Operator: Welcome to the TC Transcontinental First Quarter of Fiscal Year 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, March 13, 2024. I would now like to turn the conference over to Yan Lapointe, Director, Investor Relations and Treasury. Mr. Lapointe, please go ahead.

Yan Lapointe: Thank you, Janet, and good morning, everyone. Welcome to Transcontinental's First Quarter Fiscal 2024 Earnings Call. Before we begin, please note that our quarterly report, including our MD&A, our financial statements and related notes as well as the slides supporting management's remarks are available on our website, ww.tc.tc under the Investor Relations section. A replay of this conference call will also be available on our website shortly after the call. Please note 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. We have with us today are President and Chief Executive Officer, Thomas Morin; and our Executive Vice President and Chief Financial Officer, Donald LeCavalier. As referenced on Slide 2, 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 these 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 2023 annual MD&A and in the annual information form. With that, I would like to turn the call over to our President and CEO, Thomas Morin.

Thomas Morin: Thank you, Yan, and good morning to all. As you may have seen, we're holding our Annual Meetings of Shareholders broadcast later this morning, and I hope you can join.

As you've seen, we had a solid first quarter, mostly due to our cost reduction initiatives as well as early gains from our program to improve profitability and our financial position, which we announced last December. I thank all our teams for their excellent and timely execution. Continuing to focus on our priorities, very strong growth. We are pleased with our increased 14.3% in adjusted EBITDA despite the decline in volume from soft market demand. Second, delivering on strong return on assets and in line with our December program, to which I will come back later, we have announced the closing of our Saint-Hyacinthe printing plant in April with the end of Publisac.

And third, reducing our debt. We had a strong free cash flow and brought our net debt ratio to exactly 2x at the end of Q1. And fourth, pursuing on sustainability agenda, we're progressing well with raddar and with the installation of our BOP line, the cutting-edge monomaterial, recyclable packaging solution and the first in North America, which is expected to start production in Sorenberg this summer. Now turning to our sectors. Packaging is off to an excellent start.

The soft demand environment affecting us, particularly in the industrial and medical markets was more than offset by our cost improvement measures, a more favorable product mix, and a recovery in our Latin American operations performance. While uncertainties remain regarding short-term demand, we're supporting the needs of our customers to accelerate the commercialization of recyclable packaging and the drive to create a more secular economy for plastics. With the deployment of our new equipment linked to our strategic investments, we're encouraged by the market's interest in our sustainable solutions. Now on operating sectors, our cost-cutting initiatives have enabled us to offset the continuing difficulties in our book printing business where we're intensifying our business development activities, and we will continue to manage costs diligently. In our retail services, we are encouraged by opportunities, including the continued rollout of raddar with 2 million copies now distributed each week in Quebec, up to 3.7 million copies at the beginning of May, as well as in our ISM and premedia activities, all doing well in Q1.

Finally, as said earlier, we are pleased with the early results of our 2-year program to improve our earnings per share and our financial position. By the end of the second quarter, with the closure of Tomah, Wisconsin and Saint-Hyacinthe, Quebec, and the other staff reductions across the organization, we would have reduced our overall workforce by 6%. We have also achieved significant reduction in our cost of goods sold. And on the real estate front, since the sale of a building in Quebec City, we have launched sales processes for 4 other buildings. Now some of these decisions, combined with the end of [indiscernible] had a regrettable impact on employment for our affected employees and their families.

I sincerely thank them for their dedication and accomplishment. Now over to you, Donald.

Donald LeCavalier: Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on Slide 5 of the earnings call presentation. For the first quarter of 2024, we reported a 3.8% decrease in revenues versus the same period last year.

This decline was caused by lower volume, mainly in our printing sector and was aligned with the 2024 outlook we disclosed in December. Regarding profitability, we delivered a strong quarter with consolidated adjusted EBITDA of $96.1 million, a $12 million improvement versus the $84.1 million in the first quarter of 2023. This 14.3% increase was mainly due to improved profitability in the packaging sector following cost reductions, efficiency improvement initiatives and improved product mix. Financial expense decreased by $2.8 million to $13.9 million, mainly due to a lower debt level following strong cash flow generation in the last 12 months, partially offset by higher interest rates. Adjusted income tax increased by $3.7 million due to higher earnings and effective tax rate, resulting in adjusted net earnings of $0.43 per share for the quarter compared to $0.24 for the same quarter last year.

