At that point, please go ahead.
Thank you, Joanne, and good afternoon, everyone on the call. Welcome to Transcontinental's first quarter of fiscal 2025 earnings call. Before we begin, please note that you can find on our website at www.tc.tc our quarterly report, including financial statements and related notes, as well as the slides supporting management's remarks. 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 Advisor, Corporate Communication, for more information. We have with us today our President and Chief Executive Officer, Thomas Morin, and our Executive Vice President and Chief Financial Officer, Donald LeCavalier. As referenced on slide two, 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 may also contain forward-looking statements. These statements are based on the current expectations of management and information available as of today, and our outlook does not include the impact of potential tariffs on our operations. Forward-looking statements also involve numerous risks and uncertainties, known and unknown. The risks, uncertainties, and other factors that could influence actual results are described in the fiscal 2024 annual MD&A and in the latest annual information form. With that, I would like to turn the call over to our President and CEO, Thomas Morin.
Thank you, and merci, Yan. Good afternoon to everyone. The results for this quarter continue to demonstrate the positive effects of our program to improve our profitability and financial position. Our work to reduce the cost of goods sold, as well as fixed costs, and to turn around underperforming plants continues across the organization.
Turning to the packaging sector, we've seen an organic decrease in revenues, mainly due to the slower activities in our Latin American operations due to adverse market conditions and continued weakness in medical. However, our cost-up efforts, combined with a favorable mix with significant growth in cheese and dairy, enabled us to maintain the sector's profitability for the quarter.
In our retail services and printing sector, we recorded an increase in profit for the third consecutive quarter, and this, I'm proud to say, despite the impact of the Canada Post labor conflict, so kudos to the team. Increased book printing and specialized solutions activities contributed to this solid result. The sale of our industrial packaging business and the strong profitability in the quarter have enabled us to reduce our net debt ratio to its lowest since the acquisition of Coveris Americas in 2018.
Meanwhile, we continue to work on our acquisition pipeline. Let me now address the question of tariffs. As I mentioned on our last call, our cross-border exposure is limited to approximately 10% of our combined packaging and retail services printing sales. Out of that 10%, we have the confirmation that our book exports from Canada to the United States are exempted.
Faced with such a volatile situation, we are focused on what we can control. First, we're looking at a number of mitigating measures that can significantly reduce the impact of tariffs, considering we can't eliminate their impacts completely. We're having conversations with our customers and suppliers to see what can be done. We're also prepared to leverage our footprint on both sides of the Canada-U.S. border relatively quickly.
Second, in this asserting context, we will redouble our efforts on the execution of our priorities, as well as on the year two of our program to improve profitability and financial position. We will continue to increase our productivity through continuous improvements and operational efficiency, reduce our costs, and, as always, be agile and react quickly to any new developments. Lastly, the loss of the value of the Canadian dollar versus the US dollar will provide some relief. We've done a great job in 2024 to become more competitive in the marketplace, and for sure, we will continue on that path in 2025. On this, I will pass it over to you, Donald.
Thank you, Thomas, and good afternoon, everyone. Moving to slide five of the earnings call presentation. For the first quarter of 2025, we reported a 5.5% decrease in revenues versus the same quarter last year. This decline was caused by lower volume and by the sale of our industrial packaging activities, partially offset by a positive exchange rate impact.
Regarding profitability, we delivered a strong quarter with consolidated adjusted EBITDA of $97.5 million. Adjusted EBITDA grew by $1.4 million despite the negative impact of the labor conflict at Canada Post and the sale of our industrial packaging activities. Financial expense decreased by $4.6 million to $9.3 million, mainly due to a lower debt level following strong cash flow generation in the last 12 months and from the lower interest rates on floating rate debt.
Adjusted income tax increased by $1.2 million to $8.7 million and represented an effective rate of 17.3%. This led to an adjusted earnings per share improvement of 14%, going from $0.43 in Q1 last year to $0.49 in Q1 this year. Now, moving to slide six for the sector review. In packaging, for the first quarter, we generated revenue of $389.4 million, a 2.2% decrease compared to last year.
The decrease is mainly due to the sale of our industrial packaging activities and to lower volume, notably in our LATAM activities and in the medical market, where we continue to see some weakness. In terms of profitability, adjusted EBITDA in packaging decreased by 2.3% to $59 million, mainly as a result of the sale of our industrial packaging activities.
