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[Foreign Language] Welcome to the TC Transcontinental Second Quarter Fiscal 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, June 9, 2021. 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 to all on the line. I hope you and your family are healthy and continue staying safe. Welcome to TC Transcontinental Second Quarter 2021 Results Conference Call. Before we begin, I'd like to highlight that we have provided, as we have done last quarter, a slide presentation to help guide today's discussion. The presentation, along with the press release and the MD&A with complete financial statements and related notes, were issued earlier today, are all available on our website at tc.tc under our Investor Relations section. A replay of this conference call will also be available on our website after the call. We have with us today our President and Chief Executive Officer, Francois Olivier; and our 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 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. You can refer to the MD&A for a complete definition and reconciliation of such measures to IFRS.In addition, this conference call might also contain forward-looking statements. These statements are based on the current expectation of management and information available as of today, and they involve numerous risks and uncertainties, known and unknown. The risks, uncertainties and other factors that could influence our actual results are described in the fiscal 2020 annual MD&A and in the latest annual information form. With that, I would now like to turn the call over to our President and CEO, Francois Olivier.
Thank you, Yan, and good afternoon, everyone. We delivered another strong quarter with a solid performance across our 3 sectors. I'm very proud of the resilience, innovation and agility that our team demonstrated again this quarter as we continue to operate in the challenging context of the pandemic.Slide 4 gives an overview of our performance. In Packaging, we generated solid EBITDA despite the negative impact of higher resin prices and the stronger Canadian dollar. In fact, excluding those 2 headwinds, we would have recorded significant growth in the profitability versus last year. At the same time, sustainability continues to be a major focus for Transcontinental, and the market is recognizing our R&D efforts. I will come back to this in a minute. In Print, one year after the start of the COVID-19 pandemic, we are pleased to return to organic revenue growth. We expect this trend to continue for the coming quarters. We are pleased with having also significantly increased profitability despite the pandemic still impacting some of our customers. Excluding the Canadian wage subsidy, we recorded an adjusted EBITDA margin of 22.5% compared to 17.9% last year. At the consolidated level, we continue to generate strong free cash flow that we use to deleverage our balance sheet. The solid financial position provides us with the flexibility to invest in our growth, either organically or through acquisitions, in all of our 3 sectors. Moving to Slide 5. Our focus on employee safety has never been more important than during this pandemic. This was, therefore, natural for us to step up and respond to the Québec government call for business to support its COVID-19 vaccination campaign. Since May 26, we are offering supervised vaccination to the local population, our employees and their families at one of our Montréal sites. Moving to sustainability and packaging. Our integrated approach to sustainable package is a competitive advantage that helps to differentiate us from our competitors and supports our growth. This is why we continue to invest in innovation and product development. We want to ensure that we remain ahead with our recycle-ready, compostable and PCR product portfolio. We need to reduce waste and help the flexible packaging industry move towards a circular economy for plastic. Our innovation is being recognized by our customers and by the industry. In the last few months, we won several prizes for some of our new products, including a recent recognition for our post-consumer recycled shrink film, which we launched for the Coca-Cola Company. Let me now come back to the performance of each sector for the second quarter. Our Packaging Sector had another solid quarter. In terms of revenues, we said last quarter that we expected full year organic growth, excluding the impact of resin price, to be between 2% and 3%. After 6 months, we are in the middle of that range. With an expected strong second half of the year, we believe that we could reach a full year number close to 3%. This growth is coming from investments in product R&D and CapEx and from the ramp-up of new business won over the last 2 years.Our balanced portfolio of products is very resilient and has enabled us to perform well during the pandemic. We expect that this growth will continue as the economy recovers and the trend towards sustainable products continues to gain momentum. In terms of profitability, the double headwinds of resin price increases and currency variation continue to have a significant impact. Donald will go into more details, but I want to highlight that we achieved very solid results when we exclude these external factors, thanks to very strong execution. Our Print Sector also had a very solid quarter. As mentioned earlier, the sector returned to organic