Welcome to the TC Transcontinental second quarter of fiscal 2022 results conference call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct the question and answer session, and instructions will be provided at that time. As a reminder, this conference is being recorded today, June 8, 2022. I'd like to turn the conference over to Yan Lapointe, Director, Investor Relations. Yan Lapointe, please go ahead.
Thank you, Julianne, and good afternoon, everyone. Welcome to TC Transcontinental's second quarter 2022 results conference call. Before we begin, please note that the press release, the MD&A, along with complete financial statements and related notes, as well as the slides supporting our prepared remarks, are all available on our website at tc.tc under the 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, Peter Brues, 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 Advisor, 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 2021 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, Peter Brues.
Thanks, Yann. Good afternoon, and thanks for joining our call. First, from a safety perspective, we were pleased to see our 12-month rolling injury rate decrease by 7%. The team continues to assess manufacturing risks, train coworkers, and regularly communicate our commitment to. In terms of financial results, we were encouraged by the quarter. Following a disappointing Q1, where Omicron had a significant impact on our operations' ability to supply and manufacture efficiently, and where a lag in the pass-through of inflationary increases had a negative impact on packaging financial performance, we took actions to improve. Packaging's Q2 performance was solid. Benefiting from the team's work to ensure a secure supply of raw materials and open communication with customers during struggles, sales increased, with particularly strong growth in meat and cheese.
Profit increased due to the volume growth, though this was partially offset by the lag in inflationary cost pass-throughs. It is clear earnings increased each month, and the full benefit of inflationary cost pass-throughs will be. The R&D and commercial teams continue to progress to commercialize recycle-ready, post-consumer recycled, and compostable solutions. We continue to commercialize PCR shrink films across our beverage customer base and recently closed a deal to supply femcare packaging with PCR content to a major FMCG customer. We can be proud of the solid growth achieved by our print business. That said, it was disappointing not to see it convert to the bottom line. As the in-store marketing business moved to absorb a 22% organic increase in sales, profit was affected by three elements. First, the team was behind in passing through raw material and freight increases.
Second, the business experienced manufacturing inefficiencies related to onboarding new customers. Lastly, we grew indirect costs needed to absorb smoothly volume increases anticipated. Having visited the ISM plants in May, I was pleased to see the team's actions to ensure costs have been passed through and to ensure volume growth in H2 is accretive. Confirming our ability to grow newspaper, and that flyers remain a vital part of advertising retail sales, we were pleased to finalize a deal to print two major Western Canadian newspapers and to profitably extend a significant agreement. Our media business was in line with our expectations. The more time I spend with the team, the more impressed I am by the quality of our management and the quality of learning tools we provide to teachers and students.
This is a business we should grow, and the acquisition of Scholab further supports our customer offering by expanding our digital portfolio. In conclusion, I appreciate the work, the team has done to address the issues we faced at the beginning of the year, as well as the actions we have taken to continue. I am confident that we are well-positioned for the second half of the year. Now I'll hand it over to Donald.
Thank you, Peter. Moving to consolidated numbers on slide five of the earnings call presentation. For the second quarter of 2022, we reported revenues of $ 623.3 million, an increase of $92 million or 15% versus the last period last year.
This revenue growth was driven by higher volume in our two main sectors and by price increases following the pass-through of higher raw material and inflationary costs to our customers and by acquisitions, H.S. Crocker in packaging, BGI Retail in printing, and Scholab in media. On the profitability front, consolidated adjusted EBITDA was at $ 103.6 million for the quarter, compared with $ 109.4 million for the same period last year. This decline of $ 5.8 million was mainly due to the Canadian wage subsidy of $ 7.5 million received in Q2 last year, partially offset by higher volume in our two main sectors and by the acquisitions I referred to earlier. Corporate costs declined from a lower share-based compensation expense due to the share price.
