Transcontinental, Inc. (OTCPK:TCLAF) Q1 2017 Earnings Conference Call March 3, 2017 11:30 AM ET
Shirley Chenny - Advisor IR
Francois Olivier - President & CEO
Nelson Gentiletti - Chief Development Officer & CFO
Adam Shine - National Bank Financial
David McFadgen - Cormark Securities
Welcome to the TC Transcontinental First Quarter 2017 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, March 3, 2017. I would like to turn the conference over to Shirley Chenny, Advisor, Investor Relations. Miss Chenny, please go ahead.
Thank you, Ruth. Good morning and thank you for joining us for our first quarter 2017 financial results conference call. The press release and MD&A with complete financial statements and related notes were issued just prior to this call. For those of you who are not on the distribution list, the documents are posted on our website at TC.TC.
Francois Olivier, President and Chief Executive Officer, will begin by providing key operational highlights of the quarter. Nelson Gentiletti, Chief Financial and Development Officer, will then proceed with an overview of the financial results. After which, the lines will be open for questions.
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 Advisor, Communications for more information or interview requests.
Please be reminded that certain financial measures discussed over the course of this conference call are non-IFRS. Please refer to the MD&A for complete definition and reconciliation to IFRS financial measures.
Also, this conference call might contain forward-looking statements. Such statements based on the current expectation of Management and information available as of today inherently involve numerous risks and uncertainties known and unknown. The risks, uncertainties and other factors that could influence actual results are described in the 2016 annual MD&A, the annual information forms and has been updated in the MD&A for the first quarter ended January 31.
I would now like to turn the call over to Francois Olivier.
Thank you, Shirley and good morning, everyone. Overall, we're pleased with our first quarter results. After a strong finish last year, we had even a stronger quarter, both operationally and financially. Excluding the impact of the stock-based compensation expense, we record a 12% increase in our operationals adjusted earning in Q4 2016 and now record a 22% increase in Q1 2017. We also continued to improve our financial position as our leverage ratio now stands at 0.7 times.
In short, the increase in sales and profitability as well as our strong financial position illustrate the ongoing effectiveness of our strategy while we're conducting TC Transcontinental transformation. Having said that, we maintain our focus and commitment to our long term growth objectives as we continue to execute on our strategy to sustain cash flow generation and further shift the greater part of our portfolio towards flexible packaging.
Now let me take a few minutes to comment on our quarterly results by segment. In our Printing division, demand for flyer printing and door-to-door distribution was once again stable, whereas an in store marketing and pre-media services posted growth in the quarter. This sustained demand for retail-related offering is directly linked to the value retailer placed on the printed flyers as an effective marketing vehicle to drive traffic to their stores in the face of digital alternatives.
As such, I am very pleased to announce that we have come to an agreement with Lowe's Canada to renew our agreement for all the services offered to RONA in addition to expanding our business relationship to print Lowe's flyers in Canada. This agreement represents CAD200 million in revenues over five years.
We will provide our full range of retail-related services to RONA, including the RONA L'Entrepot and RONA Home and Garden banners, Lowe's Canada, Hayes, Reno Depot and Marseille. This agreement not only demonstrates the value of this marketing medium for retailers, it also shows Lowe's willingness to maintain an expanses business relationship with a Quebec-based Canadian Corporation. Moreover, it is a testament to TC Transcontinental's proven ability to provide high-quality products and services.
Regarding our newspaper printing activities, the five-year agreement we have signed to print the Toronto Star which started last July, helped mitigate the declines with our other newspaper clients and with our own weekly newspapers. In this tough environment we will continue to pursue more outsourcing opportunity with other newspaper publishers. We believe that in many ways, these potential partnerships represent a win-win situation for all parties.
Demand for book printing remained healthy this quarter, while on the magazine side the accelerating decline in advertising revenue for our customers is impacting their business and continues to pressure ours.
Finally, the traditional and non-contractual commercial print segment of our portfolio continues to decline. You will also recall that in the first quarter of last year, we had the contribution of the agreement to print Canada's census forms. Overall, the Printing division had a good start of the year. It continues to perform well and the main segments in which we operate are still very solid.
Turning to our Packaging division. We completed the integration of our Flexstar Packaging acquisition and we're pleased with the results in this plant so far. Overall, revenues in this division posted organic growth and our sales funnel is showing good momentum going forward.
This quarter, we continued to incur additional costs to support the investment we have made last year to develop the sales further and to increase capacity. However, we're confident that the capacity and talent we're developing will enable us to meet demand as our sales funnel is now starting to convert. Finally, we will remain very active in 2017 on the acquisition front and we will also continue to make inroads with new customers and we anticipate stimulated organic growth in this division.
On the media side, our portfolio of business and educational titles performed well this quarter. The B2B brands of the advisor and financial services group we have acquired from Rogers Media Inc strengthen our existing portfolio in print and digital platforms, as well as in events, custom publishing and market research activities.
Regarding our local newspaper, the transformation of the advertising market continues to have an impact on their activities. Faced with declining advertising revenues, we will recall that we either sold, closed or merged several titles last year. Furthermore, in the later part of 2016, we took significant actions to lower our costs and this quarter we again benefited from the measures we have put in place and eased the pressure on profitability.