growth and continues to demonstrate its resilience in these challenging times. Our cost discipline and excellent execution allowed our Print Sector to generate very good margins in the quarter. With the lifting of some government restrictions impacting our customer, we expect to see substantial organic growth in the second half of the year. We also have very good momentum in our in-store marketing group. We recently announced that we won an important customer representing over $20 million in annual revenues. We also announced the acquisition of BGI Retail, which not only brings additional business and capacity, but also adds a very talented team with skills that complement our product offering to retailers and brands. This acquisition offers significant cross-selling potential, in-sourcing opportunities and stronger design and execution capabilities. It also creates timely opportunities as we help retailers prepare for a post-pandemic environment by reinvesting in the in-store customer experience. With these recent announcements, our ISM Group is expected to generate revenues of close to $200 million on an annualized basis, and we expect it to continue to grow. In summary, our capacity to better support retailers clearly -- is clearly expanding. Not only do we continue to help retailers attract customers to their store with our flyer business, we also improved the in-store consumer experience with our full-service capabilities of in-store marketing. Our offer now includes interior and exterior signage, displays, fixtures and furnitures made in plastic, wood and metal, quite a change from our traditional printing business. Finally, our Media Sector also had an excellent quarter with strong revenue and EBITDA growth. We continue to grow our share of revenues and vertical with a promising outlook, like in-store marketing, books and premedia, including our Media Sector, which also has good momentum. Our growth verticals account now for about 1/3 of our combined Print and Media portfolio. In conclusion, I want to leave you with a few messages. First, once again, all of our 3 sectors performed well in the quarter, highlighting our focus on operational excellence and ability to drive efficiency gains. Second, with the recent product introductions and the new business won in our Packaging Sector and the recovery in our Printing Sector, we expect solid organic revenue growth for the second half of this fiscal year. Finally, our healthy balance sheet and our ability to generate strong and predictable cash flows provide us with the flexibility to continue investing to grow organically and through acquisitions in all 3 sectors. With that, I will turn it over to Donald.
Thank you, Francois, and good afternoon. I will start with the consolidated numbers on Slide 6. Once again, we had a very strong performance across all 3 sectors and delivered a solid quarter. At a consolidated level, we reported revenues of $623.3 million, in line with last year despite a negative currency impact of $24.2 million. It's important to note that we generated organic growth in all 3 sectors during the quarter.On the profitability front, despite the negative impacts from resin prices and currency variations, adjusted EBITDA increased from $104 million in Q2 of last year to $107 million this year. This improvement was operational and not due to the Canadian wage subsidy as we received slightly less in the quarter than we did last year. I'll provide more details on profitability improvement in the sector by sector review.As we have seen in previous quarters, financial expenses declined as we continue to reduce our debt and benefited from lower interest rates. We also recently announced the signing of a new 7-year third loan at an interest rate below 2%. This will maintain our liquidity position and contribute to lowering our average interest rate. Tax rate in the quarter was at 24.4%, in line with our mid-20s guidance. This led to adjusted net earnings of $0.55 per share for the quarter compared to $0.50 last year, representing a 10% increase. Now moving to Slide 7 for a sector review. Our Packaging Sector posted another strong quarter. We generated $17.3 million of organic growth, mostly due to the higher price of resin. This growth was offset by a stronger Canadian dollar, which drove revenues lower than last year. Moving to profitability. As we told you in February, resin prices continue to have a temporary but significant negative impact in the quarter. Through efficiency gains and a good mix, we were able to offset almost all of the resin impact, delivering very good performance. Adjusted EBITDA margin was 14.1% for the quarter, but it would have been north of 16% excluding the lag impact of the resin pass-through. In dollars, excluding resin and FX, adjusted EBITDA would have been higher than last year. On Slide 8, you can see that our Printing Sector had an exceptional quarter. Given the continued pandemic context, while our clients, especially the retailers, are still impacted by COVID-19, revenues were off slightly as, on the one hand, we compare to the 2 pre-pandemic months of February and March; but on the other hand, we had an easier comp for April. This returned to internal growth in Print bodes very well for the coming quarters. We were very successful in further reducing our fixed costs and operated with very efficiently during the quarter. This led to an impressive 25% increase in profitability from adjusted EBITDA