Despite lower interest rates on our debt, financial expenses increased slightly, mainly from a currency loss. The tax rate was at 23.1%, leading to adjusted net earnings of CAD 0.48 per share for the quarter. Now moving to slide six for the sector review. Packaging, we recorded organic revenue growth of $ 55 million. This growth was mainly due to the pass-through of higher raw material prices and other inflationary costs, in addition to volume growth of about 5%. In the face of continued supply chain challenges, we remain focused on ensuring continuity of supply and on supporting our customers' growth. Generating this level of volume growth reflects the solid demand for our products. Finally, the acquisition of H.S. Crocker early in this fiscal year contributed $19 million of revenues in Q2.
In terms of profitability, adjusted EBITDA in packaging grew by $ 3.2 million or 6.5% as the pricing actions we have taken allowed us to mitigate higher costs. Increase also includes higher volume and the contribution of $ 1.5 million from the H.S. Crocker acquisition. When compared with Q1 2022, adjusted EBITDA grew by $ 13.5 million, highlighting the effects of higher volume and the benefits of the action we implemented. Slide seven, you can see that printing had a fifth consecutive quarter of organic growth with $50 million of revenue growth versus Q2 last year. The growth came mainly from our in-store marketing and book printing businesses, where we saw double-digit growth, and to a lesser extent from the pass-through of higher raw material prices and other inflationary costs.
In addition, last year's acquisition of BGI Retail contributed $9 million of revenue for the quarter. Printing adjusted EBITDA for the quarter was $ 54.7 million, which was below the $ 67.3 million in Q2 2021. Decline was mainly due to the $7 million in wage subsidy we received last year and from the lag in recovering inflationary cost increases. Decline is also related to the additional cost in our in-store marketing activities related to onboarding new business and building capacity to further growth. The sector's adjusted EBITDA margin for the quarter was at 18.7%. Turning to cash flow, we generated $ 106 million in cash flow from operating activities before changes in our non-cash items and income taxes paid, in line with last year at $ 106.1 million.
We continue to maintain higher inventory as we prioritize the security of a supply to support our customers' growth. Consequently, we had a working capital usage in the quarter of $ 16.5 million versus a usage of $ 9.2 million for the same quarter last year. Cash taxes were at $ 15.1 million compared to $ 13.6 million in the prior year. Our investments in CapEx at $ 34.8 million were in line with our expectations. These investments are key to capturing growth opportunities. At the end of the quarter, our net debt ratio was at 2.35 times, similar to the previous quarter at 2.34 times as we used the cash flow from operating activities to finance our capital investments and the acquisition of Skolab in our media sector.
We continue to expect the ratio to decrease back to around two times in the coming quarters, given our improving profitability and free cash flow generation. Despite our CapEx and other investments, we continue to maintain a strong financial position with $ 407 million of available liquidity at the end of the quarter. Finally, we distributed $ 19.6 million in dividends. As for the outlook, we are starting to benefit from the positive impact of pricing and other actions taken in the last months to improve profitability. We are encouraged by the results. We look forward to improved second half of the second year and remain committed to deliver on our fiscal year 2022 outlook. Packaging, we expect to generate organic growth in fiscal 2022. We also expect profitability to improve in the second half of the year.
Printing, solid growth is coming from our ISM, book printing and pre-media activities. We expect higher revenues and higher adjusted EBITDA in fiscal 2022 when excluding the 53rd week of 2021 and the impact of the wage subsidy. We expect corporate costs at EBITDA level to be around $40 million for the year. Regarding the use of cash for the year, we will continue to invest significantly in our future through our CapEx program and pursue potential acquisitions. As mentioned last quarter, CapEx in fiscal year 2022 is likely to be similar to 2021, contingent on the timing of key investments. We expect our tax rate will continue to be in the mid-20s, and we expect cash taxes to be close to $80 million for the year, reflecting the higher than usual cash tax in Q1 2022.
On that note, we will now proceed with the question period.
Thank you. One moment, please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your telephone keypad. One moment please for your first question. Our first question comes from Hamir Patel from CIBC Capital Markets. Please go ahead. Your line is open.
Hi. Good afternoon. Peter, on the printing side, just given some of the large cost increases you're having to pass along to your customers, are you starting to see any signs that those customers might be looking to reduce page count or circulation?