In conclusion, on the Printing side, as we navigate in a mature industry, our main segments remained solid. As our focus is to continuously optimize the use of our network, this division continues to be the principal driver of our free cash flow generation. On the media side, we're concentrating our resources on targeted business development to derive added value from our asset base.
Finally, we're confident that we will successfully transform TC Transcontinental and build our scales in the promising flexible packaging segment. I'll now turn the call to Nelson.
Thank you, Francois and good morning, everyone. Revenues for the first quarter of 2017 improved 0.9% year over year to CAD504 million. Operating earnings grew 20.9% from CAD52 million to CAD62 million. Adjusted operating earnings which excludes restructuring costs, impairment of assets and other costs, increased 7.4% from CAD57 million to CAD61 million. Excluding the increase in the stock-based compensation expense as a result of the 22% share price increase in the first quarter 2017, adjusted operating earnings increased 21.9%.
Net earnings grew 14.5% from CAD37 million to CAD43 million. This increase is mainly attributable to the increase in operating earnings, partly offset by a rise in net financial expenses and income tax. The net financial expenses increase is related to a foreign exchange gain in 2016, while favorable differences between the accounting and tax treatment of certain items last year impacted income taxes. Adjusted net earnings remained relatively flat at CAD41 million or CAD0.53 per share.
On the cash flow front in Q1, we generated CAD93 million of cash flow from operations before changes in non-cash operating items. We also generated CAD7 million of cash from the sale of real estate. After paying CAD12 million in taxes, we invested CAD15 million in CapEx including intangibles and acquired assets for CAD8 million. We also distributed CAD14 million in dividends.
At the end of the quarter, our net indebtedness was CAD281 million with no significant debt maturities before 2019. Our debt to EBITDA ratio improved to 0.7 times and today we announced an 8.1% increase in our quarterly dividend.
Now let me provide you with some guidance for FY17. In our Printing division, we expect stable revenues from our services to current retailers which includes retail flyer printing and door-to-door distribution services and also an increase in revenues from our pre-media and in-store marketing services. Moreover, we will benefit from the new agreement with Lowe's Canada to print their flyers in Canada.
We will benefit from the contribution of the Toronto Star Newspaper printing contract which started in July of 2016. However, these elements should be affected by the expected volume decline from the circulation decreases in newspapers and the negative impact of declining printed advertising spending in magazines and commercial products.
Finally, as a reminder, the end of the non-recurring contracts that print the Canadian census form which occurred early in the second quarter of 2016 will have an unfavorable impact on our next quarter results. In terms of profitability, our focus will continue to be on optimizing our operations through operational efficiency initiatives.
In our packaging division, we will benefit from the acquisition of Robbie Manufacturing and Flexstar Packaging. We expect as the integration process comes to an end that these acquisitions will start to generate synergies. We will continue to deploy resources to strengthen our salesforce and our manufacturing platform.
We will also carry out our M&A plans in this promising market in a disciplined manner as to invest in quality assets that meet our strategic criteria, namely verticals, specific skills, geography and synergies. We expect that our manufacturing capacity combined with our North American salesforce, should drive sustained organic growth.
In the media sector, we expect that our local newspaper publishing activities should continue to feel the effects of the transformation of the advertising market. However, the significant measures we have taken as of the third quarter of last year should partly mitigate the negative impact. For our business and education group, we expect stable revenues and earnings.
For the 2017 P&L, assuming a stock price at yesterday's closing, you should model for full-year corporate costs at the EBITDA level of approximately CAD26 million. As a reminder, a change of CAD1 in our stock price impacts our results by close to CAD1 million.
To conclude, our sound financial position and our proven ability to generate considerable cash flow quarter after quarter gives us significant flexibility to successfully execute our M&A strategy to achieve future growth. Beside acquisitions of the packaging assets, we also intend to continue with our approach to capital allocation by supporting organic growth in packaging and by continuing to return capital to shareholders. Shirley?
Thank you, we're ready for taking questions.
[Operator Instructions]. Your first question comes from the line of Adam Shine with National Bank Financial. Please go ahead.
Maybe just starting with the Lowe's contract. Obviously, it's a nice win in terms of the additional elements and on the back of last year's testing that RONA was doing on the digital side of things. Is there any color you can provide in terms of what the incremental contribution is from the new business?
Yes, it's going to be going up by about 20%, 25% of what we were doing before. So you're looking at probably about CAD10 million or maybe a little bit more of additional volume for Transcontinental on our existing relationships that we have with Lowe's and RONA.
And we'll assume margins similar within the context of the consolidated margins, right?
Well, as you know, we were quite public in saying that every time our customer renews a contract for a while, we give an incentive to them to do that and then obviously, the additional volume will contribute. So the net will be positive, but not as positive as if it would have been just straight new business that we had on the platform, because we had to be competitive to win the business. So obviously the services that we were providing, we had to give an incentive to RONA, Lowe's to renew. But all in all, it will be positive, yes.