Now moving to Slide 6 for the sector review. In Packaging, we generated revenues of $405.7 million, down 1.8% versus last year. The decline is mostly due to lower volume, mainly in the industrial and medical markets due to the economic conditions and was partially offset by a stronger U.S. dollar. In terms of profitability, despite lower volume, adjusted EBITDA and packaging grew 29.6% to $60.4 million.

This increase is mainly due to our cost reduction and efficiency improvement initiatives as well as a more favorable product mix. This solid performance led to a 15.2% EBITDA margin, a 370 basis point improvement versus last year. Moving to Printing on Slide 7. Revenues decreased by 7.4% to $265.1 million. This was mainly due to lower volume in our magazine and book printing activities.

Printing adjusted EBITDA was $39.5 million for the quarter compared to $40.6 million last year. Excluding the $1.5 million impact from exchange rates, earnings grew organically by $0.4 million as lower volume was offset by our cost reduction initiatives. Corporate expense were negatively impacted by $0.8 million higher share-based compensation expense in Q1 following the stock performance. Turning to cash flow. Considering the typical seasonality of working capital, Q1 2024 was a good quarter.

We generated $57.4 million from operating activities compared to $12 million in the previous year. The $45.4 million increase was mainly driven by improved working capital. Our CapEx at $36.6 million were $14.6 million lower than last year and was in line with our full year guidance of around $135 million. The strong Q1 earnings growth, combined with our cash flow performance, led to an improvement in our net debt ratio to 2x at the end of the quarter compared to 2.06x at the end of fiscal 2023. It's important to note that our ratio was at 2.63x 1 year ago and that we reduced our net debt by over $245 million over the last 12 months.

Looking ahead, we expect to continue to generate significant cash flow that will allow us to continue to reduce our net debt in fiscal year 2024. In closing, we are encouraged by the cost savings and efficiencies improvement we are seeing across the organization. We started the year strong and delivered a $12 million EBITDA growth in the first quarter. However, the comparable will be significantly tougher in the second quarter. On that note, we will now proceed with the question period.

Operator: [Operator Instructions] Your first question comes from Adam Shine with National Bank Financial.

Adam Shine: I guess your efficiencies extend to this call. In terms of book printing, Donald, can you talk about the issues? I know we saw a bit of those issues creeping in last year, but just curious if they're the same or different in nature?

Donald LeCavalier: Yes. Thank you, Adam. Indeed, the demand -- we would have reported on that, I think, 2 quarters last year, Q3, Q4.

The Q1 was no different in terms of book overall demand. The reason remain the same and the ease of the supply chain opened up again imports from Asia, which was the case before the pandemic. Two things have changed though since last quarter. First, we've significantly improved our operational performance in the book segment. So there was a lot of support from the network to help reduce waste and improve efficiencies, point number one.

And the second thing we mentioned that we've launched a pretty thorough business development activities in terms of volume gains across North America. Our share of wallet in books is not right. I mean we're about 20%, 30%, and we have room for growth. So basically, we're now engaged in growing the top line with a thorough business development and prospection activities across North America. Please go ahead.

Adam Shine: Sorry about that. Can you shift over to raddar, I mean you talked about volumes. But obviously, last year was a year where you launched the product and started to expand some of the distribution opportunities. Maybe elaborate a little bit further on that.

Donald LeCavalier: Raddar for North America in general?

Adam Shine: Raddar evolving distribution across Canada.

Donald LeCavalier: So 2 things to say -- or 3 things to say on raddar. First, the rollout in Quebec goes very well. The acceptance, the welcoming of the product is strong from our customers and the consumers. And as we could mention, we will reach 3.7 million copies by sometimes this spring as early as possible. In the meantime, we're investigating other opportunities outside of Quebec, making good progress in British Columbia, where we already distribute 400,000 copies and aiming at more as we speak.

Now the third is on Ontario. We've launched -- we positioned raddar in the context of the distribution concerns we had back in September, as you remember. Meanwhile, the distribution has stabilized -- of standard flyers has stabilized in Ontario, and we actually post the rollout of raddar there, acknowledging that the customers are comfortable with the current state of distribution today. Product is still obviously available and will be, I would say, pushed in case of any need moving forward. So in summary, good progress in Quebec, good leads in the West of Canada, and we're ready to roll elsewhere in case of any need from our customers.