Despite the lower volume, we maintain a 15.2% EBITDA margin as we continue to see the benefits from our cost reduction efforts. Moving to retail services and printing sector on slide seven, revenues decreased by 9.2% to CAD 240.7 million. This was mainly due to lower volume in our traditional printing activities, including the transition to raddar and the labor conflict at Canada Post. The decline was, however, partially mitigated by an increase in our book printing and specialty solutions activities. Adjusted EBITDA grew by 6.1% to CAD 41.9 million.
This is the third consecutive quarter of profitability improvement for the sector, and we achieved this strong performance despite the negative impact from the labor conflict at Canada Post. There was also CAD 3 million of expenses related to the labor conflict at Canada Post that was put in other costs excluded from adjusted EBITDA.
The strong performance came in large part from a combination of our cost reduction initiative, the optimization of our manufacturing network, the favorable effect of the rollout of raddar, and growth in our book printing activities. We expect a tougher comparable in the second half of the year as significant cost reductions happened during the second quarter last year with the closure of our Saint-Hyacinthe plant and the transition to raddar across the province of Quebec.
Now, turning to cash flow. As expected and in line with normal seasonality, we saw a negative working cap in the first quarter of 2025. Despite almost CAD 60 million in working capital usage, we generated CAD 23.6 million from operating activities. Our CapEx at CAD 22.1 million were CAD 14.5 million lower than last year.
While we allocated CAD 16.3 million in share buybacks in the quarter, helped by the sale of our industrial packaging activities, we continued to reduce our net debt and improve our net debt ratio to 1.53 times at the end of the first quarter of fiscal 2025, compared to 1.71x three months ago. Overall, we're pleased with our results in the first quarter, and excluding the potential impacts from tariffs, we remain confident in our outlook. In our packaging sector, we continue to expect to see volume and profit growth in fiscal 2025. This growth should be more weighted in the second half of the year, as we expect Q2 to be a challenging quarter, given our solid Q2 last year.
This being said, we expect a recovery in Latin America and medical, as well as a better performance overall versus last year in the second half of our fiscal year. In our retail services and printing sector, despite the impact of the labor conflict at Canada Post that hit our first quarter results, we continue expecting to deliver a stable adjusted EBITDA in fiscal 2025 compared to 2024.
On tariffs, the situation is evolving, and we are working on initiatives to mitigate the potential impact on our results. While the tariffs create uncertainty, our financial position is very strong with a net debt ratio of 1.53x . We also expect to generate strong operating cash flows in the rest of the year, in addition to the monetization of real estate, where we continue to expect to close the sale of two buildings in fiscal 2025. For these reasons, we are in a good position to return capital to shareholders, including a special dividend of $1 per share. On that note, we will now proceed with the question period.
[Foreign Language]. Thank you. One moment, please. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by the one on your touch-tone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question.[Foreign Language] . Your first question comes from Hamir Patel with CIBC Capital Markets.
Hi, good afternoon. Thomas, the 2% organic decline in packaging in Q1, how much of that was price versus volume, and how do you see volumes trending over the balance of the year?
Price was about, and good afternoon, Hamir. Price was about 1%. I'll focus on two things that caused this reduction in the top line in Q1, and I think, Donald, you gave already some color. First is LATAM. We believe LATAM is a temporary reduction, and there are three reasons in LATAM. There is a drought in Mexico. There is, as probably most of you know, some energy shortages in Ecuador. The Colombian peso has devaluated 10%.
These were the three reasons why we went backwards in LATAM, which some impact. The second, as we also mentioned, is medical. In medical, we had a low quarter in sales. The one thing I would say is we have a good pipeline of opportunities coming from existing customers, as well as new customers and new products, and we have a pretty strong backlog as we speak. We have confidence, as Donald said, for the rest of the year for these two segments, which caused the majority of the volume decline, Hamir.
Okay, great. Thanks. That's helpful. Just on the non-core assets side, I believe you mentioned that there were two buildings that you're targeting to sell this fiscal year. Could you just remind us what sort of the remaining or expected proceeds would be from those two?
If you go back to when we announced the program, we estimated that we will be probably having an estimated proceed of CAD 100 million. So far, we conclude for CAD 20 million, and I will say that the two buildings that we expect to close this year represent a large part of what's remaining. You can establish somewhere between CAD 60 million-CAD 80 million.
Okay, great. That's all I had for now. I'll turn it over. Thanks.
[Foreign Language]. Your next question comes from Adam Shine with National Bank Financial.
Thanks a lot. Good afternoon. Thomas, maybe just with respect to flyers, obviously concerns out there that we could see a recession brewing. We'll see how that whole tariff dynamic ultimately plays out. Usually, flyers can resonate well in that type of environment. Are you seeing any changes in the behavior of any of your customers quite yet? Do you expect anything? How's the Q2 evolving so far with flyers?