Thanks for the question. First, from a print perspective, our paper prices are locked in for periods of time, so it's not something where we're seeing. When we're talking about inflationary price increases, sort of passing through freight, it's more in the ISM and book side of the business where contracted to the same. In terms of changing page count circulation, not something that's being impacted by any change.
Okay, Peter, thanks. That's helpful. I guess I'm curious though, on you know, on the newsprint side, how long does that contractual protection last? Because we've seen in the spot market a very significant move higher in pricing for graphic papers.
Good question. That period, we'll be renegotiating that in the new year. We're positioned. In terms of general inflationary increases, they tend to adjust contractually, but it depends on the timing of.
Great. Thanks. That's helpful. Just last question I had was again about some of the pass-throughs across the business. Are there any caps on inflation in some of those arrangements? You know, if so, how meaningful are those? You know, what's the sort of timing as to when you can maybe adjust those at renewal?
Yes, there can be caps. Currently, as we renegotiate contracts, we're relooking caps. For that, the caps are mostly on the printing side of the business. The contracts that we did talk in the past about the pass-through clauses that we have in contracts on the packaging side, most of them don't have caps. Therefore, any increase, the only impact we will receive will be the months before we can pass this increase to the client.
Great. Thanks. Thanks all. That's all I had. I'll get back in the queue.
Our next question comes from Mark Neville from Scotiabank. Please go ahead. Your line is open.
Hey, good afternoon. In terms of the pricing adjustments in packaging, I'm just curious, trying to get a sense of sort of where you're at, if you're sort of fully caught up, and you sort of see the full benefit fiscal Q3, or if this takes a couple more months and sort of it's a Q4 event. Just, yeah, trying to get a sense of where that's at.
You know, there are a lot of raw materials, but if we're focused, let's first talk from a polyethylene perspective. Polyethylene went up significantly last year. Stayed flat for a bit, declined slightly, and now has gone up slightly, and in the last two months is kind of maintaining flat. From a polyethylene perspective, as we move on into Q3. What we saw in Q1 that was important is that in non-contractual side of our business, in a specific segment, we hadn't passed through significant increases we had seen in polyester. We were behind in doing that. There was action taken at the end of the quarter to move that on. We saw part of that benefit in the current quarter, but we'll see the full benefit of reacting to that in Q3.
I'd also add from an inflation. Now, we've been talking about raw materials from a packaging perspective. In contrast to print where, there can be a CPI index in most contracts. In packaging, you don't usually see. There are other areas that are outside raw material, inflationary. What we have been doing is moving through the market and doing outside of contract inflationary cost increases. The results of which we saw partial benefit, in Q2, and we'll see more of that in Q3.
Yeah. These cost increases outside of raw materials, I assume you mean freight, labor, energy. I mean, I'm just curious, sort of, I assume it's a fairly easy environment to push that through, but just sort of curious as to customer reactions.
I think that, you know, I think first what I'd say is that, for all of us, both customers and ourselves, we haven't seen inflation in, like this in 40 years. So I think as a result, we initially were slower than we would have liked to react to it. I think customers are also experiencing an inflationary environment. As you know, you and I experience when we go to the grocery store, you can see that our end customers are pushing through inflationary increases.
Yeah. Got it. Maybe just in terms of the, you mentioned in the prepared remarks, Peter, some new contracts in print. I'm just curious, would they all be incremental? If there are some rough numbers you could maybe help us with in terms of sales dollars or anything that you could help us with there. Thanks.
Sure. First, you know, the reason I talked to it to for. One is that when I started working with the team, you know, I really felt that we could be the last people standing from a newspaper and flyer perspective in Canada. We have an exceptionally strong base. For me, you know, we aren't the last people standing. The strategy was to be the last people standing, and we're not the last people standing. The challenge to the team is there's still the opportunity to grow newspaper instead of talking about something that's shrinking. The reason I highlighted getting a couple of newspapers is, first, they're important newspapers, and we're in their base business in addition to what we're growing. The materiality of it, frankly, is not substantial.