Adam Shine: Okay. One last question. You referenced the fact that you're pleased with some of the deployment of the new equipment, the BOP line. Is that largely completed the deployment such that we don't necessarily see any usual equipment positioning dislocations that tend to occur in certain periods of the year when that indeed is happening. Is that largely done? And as you said, you begin production in the summer? Or more to be done there?

Donald LeCavalier: So we had a net packaging specific now.

So in 2023 and beginning of 2024, we have basically 3 large strategic investments happening in North America. One is the 1 you mentioned, which is the BOP line in Spartenburg, which is going to be powered sometime this month. And we will start debugging and producing test reals spring, early summer, and that's why we believe and we're confident in the capability we have commercialized the product in the second part of the year. Two other investments are almost complete, if not fully complete, 1 in Clinton, Missouri, dedicated to dairy, and another 1 in Tulsa, Oklahoma, for the meat segment. Those 2 large investments we're talking in the region of $30 million each are vastly complete.

Clinton is operational this month. and we already see some nice pool. And Tulsa is about 60% done and also some nice commercial pools as well there. So going in the right direction, very much in line with what we said in the last years, very much in line with our segment focus.

Operator: Your next question comes from Hamir Patel with CIBC Capital Markets.

Hamir Patel: Thomas, just starting on the printing side, given the SaltWire creditor protection filing in Atlantic Canada this week, what type of impact would you expect for TC?

Thomas Morin: I was expecting this question. Thank you for asking it. Well, listen, this is fresh news from 2 days ago. That being said, it's something we had anticipated somewhat. We're not very much exposed to the SaltWire activities.

We directly connected with our customers at least. We connected obviously with them. And so far, the business is as usual. Out of the $1.1 million, $660,000 are delivered by Canada Post already. So we don't expect -- to be very clear, we don't expect a significant disruption.

Actually, on the contrary, we [investigate] to get opportunities at least. So, so far, very close monitoring, no impact to us financially, nor on our balance sheet. And commercially it's something that we believe we're in a good position to manage.

Hamir Patel: Okay. Great.

That's helpful. And just on the packaging side. Can you comment on what you're seeing on the cost side for resins and how are you positioned there from an inventory standpoint?

Thomas Morin: So the -- I don't know that's a question that has been asked across the industry. So resins have slightly decreased from last year. There is some of this impact.

Not a massive impact on our P&L, though, we don't expect to see this further weakening. The projections we see on resin are pretty much stable for the rest of the year. I'm very positions are back to where they should be. So we're down to less than a month of inventories, which explains the working cap improvement Donald mentioned earlier. So I guess this is the answer to your question, Hamir.

Operator: Your next question comes from Maher Yaghi from Scotiabank.

Maher Yaghi: I wanted to ask you about the cost reduction initiatives that you have started a couple of months ago. We saw significant improvement on earnings. Can you help us understand the incremental -- what's left in terms of incremental profitability gains that you expect to achieve from these initiatives, both on the printing and on the packaging. And I'll have a follow-up question on that after.

Thomas Morin: Yes. Thank you for the question, and I'm glad to talk to you again. We've announced this improvement plan back in December, and the target has been $20 million to $40 million over the next 2 years of recurring profit improvement. Yes. We had a pretty solid start of the year in Q1, driven by the different components, some of which have been addressing underperforming sites, others addressing fixed costs and structure costs, which has progressed well.

We've also started some good work in terms of cost of goods sold, including waste improvement and efficiencies. So we're in line with our plan, if you will, an early start. I mean, good progress the team has been excellent and delivered good results in Q1. So in line with what we've announced for the full 2-year period, which is $20 million to $40 million.

Maher Yaghi: Okay.

Great. So the plan has remained on track and those numbers remain achievable. In terms of the packaging on the volume side, you're not alone seeing these pressures from -- on the volume side in packaging. But what can you say about your view going forward, specifically to some of the industries that have affected you? And in general, if you wanted to -- if you can comment maybe on your expectation for volumes in 2024, how would you characterize the environment right now?

Thomas Morin: Yes. Thanks for the question.

That's obviously the focus, as we made some good progress on our cost positions, obviously, we monitor our top line like extremely close. A lot of things to say, if you will, but to make it short, 80% of what we do is food related. And on the food, I'm talking packaging here. On the food-related activities, there is no more destocking in my view. And I think I mentioned that in our Q4 results.

