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[Foreign Language] Welcome to the TC Transcontinental Third Quarter of Fiscal 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, September 8, 2021.I would like to turn the conference over to Yan Lapointe, Director, Investor Relations. [Foreign Language] Mr. Lapointe, please go ahead.
Thank you, Gillian. Good afternoon, everyone on the line, and thank you for joining the call. Welcome to TC Transcontinental's third quarter 2021 results conference call.Before we begin, you can find the press release, the presentation and the MD&A with complete financial statements and related notes 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, François 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 expectations of management and information available as of today and they involve numerous risks and uncertainties, known and unknown. The risks, uncertainties and other factors that could influence actual results are described in the Fiscal 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, François Olivier.
Last quarter, we delivered another solid performance across our 3 sectors. Despite the challenging environment, particularly in the context of the pandemic and higher resin prices, our teams continued to perform very well.Slide 4 gives an overview of our performance for the third quarter. In Packaging, we recorded organic growth of revenues of $35.7 million, mainly as a result of higher resin prices. At the same time, revenues were negatively impacted by a similar amount of currency conversion impact of $37.4 million, stemming from a stronger Canadian dollar.Excluding the resin impact, organic growth was flat for the quarter. Unfortunately, our revenues did not met our expectations. This is mainly due to delays in installing new equipment caused by supply chain issues with our equipment suppliers. This situation limited our ability to ramp up production on new contracts already awarded to TC. The good news is that these new equipment are now operational and we are working through the backlog. While we expect to recover some of those missed revenues in the fourth quarter, it is in our next fiscal year that we expect the full benefit from this new volumes.Demand for our sustainable products remains very strong, which bodes well for our long-term growth outlook. New products have been developed, contracts with customers have been signed and are being negotiated, and investment have been made, and equipment installed. This position us well to deliver organic growth again in 2022.Moving to profitability. I am very proud of our operational results. Let me explain to you why. EBITDA was negatively impacted by 3 factors. First, short-term contractual lags in passing through higher resin prices to our customers; second, the stronger Canadian dollar; and third, the wage subsidy we received for our Canadian operations in Packaging last year. Excluding these 3 items, which impacted EBITDA by more than $25 million in Q3 alone, EBITDA for this quarter is higher than last year. This is a strong performance, considering that last year was the highest ever quarterly profits we recorded in this sector. Assuming that resin prices stabilize, I expect their impact to be lower in the fourth quarter before potentially turning positive in 2022.In Print, as expected, with the gradual reopening of the Canadian economy, we saw strong organic revenue growth in the third quarter compared with last year, which was more impacted by the pandemic. We expect this growth to continue for the quarters to come not only in our traditional offering, but especially in our growth markets like in-store marketing and books.As for profitability, adjusted EBITDA declined by $9.3 million. If we removed the impact of the Canadian wage subsidy, which was $20 million lower compared to Q3 last year, the sector would have reported a profitability improvement of over $10 million for the quarter. This is a solid performance, and again, reflects our ability to operate with efficiency and control of our costs. This translates into an adjusted EBITDA margin of close to 20% when excluding the subsidy, an improvement of 180 basis points versus the same quarter last year.Our Media sector once again had an excellent quarter with strong revenue and EBITDA growth. This business continued to have a great overall performance.At the consolidated level, we continue to generate strong free cash flow that we use to reduce our net debt and invest in our future growth through CapEx and M&A.Moving to Slide 5. Last week, we used the opportunity to renew our credit facility to link our cost of capital to 4 key ESG targets: employee safety, gender diversity, post-consumer recycled resin and our packaging products and greenhouse gas emissions. This opens the door to future opportunities in sustainable financing and furthers our own Corporate Social Responsibility objectives.During the quarter, we also made good progress in sustainable packaging, as we continue to invest in innovation and product development. And our recycle-ready portfolio, we have designed and produced new sustainable films for pet food and frozen food applications. These new films are now pre-qualified for a store drop-off label with how to recycle. This is a plus for our customers, allowing them accelerate the achievement of their sustainable objectives.In our recycling group, the LDPE resin we produce from post-consumer recycled content in our Montreal facility has also been certified by the Association of Plastic Recyclers, an important milestone in our journey towards using more recycled resin. Our integrated approach to sustainable packaging supports the global efforts towards a circular economy. At the same time, it differentiates us from our competitors and supports our growth.We are currently engaged in many trials with customer not only for our recycle-ready and compostable product, but also for our films, including recycled resin.The engagement in certain case excitement and positive feedbacks from our customers show us, to what extent sustainability is a key pillar for our future growth. It give us confidence that we are on the right path and that we have a strong and innovative R&D team to deliver.In conclusion, I want to leave you with 3 key takeaways. First, our continuous operational excellence and the ability to drive efficiency improvements, despite the temporary challenges from the lag and passing through resin price increase, the exchange rates and the lower wage subsidy, which negatively impacted our overall adjusted EBITDA by around $50 million year-to-date. Our 3-sector continued to perform well in the quarter.Second, we expect solid organic revenue growth for our 3 sectors for the quarters to come. And all 3 sectors are well positioned to be solid contributors to our future overall performance.Finally, our healthy balance sheets and our ability to generate strong and predictable cash flows for years to come provide us with the flexibility to continue investing to grow organically or through acquisition in all 3 sectors.With that I'll turn it over to Donald.