That said, it's an indicator to the team of where we're going. Yes, it's accretive, you know, but when measured in under CAD 5 million in EBITDA. That said, it indicates our capability of continuing to grow and reminds the team of the importance of what we're growing. From a retail perspective, we're talking about an account that's more than $ 100 million a year in sales. We were able to profitably grow with the account.
Thank you.
Our next question comes from Adam Shine from National Bank Financial. Please go ahead. Your line is open.
Thanks a lot. Good afternoon. Obviously Q1, you know, had a lot of pent-up demand. Seems like you worked through a lot of the backlog, I guess, is a better expression into the Q2. Peter, can you speak to, you know, some of the evolving demand going into the second half, the sort of line of sight and perhaps the presumption that maybe not necessarily 5% volume growth in the H2, but certainly something, you know, nicely robust in the low single digits? I'll follow up with something.
Yes. You know, yes, there was a backlog in certain segments coming out of Q1. We continue to see a backlog. That said, I think to say that we'll continue at 5%, I wouldn't want to pretend that we'd be at 5% going forward. But really pleased with the work the team's done. The interactions they had with our struggles in Q1. The direct communication with our customers I thought was excellent. The result is we're being compensated by continuing to grow. Still a lot of work ahead of us. I don't want to pretend that we don't have some challenging environments in terms of having access to raw materials and just general inflationary pressures.
We expect to continue to see that through the rest of the year, and I think the team's delivering.
How much of a dynamic is shrinkflation, you know, in terms of the business and your need to perhaps adjust to changes in sizes of packaging that are being demanded by certain customers, certainly not all?
This isn't something of our business. Right now, focus is primarily on moving to sustainable solutions. In terms of down-gauging a package, I mean, we're always working to down-gauge a package, but in terms of actually shrinking the scale and seeing that as being a negative impact on our business is not.
Okay. Just lastly, in terms of Publisac, obviously, you know, we had some news flow during the period, but maybe you can just talk to sort of, you know, the volumes continuing, the distribution continuing, and perhaps, you know, any thoughts on next steps, potentially, maybe a little premature nonetheless, but any quick comments around Publisac?
Sure. Publisac being our distribution of flyers in Quebec, there was a city called Mirabel outside of Montreal, where they had put in legislation requiring customers opt in to flyers. We had challenged that in court. The court favored against us. We'll be appealing that in the coming days. We'll appeal it. That said, what I'm extremely proud of is the decision was made on a Wednesday, and the team was able to supply our customers flyers to consumers without any delay the following week. There was no change in our service. It was completely smooth.
If I look at it going forward and legislation that's been put in place in Montreal, you know, the team had been challenged to grow our flyer business, given that the flyer is exceptionally important as a marketing tool to our customers, and in an inflationary environment, it's exceptionally important to consumers. The team's challenge when we look across Canada, outside of Quebec, we've seen a decline in flyers as we've seen. The challenge for us has been, while we don't want too massive distribution across Canada, we do want to make sure our customers have the ability wherever they may be, because. The team's been working for, you know, over, I'd say at least 12 months now, on how we can increase outside of Quebec.
The work that they've done positions us really well as we look for alternatives should we need alternatives to Publisac. We're well-positioned providing the service. Really pleased about what happened in Mirabel. Really pleased with the progress the team's doing.
Okay. Thanks a lot, Peter. Appreciate it.
Our next question comes from Sid Dilawari from Cormark Securities. Please go ahead, your line is open.
Oh, yeah. Hi, guys. Thanks for taking my question. You know, in your prepared remarks, you talked about the packaging segment experiencing about 5% volume growth from new business. You know, just digging a little bit deeper into this, how is the pass-through mechanism on this new business? You know, like, you also talked about some of the pass-through of this inflationary cost being passed on to the customer at the end of the quarter. Can we expect to see the packaging segment sort of return to normalized EBITDA margins level in the 14%-15% range in the back half of the year?
Maybe just to make sure, when you mention. It's Donald speaking, the volume of 5% and the pass-through. When we said volume about 5%, this is excluding pass-through. It's pure organic growth. The pass-through is not part of the 5%. This is organic growth.