of $53.9 million last year to $67.3 million this quarter. This was a very strong operating performance by the sector as we delivered an adjusted EBITDA margin of 22.5%, excluding the subsidy, compared to 17.9% last year, a 460 bps improvement. Our Media business also had an excellent quarter with strong revenue and EBITDA growth, building on the momentum gained in the last several quarters. Corporate expenses were higher than last year, mainly due to the stock-based compensation and a pension cost adjustment. Turning to cash flow from operating activity. We generated $83.3 million. The variation with last year is mainly due to the higher inventory driven by resin prices. In light with our growth aspirations, we continue to invest in CapEx with a total of spend of $27.6 million in the quarter. We also distributed $19.6 million in dividends. On Slide 9, strong cash flow generation and a stronger Canadian dollar contributed to bring our net debt ratio to 1.7x, a very healthy level, providing flexibility to execute on our growth strategy. Excluding the impact of IFRS 16, the ratio will be close to 1.5x. Following the rating improvement by Standard & Poor's in February, our efforts to deleverage the balance sheet were also recognized by DBRS, which changed our outlook from negative to stable and affirmed our investment-grade rating. Furthermore, at the end of the quarter, we had a total of $631 million of available liquidity. The strong financial position and our ability to generate stable, solid cash flow provide us with flexibility to capture future growth opportunities through organic growth and acquisitions.As for our outlook in Packaging, with resin prices increasing, we will continue to be diligent in managing the pass-through to our customers. However, because of the lag between the increases from our suppliers to the pass-through to our customers, we expect a significant negative impact in the third quarter, similar to the one we saw in the second quarter. We also expect the stronger Canadian dollar to continue to be a headwind. You may recall that the U.S. dollar was trading at around $1.35 at the same time last year compared to $1.21 today. The negative impact is mainly on the conversion of our U.S. results back into Canadian dollars. This is partially offset by the lower financial expenses at the consolidated level, as most of our debt is in U.S. dollars. In terms of revenues, we expect solid organic growth in packaging for the year, raising our outlook to close to 3% excluding the impact of resin price. In Print, we continue to expect volumes to recover in the second half of 2021 as we face easier comparables. In terms of profitability, excluding the important impact of the Canadian wage subsidy program, especially in the third quarter last year, we expect adjusted EBITDA to grow organically for the second half of fiscal 2021. The recent acquisition of BGI Retail, which offers significant synergies, both in terms of revenues and costs, should contribute positively going forward. Corporate costs at the EBITDA level should be close to $40 million for the year due in part to the higher-than-usual stock-based compensation expense. In terms of use of cash for the year, in addition to continue looking for potential acquisitions, we are also looking to accelerate our organic growth through CapEx. To that end, depending on the timing of potential key investments, we are likely to exceed our $100 million of planned CapEx for 2021. As for cash taxes, you can continue to assume around $50 million for the year. On that note, we will now proceed with the question period.
[Foreign Language] [Operator Instructions] [Foreign Language] Your first question will come from Mark Neville, Scotia Bank.
Maybe just first on resins. Just so we understand, a similar type impact in fiscal Q3, things start to recover in Q4 as you raise price and presumably sometime next year, early next year, sort of back to some pre inflationary type margin. Is that sort of the way you think about it?
Yes. Yes, we had some raise in April and May that we still need to -- that we have -- that we're digesting right now as we're paying more, and we're going to be able to pass some of that increase in June and July to our customers. So yes, Q3 will be impacted negatively by the raise of April in May. And after that, yes, in Q4, if there's no further raise, then things should start to ease up and all of our growth of profitability should start to be seen more, but we still have the headwind of the exchange, but this is just transferring our U.S. business into Canadian dollars for a Canadian corporation. So, but yes.And then obviously, if there's further increase, then we'll have further hit. But obviously, if there's some decrease, then we should regain some of that money that we gave away in the last year or so. So, yes, that's -- you got that right. Q3 is the last -- if there is no further raise, is the last quarter where we should have negative impact, and things should start to turn and stabilize for Q4 and the remaining of the year. What we're secretly praying for is for some decrease. Both us and our customers are -- would enjoy seeing some decrease, but this is hard to predict if it's going to come or not.
And is there any pushback from customers in terms of raising price? Presumably not because it's industry-wide, but I'm just curious. And I guess the second part to the question, is there any issue sort of sourcing material?
