some timing that you talked about in Q1. And just wondering if you can clarify that, if that is indeed the case? And secondly, if you're looking for 6% for the entire year on the packaging side in [ in ] organic growth, then that's just a reflection of a more normal growth rate in Q3 and Q4. There's nothing else factoring in there, is there?
Yes, that's right. We're expecting -- yes, some of the 9% comes from this business, the timing coming back. Having said that, we were very clear in Q1 that, that problem was only in 1 factory, and that factory, some of the volume came back. But I must say this factory had not the biggest increase -- old factory had an increase, and we had other factory that had double-digit growth. So some of the 9% comes from this. But a big chunk of the 9% just comes from the stuff that I mentioned before volume and other plants. And actually the 2 -- we have 2 factory that were north of double-digit organic growth, and they were unrelated to the issue we had in that plant. Actually that plant was the one with, I think, the lowest organic growth of all the plants. So some of it contributed, but not the bulk of it.
So if that's the case, why would you only have, say, 6% organic growth target for the year, if some of those plants are doing double-digit growth?
Yes, well, if you recall, because of that delay in Q1, we were actually negative organic growth. So now with the 9%, we're not even at the 6% now. So in order to go to 6% for the balance of the year, we need to be in Q3 and Q4, above 6%. And we think we could -- we can make that happen.
Okay. And then, you talked about the marketing services business and the print side growing. Can you give us an indication of what the growth rate was?
Yes, this is a business we started about 5 years ago, mainly with the retailers that we were servicing with flyers and [ print ] media and distribution. And we brought a lot of innovation in that market and built a platform from scratch with new equipment, with new services and then changed a lot of -- brought a lot of innovation and lot of efficiency, I would say, in that market. And we had a lot of early success with our retail customer, giving them all the point of purchase printing material to all of their stores. But this offering was, which I think is quite unique, got known into the market. And other types of customer that were nonretailer have started to call us and inquire about our services. And we've been growing nicely in that business with people that are not retailers, but that own a lot of stores or places in Canada. Example, a beer company that sent a lot of signage to all the bars in Canada, banks, restaurants chains and all that. So that win that we just mentioned, unfortunately, the customer doesn't want us to disclose their name. But they own a lot of sites in Canada, and they're not a retailer. But they are somebody who's got a lot of sites. And so not only now we're growing the point of purchase printing business with retailer, but with other types of company, like the one I mentioned.
So can you tell us what the growth rate was in the quarter for marketing services?
The growth rate has been double digits for a long time, because we're winning customers constantly. We only mention it when it's like above $10 million a year, but you could take that offline with Donald and Shirley. They could share the history in the last couple of quarters. But it's always a good growth in that space. It's double-digit. I don't know if it's 10%, 11%, 12%, but if we keep it growing at, if I recall, around 11% compound in the many, many, many quarters because we've been signing up customer on a very regular basis in that space.
Okay. And then, Nelson, on the CapEx, you gave us a number for 2018. Can you give us a number for 2019 that would reflect full year of Coveris?
Yes, I mean, we haven't provided guidance yet on that, David. But go back and look at the material that we produced when we did the -- when we announced the transaction. I think all the details of what we guided Coveris to on an annual basis continue to use that in all that information. We'll be providing later on in the year kind of combined guide for the updated CapEx for 2019.
[Foreign Language] Drew McReynolds from RBC.
First follow-up for you, Nelson, on the working capital in Q2. I know you walked through a little bit of the put and take for the full year. How we should be modeling the change in noncash working capital?
I think for now, I mean, obviously, we need to get our hands around what Coveris will look like. But -- and I think you should assume for the model that there is no change. I think that'd be a good assumption. I think once we come out of the next quarter, and obviously, we will be starting to work on our planning for next year. I mean, we'll be able to provide, I guess, more accurate guidance, but leaving it kind of flat/no change would be what I would use for the model.
Okay. So that Q2 reverses in the back half of the year?
A little bit, yes.
Okay. Great. And then, with respect to Coveris, I know early days, one of the kind of comments you made when the transaction was announced that gave you some confidence on the asset were that the end markets of Coveris were growing. Just want to, now that you're in there, just confirm that, that's what you're seeing. So really now a question of getting kind of the operational plan in place to then capture some share and grow with these markets. Is that still intact?
Yes. After a month of visiting, I visited the top 8 customers, like I said in my prepared remarks, that are close to 30% to 35% of the sales, and visited a lot of employees. My personal level of excitement about the possibility of long-term of putting the 2 platform together is still there. And I think even more and more positive. We've like -- as we told you, we did an extensive due diligence. We looked at everything. And now that we've been owning it for 30 days, we're even more excited about the possibility in various verticals. So yes, it's still -- all the things that we mentioned when we acquired, we are still firmly positive about the long-term outcome and growing in a lot of those verticals. Especially the one where we were present, putting the 2 together. A lot of customers are excited about that and are excited about the type of ownership and stability we provide to them with the acquisition of Coveris. And putting the 2 platforms together, I think makes our offering more, I guess, stronger for customers. So a lot of excitement on our side, but a lot of support so far from the customers that I have visited and talked to.
Okay. That's a great. And maybe a follow-up, François, on that. Obviously, a big transaction for you, but also within kind of that flexible packaging space, are you seeing any change in the competitive environment? Either with Coveris or in some of the kind of legacy packaging markets, just as you, frankly, rev up and start to gain some traction?
I guess, not so much change in the marketplace. Big change for Transcontinental, though we were a smaller player, at $300 million. And we were dealing mainly with Tier 2 customer. Now we are a bigger player. I would say in some verticals, we're dominant player or we are that market leader in some of those verticals. So now we deal with a lot of Tier 1 customers, which was not the case with our TC platform. So it's different for us. But I think we have a good mix of Tier 1 and Tier 2 customers, and we will have a strategy per vertical to try to grow the business in each and every vertical.
Ms. Chenny, there are no further questions at this time. Please continue.
Well, thank you, everyone, and have a great summer.
[Foreign Language] Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.