Right. No.
Yeah. Okay. Just wanted to.
Right.
Yeah. Regarding margin, before I let Peter add on to finish your question, you know, if you look at the impact of all the increases we had to put on the pricing regarding inflation, raw material increases, margin, it will be tougher to evaluate the margin in the future quarter because it does play with obviously all the increases we're adding to our client. Therefore, the margin is not the best way that we track growth. It will be a pure EBITDA. My comments when we say we should be better than last year was regarding the EBITDA in dollars. This is where we're looking for it for the rest of the year. I'll let Peter complete the answer.
When you ask about the 5%, if I understand the question, the 5% growth is organic growth, and the 5% growth is at pricing that reflects current raw material prices and the current inflationary environment. In terms of the impact of inflationary pass-throughs and some of the raw material increases that took place, for one, we were slow to move on polyester. That was done at the beginning of the quarter. The full impact of which would only be that's specific to a polyester issue.
Okay, thanks. That's helpful. Maybe one for Donald LeCavalier. We saw inventories rising during the quarter. Is there something to unpack here in terms of stocking up, or is it just inflationary to avoid input shortages? How does this play into your COGS in the following quarters?
Well, yeah, it is first inflationary when you compare it to last year, because it's also that for some products, specific product, we wanna protect ourselves. We have a lot of growth on the sales side and wanna make sure that some of our raw materials or other products are available. Therefore, we build a little more in the inventory. This is something obviously we track with the team. We make sure to be as efficient as possible. We're confident, you know, it's some improvement over the rest of the year, but also that will depend on where the pricing of raw material will go and this is something that we cannot have any view as we speak right now.
Okay. All right. Thanks. That's it for me. I'll pass the line.
Ladies and gentlemen, if there are any additional questions at this time, please press star followed by the number one. We do have a question from Drew McReynolds from RBC Capital Markets. Please go ahead, your line is open.
Yeah, thanks very much. Good afternoon. On the retail flyer side, just with existing major retailers, we haven't really talked about just coming out of COVID here and reopening, just what some of the trends and you're seeing in that core business. If you can provide an update there, that'd be great. Secondly, maybe for you, Donald, I noticed in the other revenue category, it was certainly well below what I was forecasting. I know it's not a big number, but it does speak to inter-segment items impacting that. Is that something you can just quickly address here or otherwise we can take it offline? Thank you.
I'll start by answering the question in terms of circular volume. In terms of circular volume, what I'd say to you is it's holding steady. We haven't seen a significant change year-over-year in overall circular sales. When we interact with our customers, part of how they view marketing. Interactions with our customers a tenfold benefit when you as opposed to a digital one. Important to them.
As far as your question, it's mainly transactions between our printing group and our media group. As you're aware, we print most of our books that we publish on the education side, so it's more transactions for that group during that period. We're still building inventory for the media group.
Okay. Got it. Thank you. Maybe one last one. Peter, you had called out meat and cheese within packaging as certainly a particularly strong category. More broadly across the different subcategories that you do packaging in, you know, is there any other kind of trends to flag on that, either kind of pockets of softness still or other pockets of strength, or is it, you know, meat and cheese particularly strong and then nothing really notable across the rest of the categories?
It was pointed out because it was the most significant. I would say that meat and cheese beverage remains strong, especially with the work we're doing Cycle content, seeing strength there. I'd say the only part of the business where we're experiencing some weakness is from a Latin American perspective. You'll appreciate that there is 8% of the world's consumption of bananas in Russia. Ecuador is the primary exporter to Russia. 25% of their production goes to Russia. That's caused banana prices to be impacted and there to be pressure on the LatAm. The banana packaging side of the business. There's some pressure there.
It's not massive, but it's something to be aware of. If I'm looking at from a pure growth perspective, that part of the business is relatively flat where we would have ex-
Got it. Thanks for that added color. Thank you very much.
There are no further questions at this time.
Thank you everyone for joining us today on the call, and we look forward to speaking to you soon.