Thank you, Adam, for the question. Good afternoon. You're right in saying that flyers are a good tool in case of high inflation or recession for consumers. We haven't yet seen an uptick, to answer straightforward your question, but indeed, you're right, we would expect this to happen should recession or inflation high rates materialize. I would say that it's something we've experienced in the past. You're right in saying so. Yet, we haven't seen any uptick on that.
Okay. Anything to note on the evolving transition to raddar, just in terms of any additional distribution opportunities and perhaps just acknowledging that some of the pressure over the past year at the top line has been exacerbated as you move through that transition from Publisac to raddar? Are we getting closer to a lapping of that top line pressure, or do you see that for another maybe quarter or two?
I think it's difficult to predict. What I'd say on this, Adam, and the key message here is post the labor issue at Canada Post, we've seen the volume coming back in raddar. One thing was the right thing to support the product during the strike, which we did very well. Our customers are extremely thankful for that, and we saw very much very quickly after the strike, volumes coming back to the normal levels. We'll see moving forward. It's a bit early to say what is it going to do next.
Adam, if I can add, your second quarter will be the last quarter where we were still last year using Publisac for a large part of Quebec, most of Quebec except Montréal, and also we were using the plant in Saint-Hyacinthe. Starting in the third quarter, it should be more apple to apple.
Sure. Exactly. Maybe one more thing, just on the packaging side. I know you talked about some better results expected in the second half of the year, but I think in the last quarter, as you closed out fiscal 2024, there was a suggestion that the market in medical was perhaps stabilizing a little bit. Was there something that happened in Q1 to sort of reverse course a little bit there, or was the comment maybe just a bit optimistic, perhaps premature back in December?
When we were talking in December, we already had a view on the backlog, Adam. Adam, the backlog remains strong. It's the speed at which we can materialize or manufacture the backlog. Nothing has really changed. It took a bit longer. The signs are positive as we speak.
Perfect. Thank you for that. Appreciate it.
[Foreign Language] . Your next question comes from Sean Steuart with TD Cowen.
Thank you. Good afternoon, everyone. I wanted to come back to tariffs. I would guess it's quite small, but the book exports that are exempt from tariffs, can you give us a sense of the scale relative to the 10% of the combined company sales that are exposed potentially to tariffs, what that would constitute?
What we said is we have roughly 10% in both sectors that are exposed to either mostly U.S. to Canada, but some of it also Canada to U.S. on packaging. I will say that the retail servicing and printing represent less than 40% of that impact, and a major part of it is either book or information material.
Yeah, and this 10% include, I think you said it right, also what we sell from the United States into Canada. Combine both.
Got it. Okay. Thanks for that. Just a question on the returns to shareholders and the thinking around the special dividend and the rationale for that choice versus faster buybacks. Your company has pretty consistently increased the regular dividend as well, how we should think about the special dividend versus ongoing increases to the regular dividend going forward.
We look at it as first, the good news is now we are in a position with our strong balance sheet. Back in June last year, we were confident enough to announce the NCIB program, of which we bought back close to CAD 50 million of share. Now we are announcing the special dividend following a good transaction for us where we cashed north of CAD 130 million.
We thought that the special dividend was another way to return capital to investors. If you look globally over the last year, we said it earlier today, we returned north of CAD 125 million. This fiscal year will be an important return to investors. We look at it as a global, and we still have the NCIB in place, of which there is about 18% that we can trigger. We won't comment on our action in the future, but we look at it as a total return to our investor.
Understood. That's all I have for now. Thank you.
[Foreign Language] . Your next question comes from Maher Yaghi with Scotiab ank. Your line is now open.
Great. Thank you for taking my question. I actually wanted to ask you a question on the tariffs from an opportunity perspective rather than what you could lose because I think some of your peers transport a lot more than you across the border. Is there an opportunity to either win market share on either side of the border, given your capabilities, your capacity to produce both on the printing and the packaging?
I think, yeah. I think it's a good question. We're obviously looking at any opportunity to not only mitigate, as we could share with you, but also potentially take advantage of the tariffs, given our footprint, certainly for packaging as well as for retail services and printing. Also considering the low Canadian dollar, obviously, that helps. I think it's a long process to make it straightforward.