I wouldn't say pushback in the sense they are not happy, but I think we all live in a very inflationary world, not only resin that is going up. So like for most of our customers, we have a formula that is pre-agreed in the contractual agreement. So they understand the game. So I don't say they would be -- that they're happy, but no, they're not pushing back. And our industry operate at a very high capacity level, so it's in some of the vertical we're in, we are still very busy and are at the edge of the customer on time. So those who feel that is not unfair. We deliver other people that are willing to acknowledge that the price is going up. And we're just, frankly, just passing it through, we're not looking to gain from that.In terms of is there a problem getting material, in some of the area of our global supply chain it's still very tight. So the fact that we have good suppliers and good relationship was really tested in the last 6 months because in some areas of what we buy on the outside, the supply chain is still very tight, and we are still in an environment where it seems that inflation is still present. But so far, we've been able to manage that properly.
And then Mark, maybe to -- just to complete the answer on Q4. Yes, you're right that if there's no more increase, it should stabilize, but for model purpose, if you -- for margin, obviously, will have an impact because we sell at higher price, we have the profit, but it will stay in the margin when you compare to Q4 of last year.
Yes. Yes, okay. And Donald, the FX impact, is it purely translation? Or is there any impact on the percentage margin?
It's purely -- I'll let Donald complete my answer. But for the bulk, it's just purely translation. Our flexible business is U.S., we look at all the KPI and the results in U.S., but because we're listed in Canada, we need to convert that at the end of the quarter. And then you have a gain -- or a loss right now. It's like Donald said, it's big loss, but it's purely conversion. So it is what it is, what track is are we are we growing in U.S. dollar or no, and if you factor out the resin, our sales and EBITDA is growing, and that's what we're looking at, and that's what we're happy about.
It will have, again, to complete, a slight impact because it's actually what it does, without going in detail, is you decrease your top line because you're selling in U.S. and your profit decreased at the same time. So it does play also in the margin, but not as big as the resin will play into the margin. But it will have an impact. And the most important thing is that it's not cash because, obviously, we generate free cash flow in the U.S., but we have interest and debt in the U.S. So on that side, we're protected.
Right. If I could ask this one more. I'm just curious if you could share the revenue contribution from BGI on an annual basis, if you could.
I don't know if we shared that in our disclosure, Donald? We've not shared that. Well, it's roughly $40 million to 4 -- $40 million, $45 million of additional revenue. That's why -- and our run rate was $40 million. We gained a $20 million customer. We're growing double-digit besides that, and we just acquired about $40 million of revenue. So that's why we're saying with the growth, we're probably past $200 million of revenue in the in-store division, right?
Your next question will come from Adam Shine of National Bank Financial.
Maybe I can push a little bit more on resin, just to get a little clarity around the Q2 numbers. So if we just look at the packaging revenue organic growth, which was just shy of 5%, I think you guys highlighted in a few places that most of that related to the resin prices. And I think your organic x resin in Q1 was like 5%. So in the H1, you're tracking to 2.5%, you said. So are we really a bit closer to 0, just organic x resin in the Q2? Is that a fair place to be?
Yes. It's positive, but not a whole lot, and we knew that because like I told you often, Adam, there's an inventory thing in that business, depending on when we ship. But obviously, if we think we're going to be closer to the top of our range at 3%, we obviously expect Q3 and Q4 to be stronger than 3%, if we're at 2.5%. So we were expecting that and we give you guidance, 2% to 3%. We're at 2.5%. And now we're saying it's probably going to be much closer to 3% than 2.5%. So we expect Q3 and Q4 to be pretty good in terms of organic growth in flexible packaging, without the resins. Yes, you got that right.
Okay. And I just want to clarify one more thing on resin and then jump into one on Printing. So on EBITDA, if we look back at Q1, Q1, I think, Donald, you were more specific in regards to $6 million, $7 million impact, 150 bps on margin. Are we looking in this Q2 had an impact that is at or meaningfully above $10 million at this point? Is that something that you can maybe provide a little color on?
Yes. On the bridge side, when you bridge versus last year, we're at that level. Yes.
Okay. Around the $10 million mark. Okay.
North of it.
Oh, a lot north? I mean not to play Price is Right, but are you closer to 15% than 10%?
No, no, no. You're okay with other assumption on it.
Okay. All right. That's helpful. And then just in regards to the Printing side, which obviously was the real big surprise in the period. And if I reflect back on some of the comments that Francois might have made back on Q1, this was a business that seemed to be, ex subsidies, maybe you guys thinking of like 19% to 20% level, and all of a sudden, obviously, delivered much above expectations. So maybe, number one, can you just talk to what might have been incremental in terms of efficiencies and savings that materialized in the Q2 to drive this sort of upside surprise on Printing margin? And then additionally, just reflecting on prior comments, Francois, when we think about a margin this year in Printing, and I don't want you to be overly specific about it, but is it fair to say that an ex subsidy margin is actually gravitating closer to 22% this year than necessarily 20% that was previously anticipated?