I will start with the consolidated numbers on Slide 6. We reported an increase of 5.8% in revenues versus last year. This was driven by organic growth of $70.4 million from higher volume in our Print and Media sectors, was also driven by higher pricing and packaging following our intelligent management of resin pass-through.The revenue growth was partially offset by a negative currency impact of $38.2 million mainly from the rise of the Canadian dollar versus the U.S. dollar. On the profitability front, adjusted EBITDA decreased to $101.7 million this year. Good operational performance in all 3 sectors was more than offset by 3 external items detailed earlier: the wage subsidy, the lag in passing through resin price increases and the exchange rates, which negatively impacted the quarters EBITDA by total of about $50 million.As we have seen in previous quarters, financial expenses declined slightly in line with lower net debt. Last week, we extended our credit line through 2026 and linked it to a 4 sustainability indicators related to ESG issues. In July, we also announced a $250 million debt offering at a very good rate. And the transaction was well oversubscribed. These actions are clear demonstrations of the confidence by our financial partners in our financial strength, our long-term growth strategy and in our commitment towards ESG.Moving to taxes. Tax rate was 23.6% in the third quarter, in line with our mid 20s guidance, and led to adjusted net earnings of $0.51 per share for the quarter.Now, moving to Slide 7, for a sector review. In our Packaging sector, organic growth was due to the higher price of resin, and was offset by a stronger Canadian dollar, leaving revenues in line with last year.Moving to profitability, you may remember that at $65 million, Q3 2020 set a record of quarterly profits in Packaging, as we benefited from low resin prices, favorable currency exchange and the Canadian wage subsidy. This year, these 3 external items had a negative impact of about $25 million, leading to an adjusted EBITDA of $42.3 million. Excluding these items, our continued focus on efficiency gains will have resulted in EBITDA growth. Adjusted EBITDA margin was 12.2% for the quarter, and would have been at more than 16%, just by excluding the temporary lag impact of the resin pass-through.On Slide 8, you can see that our Printing sector had another very good quarter, with 14.4% organic growth versus Q3 last year, which was more impacted by the pandemic. Adjusted EBITDA for the quarter was $60.1 million compared to $69.4 million in Q3 2020. This is a solid performance when we consider that the wage subsidy was $20 million lower than last year. It also shows that the growth in revenues converted well to the bottom line as we continue to benefit from our cost discipline. Excluding the wage subsidy, adjust adjusted EBITDA margin for the quarter was at 19.8% compared to 18% last year, a 180-basis point improvement.Our Media business also had another excellent quarter, with double digit revenue and EBITDA growth, building on the momentum gained in the last several quarters. Corporate expenses were higher than last year, due mainly to the stock-based compensation, wage subsidy received last year and non-recurring costs related to our vaccination clinic.Turning to cash flow from operating activities. We generated $54.6 million in the quarter. The variation with last year is mainly due to the higher inventory, which was impacted by resin prices and also from lower EBITDA. In addition, tax paid was higher due to the deferral of Canadian income tax into installments last year.As we indicated last quarter, we are increasing our investment in CapEx to drive our growth aspirations with a total spend of $45.3 million in the quarter. Please keep in mind that CapEx amounts can vary significantly from one quarter to another, and this number should not be used as a run rate. In addition, we also invested $44 million related to the acquisition of BGI Retail in our ISM business.Finally, we distributed $19.5 million in dividends. Despite the significant growth investments we made during the quarter, we continue to maintain a very strong financial position with over $800 million of available liquidity at the end of the quarter.Now for the outlook. In