To materialize sales on both retail services and printing and packaging, it's a long process. We're talking about a 12-months-ish process. Now, can this be fast-forwarded given the urgency by tariffs? Maybe. We are actively looking at opportunities, of course, and the team is engaged in capturing some opportunities short-term, but let's not expect a very quick win at this level. It takes some time to qualify and to deliver. But yes, quick answer, we're looking at this as well.
I guess that brings us back to the process of tariffs and impact on that 10% you mentioned. How quickly clients can turn around and find another local supplier for the products that are in question here, i.e., if let's say tariffs are implemented in the beginning of April, how quickly you think that 10% can be affected?
The 10% is impacted right here. I mean, these tariffs are happening on April 1. There is an impact. That is for sure. Now, the question is more on the mitigation side of the process. We have a strong supply chain based on both sides of the border. We have a reliable supplier both in Canada and in the United States, and we can really engage with both of these supply sources and solutions for the most part, not for everything, but for the most part. How quickly can we engage? We're already engaging with our suppliers as we speak. We've been engaged with them for the last two months, I would say, trying to find ways in case of, which is where we are today.
The 10% is just what I just want to make sure I get this. The 10% is the final sales that you make that are affected potentially by cross-border tariffs, right?
Yes.
Yes. Yes. Either.
It's not the input cost. It's not 10% of the input cost. It's 10% of top line.
The details regarding the input cost came out recently. We're working on it with the community to understand the details and to see where it could affect us, but there's too much still to understand what will be the potential effect for us in Canada. This is why there's a lot of volatility in this market right now. It is hard for us to say this is the impact.
Yeah. No, I mean, I think every day you wake up with a different answer. Maybe one last question, and that's related to the special dividend. In the context of a possible recession, either both in the U.S. or in Canada and a weakening dollar, etc., even with that, you still felt your balance sheet is strong enough to support a special dividend. Can you maybe talk a little bit about that view that you have that got you to decide to pay the dividend now instead of waiting a couple of months to see what tariffs could mean to the economy?
First, yeah, you did mention tariffs, precision, and also the US dollar. There are a lot of different aspects to look at, but I would say first that the US dollar being at $1.45, well, $1.44-$1.45 is very positive for us. Actually, you can see in our bridge in our first quarter, the impact of having a dollar probably an average at $1.40 gave us $2 million more profit on the packaging. If it is $1.45, that is important for us. That is one thing. Second thing, yes, we do have a strong balance sheet. We are at 1.53. If we proform the impact of paying a dividend, we are back where we were at the beginning of this year, which is roughly at 1.70. We see we have a strong forecast in free cash flow, as you are aware. We have limited need in CapEx.
We're really confident about the future of our balance sheet. It's too hard right now to say if the recession was the impact, but as Thomas mentioned, usually on the retail services side, this is a resilient business on the recession. On the packaging side, we're doing packaging for food, for retail food. Overall, I won't comment on what would be the impact of recession, but when we take all those aspects, the board and the management was confident to pay that dividend right now. It's usually at this first quarter where we announce the new color versus the dividend for TC.
I see. Maybe, sorry, one last question on M&A because there's voices out there saying that if we do have and if Canada has to face certain tariffs, there could be an increase in potential M&A within Canada, within Canadian firms. What's your view on that? Is there a potential for increased opportunity to transact in the coming months, given also your strength in your balance sheet?
I think we mentioned already at the last call that we were actively looking at implementing our footprint, notably in Canada and in the ISM segment of our portfolio. What I can tell you today is that we do not change our plan, and we are actively pursuing this direction. Now, we also remain opportunistic. If there is something of any interest, why not? For the time being, the focus remains exactly the same as it was three months ago. We have a strategy and an action plan which has been delivered as we speak.
Okay. Thank you very much.
Thank you.
[Foreign Language]. Your next question comes from Stephen MacLeod with BMO Capital Markets.
Great. Thank you. Good evening, everyone. I just wanted to follow up on a couple of things. One was just with respect to just the cost savings and the initiatives that you have that you've implemented and we're obviously seeing the benefits of. Just could you just give us some understanding or some update as to where you stand in terms of recognizing the full percentage of the expected savings that you had laid out?
Yeah. Thank you for the question. We said that I think last time that we had achieved, I think, $30 million out of our $40 million program. We still have time to go. That is what I would say in a short answer.
Yeah. As we said also when we spoke about the outlook for fiscal 2025, we expect top line for price pressure to be relatively flat on the packaging side. Obviously, printing is going to transition, but we were and we remain confident to see growth. Obviously, the cost program will be not only will we achieve the remaining $10 million, but we are proactive on many other issues to be even better to achieve more than this $40 million.
