Transcontinental Inc. (TCL.A:CA) Q4 2025 Earnings Call Transcript

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Overview

The earnings call presents a mixed picture. Positive aspects include increased profitability, improved net debt ratio, and ISM growth. However, negative factors such as declining volumes in book printing, Canada Post disruptions, and no commitment to dividend increases balance the outlook. The Q&A reveals uncertainties in revenue targets and cost savings impact, tempering optimism. The stock price reaction is likely neutral, with slight positive and negative elements offsetting each other.

Key Financial Performance

Net earnings per share Improved for the fourth consecutive quarter, resulting in a significant growth of 10.7% for fiscal year 2025.

Packaging sector's adjusted EBITDA Increased by 3.7% year-over-year for the full year, excluding the effect of the sale of industrial businesses. This was due to cost reduction initiatives and a favorable exchange rate.

Revenues for Q4 Reported at $732.4 million, a 2.3% decrease versus last year. The decline was caused by lower volume in the retail services and printing sector and the impact of the sale of industrial packaging operations, partially offset by recent acquisitions in ISM, higher volume in the packaging sector, and a positive exchange rate impact.

Adjusted EBITDA for Q4 Decreased by 3.2% to $137.6 million, mainly due to lower volume in the retail services and printing sector caused in part by the labor conflict at Canada Post.

Adjusted earnings per share for Q4 Improved by 3.8% to $0.82 compared to $0.78 for the same quarter last year, mainly due to improvement in profitability and lower share count.

Packaging sector's organic revenue growth for Q4 Increased by 2.8%, mainly due to volume, but was more than offset by the impact of the sale of industrial packaging activities in November 2024.

Packaging sector's adjusted EBITDA for Q4 Grew by 3.3% to $67.9 million, with margins increasing by 60 basis points to 16.4%.

Retail services and printing sector revenues for Q4 Decreased by 4.3% to $275.9 million, mainly due to lower volumes for flyer printing activities impacted by the Canada Post disruption.

Retail services and printing sector adjusted EBITDA for Q4 Decreased by $9.5 million or 14.9% to $54.1 million, mainly due to lower volumes for flyer printing activities impacted by the Canada Post disruption.

Cash flow from operating activities for Q4 Generated $172.5 million compared to $185 million in the previous year, with a positive working capital of $64.9 million offsetting a large portion of the working capital usage of the first 9 months of the year.

CapEx for Q4 Reported at $23.3 million, in line with last year, bringing the full year total close to $100 million, a $22 million reduction versus last year.

Net debt ratio Improved to 1.59x at the end of fiscal year 2025 compared to 1.68x 3 months ago.

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Operating Highlights

Packaging sector's organic top line growth: Driven by higher volumes, adjusted EBITDA up 3.7% over the previous year when excluding the effect of the sale of industrial businesses.

Radar geographical footprint expansion: Exploring opportunities to expand Radar's geographical footprint in fiscal year 2026.

Newspaper printing business: 10-year extension of printing agreement with the Globe and Mail, maintaining a 40-year partnership.

ISM business growth: Acquisitions of Mirazed, Intergraphics, and Middleton bring ISM business close to $300 million in revenue.

Safety improvements: 39% reduction in accidents year-over-year, following a 9% reduction between 2023 and 2024.

Cost reduction initiatives: Contributed to Packaging sector's adjusted EBITDA growth despite weak demand.

Sale of Packaging business: Expected to close in Q1 2026, proceeds to be used for shareholder distribution and debt reduction.

Corporate cost alignment: Plans to align corporate costs with business size post-sale, with full impact expected in fiscal 2027.

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Risk or Challenges

Canada Post labor conflict: The labor conflict at Canada Post significantly impacted the retail services and printing sector in Q4 2025, leading to a 4.3% decrease in revenues and a 14.9% decrease in adjusted EBITDA. This disruption caused lower volumes for flyer printing activities.

Sale of packaging business: The sale of the packaging business, expected to close in Q1 2026, introduces uncertainty regarding the transition and potential operational adjustments. The company will need to align corporate costs with the reduced size of its business.

Lower volume in traditional activities: Lower volume is expected in traditional activities, including book printing, which had a strong fiscal 2025. This could impact overall revenue and profitability in fiscal 2026.

Economic and demand environment: Weak demand environment in 2025 affected the packaging sector, though partially mitigated by cost reduction initiatives and favorable exchange rates. This remains a potential risk for future performance.