And then just turning to packaging, you're very clear in regards to the commitment to continue to do more M&A, obviously on a selective and strategic basis. It's interesting about I guess 11 months ago or so, during the course of marketing you were telegraphing that you had clear visibility on a couple of deals that were to come. Is there any color you can provide? Is there a growing likelihood that we'll see a deal in 2017 or the process continues at the pace that it's likely to evolve?
It would evolve at the speed it needs to evolve, but what I can say is we're very active in the market and we try to convince people to join our story. The only color that I could give you is that the more we progress, the more we feel comfortable about that space and moving forward. In the sense that we have a much bigger team now around the table, much more knowledge about the industry and the various verticals.
So we feel more confident to keep going and also now we start to have synergies when we do a deal which we didn't do a whole lot when we were smaller. So by just what I mentioned, we would now be willing to maybe look at the bigger deals if they come in late. I'm not saying that they will, but if we have an opportunity to move faster, we would certainly feel comfortable to execute on bigger transaction if they would become available.
And of course, you're not giving the breakdown in terms of the Printing and Packaging sector. But when we look at the results and listen to you acknowledging that you're still making investments, particularly on the sales infrastructure side of things, can we make the assumption that we're still seeing very nice year-over-year expansion at least on the Printing margin side of the business?
Yes, the Printing is performing right now beyond our expectation I would say, both in terms of sales and profitability. The color I could give you on the packaging is that we do have sales organic growth and we're planning to grow this business organically double digit. As the year is going to unfold, I think quarter by quarter the increase is going to grow as we have a lot of agreement in place now it's to bring them into the plant and do the testing and bring them on.
So we expect that the organic growth throughout 2017 is going to increase from what it was in Q1. So we're quite positive about that.
And in terms of this organic growth converting to additional profitability, it's the same thing, Adam. In Q1, we still have a lot of costs of installing those equipments, running them and starting them up an stuff like that. And as the year is going to unfold, we expect a better conversion of this new organic revenue to the bottom line at what it contributed in Q1.
Because we're still installing new equipment and ramping up new equipment and there's a cost to that. And we added a lot of sales representatives in the marketplace and as you know it takes a couple of months for guys to bring water to the mills. So we expect the packaging year as it unfolds to get better, both in terms of organic growth and conversion. But Q1 was good, but we expect future quarter to be even a little bit better as the year goes by.
Your next question comes from the line of David McFadgen with Cormark Securities. Please go ahead.
So you said that you're exiting the interactive marketing solutions business on the media side. I was wondering, are you just planning on shutting these businesses down or are you planning on selling them? And if you are planning on selling them, any idea on what the proceeds might be?
Well they were all sold last year, so we got the proceeds and it's all done. So right now you see a positive contribution in our media results right now because last year these things were losing money and since we have exited completely throughout 2016 the last piece of assets that we got out of it was that E-flyer production in Q4. So now we have no more assets, we got all of the proceeds in.
That was a couple of millions or tens of millions of dollars we got. But if you go in our detailed financial, you'll see that money came in through Q2, Q3 and Q4 last year. And for this year, for about the first three quarter, like I said, that business was at a loss last year, so we will comparable have a net benefit as we're obviously not incurring any loss this year in that business.
Have you thought about just exiting entirely the media business, just given the profitability and the trends in terms of advertising revenue just keeps declining?
No, no we have not thought about that. Having said that, we're paid to review every single assets that we have in that space and they are not all created equal. Some are doing very well, some are actually growing and some are declining at a double-digit rate.
So we're going to continue to assess our portfolio which is now for Transcontinental our media portfolio, is only about CAD300 million. So less than 15% of our revenue. And out of that CAD300 million of revenue, I would say there's about 40% of the revenue we knew now in media would have nothing to do with advertising.
It's not advertising base and that business is performing very, very well. But obviously everything that lives on advertising and media right now is challenged and we intend to continue to do what needs to be done in terms of managing that business or doing some portfolio management as we see it fit.
Okay. And then could you just give us an update on packaging? I know last quarter, there was that inventory rebalancing at Capri was all back to normal and you got some of the volume back from that one customer that was sold. Can you just give us an update on what's happening there?
Well I think I gave the color in Adam's question that we specifically about one customer, I think they are getting back on track. I think last year, our biggest shortfall of volume with that customer was in Q2 and Q3 and we're anticipating much better volume in Q2 and Q3s with that specific customer.
That's echoing my comment, we were doing a lot of other things with other customers but this customer will be back to normal. It's obviously a large customer for us, so we feel pretty good about the next couple of quarters in terms of organic growth compared to last year being able to reach our objective of double-digit north of 10% organic growth on a comparable year. And you'll start to see that in a bigger way in Q2 and even more in Q3 would be my guess.
Okay. So is the main driver of that pick up in organic growth the stabilization of that one customer this year compared to last year--?
No, this is a small contributor, but the main driver is new customer and new accounts and new people coming in into our platform.
And in many verticals, this customer is in the dairy vertical, but most of our organic growth is not coming from the dairy vertical. Having said that, we have a few wins in the dairy vertical, but we have in every single verticals including new verticals we were not in before.
There are no further questions at this time. Please continue.
Thank you, everyone and talk to you next quarter.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
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