Packaging, assuming stability in resin prices, the impact on profitability should be smaller in fourth quarter. In terms of revenues, now that the new equipment is operational, we expect to see organic growth not only for the fourth quarter, but also for 2022, and that excluding the impact of resin prices.Assuming that the Canadian dollar remains at current level, we expect the change rate to continue to be a headwind in the fourth quarter, but to a lesser extent than what we saw in Q3. In Print, considering a continued gradual reopening of the economy, volume should continue to recover in the fourth quarter.Corporate costs at the EBITDA level should be around $40 million for a year. In terms of the use of cash for the year, in addition to continue looking actively for potential acquisition in all 3 sectors, we will continue to invest in our inorganic growth through CapEx. To that end, depending on the timing of potential key investments, we're likely to reach over $130 million of CapEx for the current fiscal year. As for cash taxes, you can continue to assume around $50 million for the year.Finally, as we head into our last quarter, I'd like to remind you that 2021 is a 53-week fiscal year for us. We will, therefore, have an additional week in the fourth quarter compared to last year.On that note, we will now proceed with a question period.
[Foreign Language] [Operator Instructions] And your first question comes from Mark Neville from Scotiabank.
Maybe just first on the margin in Packaging. I can appreciate the lag on the pricing adjustments. I'm just curious is that strictly a timing issue, and just curious if there's any -- for your non-index customers, if you're getting any pushback on trying to raise price?
No, no. It's mainly the resin pass-through. A little bit last year we had a little bit of a Canadian wage subsidy for our 3 packaging plants, which we don't have anymore for packaging. So -- but the bulk of the difference between last year and this year is the resin price lag too, with 12 increase in the last 14 months, we're past negotiating with the customer, we just pass it through. Unfortunately, our contractual agreement have lags built in the contract. I don't think it's a first in the industry. I believe that there's 12 consecutive -- well, 12 increase in the last 14 months. So it's mainly the lag.And last year, we were benefiting, like I said, from the Canadian wage subsidy a little bit. And also last year, the resin was going the other way, if you could believe it at that time. So we had a little bit of a boost from that.So if you normalize, last year, we're around the 16%, 17%. If you are normalizing this year, we're around the 16%, 17%. But the lag is huge because it's increase after increase after increase. And when the lag is 2, 3 months, you could see the impact. This thing is going to ease up in Q4 as resin have not increased yet and for Q4, and now we're passing a lot of these lag that we incurred in Q3. So we're hopeful that resin is going to stabilize and eventually go the other way, so that we could recoup some of that money. But from a margin standpoint, you could assume that it's pretty similar to last year. It's hard to believe when last year was 18, and this year is 12. But that's the case.
Got it.
Sorry, go ahead.
Yes. Well, sorry, maybe to add, regarding your question for the index. All the pass-through that we have with most of our clients, most of the contracted businesses is contract per contract. And what we have said in the past, there's -- the vast majority it is for 3 months. So therefore, an increase takes at least 2.5 months before we can pass this increase to the client. But when there's 9, 10, 12 months in a row that there's an increase, we're always in a catch up. This is why Q3 is stronger, because we have like, months before and some of our clients is 6 months also. So you carry those for 6 months. So this is why it's moving up.And last point is that the price increases were steeper at the end of our second quarter instead of $0.05 or $0.07 per month. So those apply in the delta for the third quarter.
Okay. I guess, just based on that, if you see stabilization by the time we get to fiscal Q1 or Q2 of next year, you should be back sort of in a normalized range, correct, in the margin growth?