Dependence on acquisitions for growth: Recent acquisitions in ISM contributed to revenue growth, but reliance on acquisitions may pose integration and operational risks.

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Guidance & Outlook

Sale of Packaging Business: The sale of the Packaging business is expected to close in the first quarter of calendar 2026. Proceeds from the transaction will be used for a $20 per share distribution to shareholders and to reduce net debt. Post-transaction, the company expects a pro forma net debt of about 1.7x.

ISM Activities: Growth is expected in ISM activities both organically and through the impact of recent acquisitions.

Canada Post Labor Conflict Impact: The impact of the Canada Post labor conflict is expected to be limited to the first weeks of the first quarter of fiscal 2026.

Media Business: Growth is expected in the media business in fiscal 2026.

Corporate Costs: Corporate costs will be aligned with the size of the business, with a lower run rate expected in the second half of fiscal 2026 and full impact of cost reductions in fiscal 2027.

Traditional Activities: Lower volume is expected in traditional activities, including book printing, which had a strong fiscal 2025.

Adjusted EBITDA: Adjusted EBITDA is expected to remain stable in fiscal 2026 compared to 2025.

Capital Expenditures: CapEx for the remaining business is expected to be around $60 million in fiscal 2026.

Cash Taxes: Cash taxes are expected to be around $30 million in fiscal 2026.

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Shareholder Return Plan

Dividend Distribution: The company plans to use proceeds from the sale of its packaging assets for an approximately $20 per share distribution to shareholders.

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Key Q&A

Q:Can you speak to whether you are still seeing volumes for the U.S. outsourcing customer in book printing and the outlook for this segment?

A:Volumes for the U.S. outsourcing customer in book printing are declining due to the end of some major contracts. The outlook for next year is not as strong as this year. However, the team is actively pursuing new business opportunities in the U.S., with some leads expected to materialize in 2026.

Q:What is the scope of the opportunity in in-store marketing (ISM), and are there strategic acquisition plans?

A:ISM had a strong Q4 with 1.8% organic growth, supplemented by acquisitions. The segment is highly fragmented, and there are ongoing acquisition opportunities. Two acquisitions are expected to close within the next two quarters. There is no specific sales target yet, as the focus is on integrating businesses and delivering value.

Q:What are the organic revenue growth expectations for ISM and other growth businesses versus legacy printing in 2026?

A:ISM is expected to grow organically and through acquisitions, while legacy printing, including book printing and the flyer market, is expected to decline. Overall, organic growth is slightly negative, but ISM and other growth areas are expected to offset declines in traditional activities.

Q:Can you provide details on corporate cost savings and their impact on EBITDA guidance for 2026?

A:Corporate costs are expected to be halved over time, with some reductions likely in fiscal 2026. The company is taking proactive measures to adjust the cost structure, but the exact timing and impact on EBITDA are still being determined.

Q:What is the organic growth rate and market share for ISM, and are there larger acquisition opportunities in this segment?

A:The organic growth rate for ISM is around 2%. The market is fragmented, with the company holding approximately 20% market share. There are some larger players in Canada, but most opportunities are smaller businesses with revenues between $20 million and $40 million.

Q:Will corporate costs be broken out separately after the packaging sale is completed?

A:The company is working on how to present results post-sale and plans to update the market. Corporate costs will likely be presented differently, reflecting the new company structure.

Q:What was the impact of Canada Post disruptions on retail printing EBITDA?

A:The Canada Post disruptions had a negative impact of approximately $5 million to $6 million on retail printing EBITDA.

Q:What is the revenue outlook for 2026?

A:Revenue growth in ISM is expected, driven by acquisitions and organic growth. However, declines in book printing and the flyer market may result in slightly negative organic growth overall. Changes in the Radar model, which uses less paper, may also impact revenue.

Q:Will the dividend increase in 2026?

A:The company does not plan to raise the normal dividend in 2026. However, following the transaction closure, there will be a significant cash distribution to shareholders. The company will continue to pay dividends and may consider additional shareholder returns, subject to Board approval.

Q:Review of Unclear Management Responses

A:Management avoided providing specific revenue targets for ISM, details on the exact timing and impact of corporate cost reductions on EBITDA, and clear guidance on how corporate costs will be presented post-sale. Additionally, they did not commit to a dividend increase, citing the need for Board approval and future performance evaluation.

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