What we see depending on the segments is a lower demand, but not massive related to inflation, probably. On this very part, we see some signs of improvement driven by the retail services starting to promote more at the beginning of the year, which is encouraging moving forward, yet a bit too early to confirm. Now on the nonfood activities, which is industrial and medical, industrial has been low for the last 12 months. It's a bit the same discussion as on books. It's been low because of the high interest rates in North America, which has slowed down the construction activities.

So this remains the same. On the third door medical, medical is where there is still some high level of inventories. And we don't expect this to turn before the second half of the calendar year. That's our best estimate at this point in time.

Maher Yaghi: And maybe 1 last question on leverage.

You're continuing to reduce leverage. Can you remind us what are your objectives, at which point you might decide to reallocate some of the cash flows away from just reducing straight up debt and reallocate it differently in terms of excess cash flow?

Donald LeCavalier: We don't have any specific objective of target to beat. We're definitely more comfortable to be below 2. So we're quite happy to be there at this moment. But we don't have a specific objective.

I remind you that when we bought Coveris, at that time we had almost no debt on the balance sheet, and we were quite happy to be in that position at the time. So it's not because we will be closer to 150 by year-end, I will say it's the time, but it definitely put us in a position to be back on action regarding M&A. But we don't have any specific objective. But as I said in my opening remarks, pretty glad to be at 2 this morning compared to 2.62 last year.

Operator: Your next question comes from Drew McReynolds with RBC.

Drew McReynolds: Just a couple of follow-ups first. I think, Thomas, on your opening remarks, you said there are 4 other properties in progress in terms of sales. Do you have any sense of timing of when you'd realize more in noncore real estate sales?

Donald LeCavalier: Drew, it's Donald talking. Regarding timing, as Thomas mentioned, we have 4 buildings in the market right now. So we're positive that we should have action in this fiscal year.

Having said that, we don't put pressure on ourselves. We want to get the best pricing. So we won't push to close it this year, but I will say that we're cautiously optimistic to have some of them closed this year.

Drew McReynolds: Okay. Great.

And just back to book printing. Are you at a point where you're just simply lapping tougher comps? Or is there incremental pressure here kind of sequentially as you go through kind of this fiscal year?

Donald LeCavalier: If I get your question, Q1 last year was good on the book side, and we started to see 2 things happening last year at the beginning of fiscal last year is that, first, I will say the post-COVID effect where the demand went down a little bit. And then as Thomas mentioned, the Asian market reopened. So those 2 happened at the same time. And we had some issue also internally on the operations side that we're fixing.

And actually, 1 of the reasons that the impact on the bottom line is not as heavy in this quarter is that we took action on that side. And now as Thomas mentioned, we're taking action on the sales side. But the further we'll go in fiscal '24, the comparable will be not as tough as this Q1 for sure, on the book side.

Drew McReynolds: Yes. Yes.

Understood. Okay. That's great. And then last 1 for me. Just on the printing margin side, clearly, you're seeing you guys hold the line on that.

In terms of just the impact of the plant closure as we look forward, is there anything kind of materially you wanted flag on that or just all part of sustaining printing margins going forward?

Donald LeCavalier: Well, yes, as you know, Drew, it's been an objective to always try to maintain the higher teens margin on the printing side and free cash flow. We don't have the effect of the closing in the first quarter, and we finished at $14.9 million compared to $14.2 million. So we're confident that over fiscal 2024, we should be better. The efficiency of Saint-Hy will kick in probably more on the second half. Raddar is still on a transition for us.

So it's good in the first quarter. When we compare to last year, we didn't have Montreal last year. And obviously, that should improve also for the rest of the year. So positive to be ahead of last year regarding margin.

Operator: Your next question comes from David McFadgen with Cormark Securities.

David McFadgen: Great. So I just want to, first of all, just talk about the organic growth outlook on the packaging side. So as you stated earlier, 80% of your business is food related. So that would seem to imply that the decline in Industrial and Medical was fairly high, I guess, high single digits. I don't know if you can comment on that.

And then barring a change in the economy, do you kind of expect that the packaging, organic decline would sort of be somewhat similar to Q1 for fiscal '24?

Donald LeCavalier: Yes. Thank you for the question. Couple of comments here. Industrial has been down from more than a year. So if you compare it to year-over-year, the decline is not massive on the industrial part of the business.