Yes. I guess, if resin stays stable next year for sure year-over-year conversion we're not going to have those that we have this year. And, hopefully, if it goes down, then we'll start to benefit. So it'll be -- it'll be positive year-over-year. But the market is very volatile right now. And I wouldn't want to predict anything at this point. So we're just going to keep doing our job and see where the price is going to go. It's very volatile right now and very hard to predict.
And with the customers that are not contractually indexed, is there any pushback from them in terms of...
No, we're past the push back. We're passing it through. And a lot of our plants are very, very busy. So if they don't want to take the increase, then they -- they wouldn't – they wouldn't need to have their product manufactured by somebody else. That's basically for the most part, our position after 12 consecutive. You can negotiate if it's 1 increase in a year, or even 2, but when you're up to 12 and 14 months, you're past negotiating, you're just passing it through. And if people don't like it, you know that it is what it is.
Yes. No, I understood. Maybe just one last question. I'm just curious, the recent hurricane, was there any impact on the business or ability to source revenue there?
Yes. Obviously, there's one particular type of resin that we use for barrier and our cheese and meat vertical, which is, the 2 combined, our largest vertical in our portfolio. There's one type of resin that is hard to get right now because of an accident in one of our supplier of our 2 suppliers. So this resin is pretty tight right now. But TC found ways to modify their product offering to be able to service their customer. But, yes, there are some types of resins that are hard to get through right now. But we find ways to serve our customer. And we don't, at this point, anticipate suffering from that for the moment.
Your next question comes from Adam Shine from National Bank Financial.
On the Packaging sort of growth front, notwithstanding the extra week that will benefit you in the Q4, you've come off, I guess, 2 quarters now of, let's call it, flat to muted growth. Obviously, some of the factor in this quarter was clearly related to the delayed production ramp. Can you speak at all to what the growth profile looks like, given that you are ramping up on new equipment? Obviously, sounds like you've been adding some new contracts, new mandates. So as we think about growth, that otherwise, on an organic basis, might be, I don't know, 2% to 3% type range. Do you see a better line of sight for something above that level going into next year?
Yes. For this year, last time, all along, I said 2% to 3%. Last quarter, I didn't expect our machine equipment supplier having issue installing the machine, for lack of TLC to run these machines that are highly automated. So this delay was not planned. So for this year, we're still in the zone. We think, of 2% or 3%, but now maybe closer to 2% because the volume was qualified, the volume was ready to come to TC.But because of our no installation issue, we couldn't handle the additional volume that our customer was willing to give us. So obviously, this volume -- some of it is lost. I mean, they had to -- they had to pack their food with film and they kept ordering from their incumbent suppliers. So some of that is lost. So that's why, I'm saying, the 3% that I was hoping for last call is now maybe more of a 2%.The good news is, the equipment will be running as running now. And it'll be running less than what we had hoped for in Q4, but it will run. So we expect organic growth in Q4. And when it's all said and done, we should be pretty close to 2% come the end of the year. So we expect organic growth in Q4 in Packaging.As for next year, we're in the middle of our budget presentation and what I can tell you is what I look at with what we have in front of us is probably very similar to this year expecting a 2%, 3% organic growth for next year is probably what we will confirm in Q4.
Great. I appreciate that. And just maybe building a little bit on the earlier question that I think focused a bit more on what customers were doing, whether or not they were resisting on resin price increases. The question isn't so much there. It's more along the lines of, are customers, whether it's on the printing side, or the packaging side, are they changing behaviors in any particular way with a positive or negative effect on you guys in terms of lessons learned from COVID through the pandemic, any anything evolving out there, whether it's pushback or opportunities for additional business?