Oh, great. Okay. That's good. Thank you. Maybe just turning to the impact on the retail services and printing business. I mean, do you see a scenario where the long-term run rate on margins in that business is now north of 19%?
Obviously, as we said, and we're still in transition, the full impact will be at the end of the second quarter. Because of using less paper, and paper is a pass-through, we always say that roughly paper represented 50% of the flyer products. With raddar, we use way less paper. Just mathematically, it helped us to have better margins.
I would say that the margin we will make over the last 12 months does represent the new base, and it's up to us to get to be better. We're confident that raddar can expand across Canada and create more opportunity to be even better on the margin side. We are definitely glad with the margin increase that we had in this group for the last five quarters, which is going back at the close to 20% margin that we used to have in the past.
Yeah. Okay. Okay. Great. One other question I have was just on the CapEx outlook for 2025. Are you still kind of in that, I think it was CAD 120 million range? And then maybe could you just give us some color on how to think about the tax rate for the year as well?
Yes. We're confident with the CAD 120 million. We do have discussion, and currently, and Thomas spoke to it in his opening remarks to maybe use some CapEx to mitigate the impact of the tariff. I will say that you might see also movement on the working cap to also protect versus the tariff impact. The CAD 120 million should be the right spot, even though that now at CAD 145, most of our CapEx are in US, but we're working hard as a group to maintain that CAD 120 million. I will say for the tax rate, we should be in the same zone as fiscal 2024.
Okay. That's great. Thanks for the color, guys. Appreciate it.
[Foreign Language] . Your next question and question comes from Drew McReynolds with RBC.
Yeah. Thanks very much. Good afternoon. A couple of clarifications for me. First, on the strike impact, Donald, you referred to, I may have missed it, $3 million of strike impact not being in EBITDA. Is that the right interpretation? I can't recall what you said.
Those are expenses that occur in Q1 that we had to put in place to protect our product and to support our clients. We put in place an infrastructure in the first quarter, creating distribution in the rest of Quebec. That came with a cost, and we can put this cost below the line. That is the CAD 2.9 million that I referred to. When you go back to what we said in December, saying that it should be an impact of CAD 7 million, I'll say that today the global impact is roughly in that region, including that CAD 2.9 million that we were able to put below the line.
Correct. Yeah.
Okay. Yeah. That's perfect. Another point of clarification, just back to tariffs. You did mention last quarter 10% of total revenue was cross-border sales. The language today, did I hear you correct? That's 10% in packaging and 10% in printing is roughly that exposure?
Yeah. Thank you for clarifying this. It's 10% combined. So it's not 20%.
Combined.
Yeah.
Okay. Okay. So 10% combined is the exposure. And then within retail services and printing, you said a portion was below 40%. Obviously, the book printing is the majority. What was the below 40%?
If you take the 10%, which is the console numbers for TC, from that 10%, there's about 40% coming from the retail servicing and printing. From that amount, a large part of it is what we call information material that are currently excluded from the tariff from Canada to the U.S., which is obviously mainly our book business, but it also includes some other business that we do on retail services.
Okay. Okay. Yeah. Thanks for that clarification. Maybe a last one here on maybe to you, Thomas, on the end market demand within packaging coming out of last quarter. You obviously alluded to the volume and pricing put and take. It just seems like out of the gate here, as it pertains to LATAM and medical, it just took a little bit longer to kind of get back to where you need to get back to. Is there anything else that's kind of changed from your commentary last quarter, or do you still see that kind of end market demand improving?
Yeah. There is nothing really material that has changed. A large amount of my comments are driven by our own actions. I mean, we do not rely that much on the overall market trend in case it is a macro trend. So a line of sight on the pipeline of opportunities and deals with close is still the same.
Got it. Got it. Okay. That's great. Thanks for that.
Thank you. Thank you.
[Foreign Language] Ladies and gentlemen, if there are any additional questions at this time, please press star followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys. [Foreign Language] . Your next question and question comes from Martin Kim with Cormark Securities.
Thank you for taking the question. I just have a short one. Is there any long-term target leverage ratio you're looking at?
For leverage ratio?
Yeah.
We do not establish targets, but we do prefer to be under two. That has been historically the case, and this is where we always push to be. Obviously, when we do acquisition, we will definitely go above two, like we did in the past. We are more comfortable to be under two. This is where we can do like we did in the last 12 months, being proactive either on NCIB, dividend, or an acquisition.
I see. Thank you so much.
[Foreign Language] . Mr. Lapointe, 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.
[Foreign Language] Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.