If anything, it has to grow now. That would be my view, because we've probably reached the bottom of it. On the medical side, that's more -- that's fairly newer, that started more in end of Q4, I would say, Q1. And we're talking about a double-digit demand reduction, which is no different than what you would have probably read across the industry. We're actively talking to our customers to understand how long is this going to last and also accelerate some of the funnel of opportunities we have in the Medical segment.

Now your question for the rest of the year in the food part, I'd say 2 things on that. Q2 last year was extremely strong in demand. in the Food segment. I think we mentioned that. This led to a pretty strong result level in Transcontinental in Q2.

The demand in food is not as strong as it was last year, remains solid, but not as strong as last year. Last year was an anomaly, if I may say anything. For the rest of the year, though, beyond Q2, I think we should see some nice pickup, given what I said seasonality should help as well as the promotional activities of most of the retailers.

David McFadgen: Okay. And then just on the packaging EBITDA margin, obviously, it was up quite a bit.

And the first quarter. Do you think you can maintain this level now?

Thomas Morin: What's controllable is under control. So what we've done in the first quarter, anticipating on the softer demand is to put our costs under control. This shall remain. There is no reason why this should go away.

Again, the volatility of demand is something we can't control. So as a percentage, it's a difficult question to answer given the 2 components of the equation. But as far as I see, our cost base is now in a good position and shall remain strong.

Donald LeCavalier: And also Q1, adding on the cost base, the mix was in the right direction that it helped. And we said last year that we were aiming at being above 15%, and that's what we reached in Q1, and we intend to keep that pace.

David McFadgen: Okay. And then just on the printing side, the in-store marketing, I think that's growing at a pretty good clip. Can you give us an idea of what the growth is for that segment?

Thomas Morin: Well, I think the 2 things to say on ISM, first, yes, indeed happy with the growth we're running as per our strategy and our plan. That being said, it's also not happening by chance. There is a really high level of synergies between our retail services, namely the flyers and the ISM, we're talking to the same customers.

And we're very happy with the funnel of opportunities we see moving forward in the ISM.

David McFadgen: Okay. But no indication of growing 10%, 20%?

Donald LeCavalier: And the order, the business, that's -- ISM for us was roughly 4% growth on the top line.

Thomas Morin: It's been growing. We're very happy with this business.

It's been growing. Obviously, we had a great acquisition, and now it's north of $250 million. And 10 years ago, we had close to $5 million. So it's quite a transformation on the printing side also. So it's a good business for us and still growing.

David McFadgen: Okay. And then lastly, can you give us an idea what the net proceeds would be from the real estate sales, assuming you completed the law

Thomas Morin: You mean the outcome, the money outcome, we mentioned that the first wave should bring -- we have a value of building of about $100 million. Having said that, without going into much detail, the tax value of those buildings is quite low because those are buildings that we own for a long period of time. So you should deduct obviously, some millions of dollars to get back to government of Canada. So that's the target.

Operator: [Operator Instructions] Your question comes from Nevan Yochim with BMO Capital Markets.

Nevan Yochim: On the Printing segment, I was just wondering if you're a little bit more optimistic about the 2024 outlook relative to what you're forecasting last quarter. I just look like given a few wording nuances in the outlook section, it was a bit more positive.

Thomas Morin: I think -- we're doing everything we can to control what happens in this segment. The launch of new products, obviously, gives us good hopes.

But again, it's very volatile as we talked already. We had a strong Q1 in the demand for flyers. The radar looks promising and is promising. Is this giving us an overall optimism of the year, it's a bit too early to say, in my view. Let's see what Q2 shapes out.

The level of promotional activities was good in the beginning of the calendar year. Let's see if it continues in.

Nevan Yochim: Okay. Great. And then maybe just on printing margins.

Can you comment on the outlook for the balance of the year? I think at Q4, you said maintaining margins would be tricky. Just wonder if you have any better visibility into this?

Thomas Morin: Well, as I said earlier, we were ahead of the margin if you compare to last year and radar should be positive overall regarding margins. First, there's an impact of selling less paper. So it does play positively for margin because the top line will be lower and radars is positive for us. And we think that Santos should bring also some synergy in the second part of the year.

So overall, we want to protect the margin for this business, the free cash flow, the most important thing. So we're confident to be ahead of last year regarding margin.

Operator: Mr. Lapointe, there are no further questions at this time.

Yan Lapointe: Thank you, everyone, for joining us on this call today, and we look forward to speaking to you soon.

Operator: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, please disconnect your lines.