I think, no. I think most of our customers, including us, we are in an inflationary environment. Our customers are now used to receive this call not only from us, but from all of their supplier, whether it's freight, whether it's energy, whether it's -- and then our customers, which, in the Packaging, which are the food, people have the ability, or they're passing that to the retailer. And as you can see the price of the basket, the food in North America is also going up. So it is an environment where we have those discussion and people are expecting it.As far as changing of behavior because of COVID, I don't see any change in Packaging so far. People need package to put the food in and what we do flexible is the most efficient packaging in many areas.And Print, obviously, we're very much tied to retail. So as soon as COVID limit the number of visit to the store and less people into the store and retail slow down, we're slowing down with it. I think that COVID for TC in terms of our core Print business is going to turn out to be positive. Why I'm saying that is that most retailer that we deal with have realized that one of their key competitive advantage is their brick-and-mortar store. There's a renewed, I would say, strategic focus from a lot of CEO and a lot of Canadian retailer on their store. The fact that they have billions of dollar of inventory sitting in hundreds of locations across Canada is a competitive advantage for e-commerce. So that's what we feel is that COVID has refocused a lot of retailer on their store strategy.And if you think of TC, we're the #1 partner to bring people into the store. We help the retailer bring people into the store. And the #1 tool for retailers in Canada to bring people to the store remain printed flyers. And then our strategy about ISM and store marketing is once the people are in the store, they want to have a, the retail ones, them to have a better experience and we are the one helping them having the store look better. And then when they leave the store, we're the one doing personalized offer with a lot of direct mail personalized program with retailer.So this renewed interest around building a retailer strategy around their brick-and-mortar and this e-commerce world that bodes well to our overall strategy and in Print at TC for the reason I just mentioned. So the only area where I think the COVID have accelerated the decrease of a secular decline of printing is in a magazine. We see a lot of magazine publisher diminishing the number of time that they come out, paper price in the magazine is going up. So we see there a negative impact from COVID. But I want to remind you that magazine printing for Transcontinental, printing is now quite small, so not a big impact on our overall EBITDA. So a lot of color but that's my answer.
[Operator Instructions] Your next question will come from Drew McReynolds from RBC.
Maybe extending Adams question a little bit, in terms of the reopening dynamics in the quarter. Maybe you can just kind of drill down into how demand on the Printing and Packaging kind of evolved through the quarter and assuming sustained reopening, how that continues here in Q4 on a full quarter kind of run rate basis?And then secondly, just on the wage subsidies, maybe for you Donald. I think you had $9 million in Q3, $36 million last year. Just -- but what do we pencil in here for Q4?
Yes, on the Print, we're pretty much tied to the economy. So when retail is reopening, we're going up with it. So this quarter, we were 14% up to last year in revenue and Print, that converted in about $10 million more profit, so a good performance from our team. We expect that to continue because our comparable in Q4 was more severely impact than what we're going through right now.You know, obviously, this fourth wave with these variances is more severe than we think and then more restrictions are apply on the economy, we will suffer. But it looks like the vaccination rates in Canada that the government are not going to re-close the economy. So we expect to continue to have the same kind of growth and lift in Print, because the comparable from last year is lower. And then retailer are reopening and starting to go back to what I call a regular marketing program. And they want to have people into their store. So obviously, that would be good also for ISM. So we expect revenue to be better in Q4.As for next year, obviously we've made acquisition in ISM and we have a lot of opportunity to grow in ISM. We've made investment as you know, in our book capacity and this strategy is working very well. So we anticipate that to continue into next year. So yes, we expect revenue to be -- to continue to be strong but the pandemic is the wild card.In terms of Packaging I could say that last year in Q3, we had some food category, like the meat and cheese that was record volume, because remember last year, we were in this frenzy where you have retail store shelf empty and people were grabbing stuff. So we were producing a lot. We had a good quarter this quarter, like the demand is very strong, but not as crazy as last year and those areas still very good.So not a lot of impact from the COVID on our Packaging business, 20% is about our industrial portfolio, this is starting to coming back to normal, I don't see that slowing down.So I would say that in Packaging, we're back to normal. And what's going to drive our organic growth is our sustainable product offering, and the ability to introduce that in the market is really the driver will be a growth of the future and that's the COVID impact on our Packaging business.
And Drew for subsidy, you're right, last year it was 36 in Q4 -- last year in third quarter, I should say, north of $14 million in the fourth quarter. And we don't expect to have that kind of money subsidy in the fourth quarter; actually it's going down as we speak. So we're probably less than 50% of what we receive in the third quarter, so $2 million, but nothing much than that, nothing more than that.
[Foreign Language] Mr. Lapointe, there are no further questions at this time.
Thank you for joining us on the call today, and I look forward to speaking to you soon.
[Foreign Language] Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Please disconnect your lines.