Yes. Well, you're asking me not to be specific, but you're [indiscernible]. So I would say that I mentioned that earlier when we were forcing the COVID to operate partially or with minimum people, I guess we learned a few things on how we could run our platform because some plant had to be shut down and all that. And I think for the most part, I think we are operating right now with a much more leaner organization. And then we've moved some volume around, reallocated some equipment, shut down some equipment. So we operate with -- a lot more efficiently. So whatever volume is thrown at us will generate more margin now than it did pre-COVID. And we thought we were pretty good before COVID. So just to say that there's always room for improvement. So our cost structure and efficiency is much better. So that's why the -- mainly the margin are higher.I would say it also that we're putting ISM Group together, and we made a press release about moving 5 building into 1 building into Brampton. As this is ramping up and other acquisitions are coming in, and the volume is coming in, Adam, you have a huge impact on margin. It's because everything is happening on the same time, lower cost base, more sales and then a better product mix that enable you to win more business. And you put all that together, our target for our ISM business was 15%. I think now we think that we could maybe reach eventually 20%, so -- which is similar to Print. You want me not specific. I won't be specific, but I can tell you that this year, I think our Print margin will start with a 2 when it's all said and done.
Okay. I think inevitably, it will.
[Foreign Language] [Operator Instructions] Your next question will come from the line of David McFadgen of Cormark Securities.
A couple of questions. So I mean you sort of touched on it, but I was just wondering given the strength of Printing in the quarter in terms of the EBITDA margin, as you see the business pick up, volume picked up, are these costs that you've taken out, are these truly sustainable? Or you're going to have to add those costs back in just to support a higher revenue? I know this year you said that the printing EBITDA margin probably starts with a 2, but I'm just wondering as volume really picks up, assuming it picks up, is that really sustainable based on the last -- this quarter's results? And then secondly, where are you guys at on acquisitions? I know acquisitions is always something you've done every year. And in the past, you indicated that you'd probably act as well, and I was just wondering if that's still the case.
Yes. In terms of the way we operate in Printing and is it sustainable, I would say not only sustainable, we could still improve from where we are. That's kind of giving you how I feel about that part. And the only thing that excite me about what I call the traditional business of Transcontinental, which is our Printing and Media business, in my remarks, I mentioned that this portfolio is about $1.3 billion, if you include the Media business, what we just said is that 1/3 of that, 1/3 of that is actually growing. And I'm not talking about Print is growing because of the COVID. I'm actually talking about in-store marketing, book printing, premedia and our Media business. What I just mentioned is 1/3 of our revenue and probably more than 1/3 of our EBITDA, and it's actually growing. And a lot of what I did -- just mentioned, not only growing, it's growing double digit. And in my view, is with market share gain and a little bit of M&A and POP. We hope that pretty soon half of our revenue in Printing and Media is going to be actually growing. So this is -- that's what excite me about the traditional business of Transcontinental. So yes, I think not only sustainable. I think we could continue to have our portfolio evolving. People think of the Print group like it was 15 years ago, but it's a quite different business. And for me, if you have more than [ 1/2 ] your business in a business that is growing, you're actually a growth business instead of a declining business.In terms of the acquisition, what [ is key ] is that we have opportunity to acquire. Obviously, the biggest place is flexible packaging. And we're very active, and we're looking forward to make acquisition, but the right one at the right price. And this market is very competitive right now. There's a lot of private equity money around that space. So that makes it a little bit more complicated for us, but there are still opportunities. But what also people overlook is we have opportunity to acquire in our Media business, which is a business that derives fantastic return on capital employed, actually the best within Transcontinental. And in the Print Sector, with the growth story that we have in POP, we could also make acquisitions. So yes, we are thinking of acquisition in the 3 sector, and we are looking at files in the 3 sectors, Print, Media and Packaging.
[Foreign Language] There are no further questions at this time.
Well, thank you all for joining us on the call today, and I look forward to speaking to you soon. Thank you.
Ladies and gentlemen, this concludes today's conference call for today. Thank you all for participating. Please disconnect your lines. [Foreign Language]