Welcome to the TC Transcontinental Second Quarter Fiscal Year 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, June 5, 2025. I would like to turn the conference over to Yan Lapointe, Senior Director, Investor Relations and Treasury. [Foreign Language] Mr. Lapointe, please go ahead.

Thank you, Joel, and good morning, everyone, on the call. Welcome to Transcontinental's Second 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 Jonathan Provencher, Senior Manager, Corporate Communications, 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 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 our outlook does not include the impact on our operations of potential tariffs or the labor conflict at Canada Post. 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, Yan, and good morning, all. Once again, the results for this quarter demonstrate the positive effects of our 2-year program to improve our profitability and financial position with a growth of 11.5% in adjusted net earnings per share in Q2 versus Q2 last year. As anticipated, our packaging sector experienced a decrease in revenues and profits in Q2 compared to the second quarter of 2024. The 3% organic decline in revenues was mainly due to lower volume. In Retail Services & Printing sector, we had a very good quarter with significant increases in revenue and EBITDA. This solid performance was driven by growth in our Book Printing, Specialty Solutions and In-store Marketing businesses. It also benefited from reduced costs, mainly due to the transition to raddar. On safety, I'm happy to report a significant year-over-year improvement across the company in the first 6 months for this fiscal year from 46 incidents to 28, a 40% decrease. We are very encouraged by these results, which will get us close to our no injury target. Now looking ahead to the rest of the year and starting with Packaging, we should continue to benefit from the recovery we're seeing in medical. And overall, looking at our good sales pipeline and with our continuous efforts to close deals, combined with the implementation of additional cost out, we remain confident to achieve both an organic volume and profit growth in the second half of fiscal 2025. In Retail Services & Printing, we will focus on closing acquisitions in ISM in Q3 in sustaining our sales momentum in books and in managing costs rigorously in our raddar business, given its tough comparable in the second half of last year. All-in-all, as the year unfolds, we continue to be laser-focused on our four priorities of growing profits, delivering a strong return on assets, maintaining a solid balance sheet and commercializing sustainability. Now over to you, Donald.

Thank you, Thomas, and good morning, everyone. Moving to Slide 5 of the earnings call presentation; for the second quarter of 2025, we reported 0.1% increase in revenues versus the same quarter last year. This increase was caused by the first volume growth in our Retail Service & Printing sector or RS&P since 2022 and also a favorable FX impact. This growth was partially offset by the impact of the sale of our industrial packaging activities and lower volume in packaging. Regarding profitability, we delivered a strong quarter with consolidated adjusted EBITDA of $108.5 million. If we exclude the impact of the sale of the industrial packaging activities, adjusted EBITDA increased by $2.1 million, following a very good performance from our RS&P sector. Financial expense decreased by $5.4 million to $9 million, mainly due to a lower debt level following strong cash flow generation in the last 12 months and from lower interest rates. Adjusted income tax remained stable at $12.7 million and represented an effective tax rate of 20.8%. This led to a solid adjusted earnings per share improvement of 11.5%, going from $0.52 in Q2 last year to $0.58 in Q2 this year. Now moving to Slide 6 for a sector review; in Packaging, for the second quarter, we generated revenues of $404 million, a 2% decrease compared to last year. The decrease is mainly due to the sale of our industrial activities and to lower volume across most of our markets, partially offset by favorable exchange rate. In terms of profitability, adjusted EBITDA decreased by 8.1% to $65.4 million, mainly as a result of the sale of our industrial activities and lower volume, partially offset by favorable exchange rate. EBITDA margin was solid at 16.2% as we continue to see the benefits from our cost reduction efforts. Moving to Retail Services & Printing on Slide 7; revenues increased by 5.1% to $279.9 million. This was mainly due to an increase in our Book Printing, Specialty Solutions and In-store Marketing activities. Our book business sales were solid in the second quarter. They benefited from a weaker Canadian dollar and from the impact of a U.S. book printer outsourcing some volume to our book platform. Adjusted EBITDA grew by 15.5% to $54.4 million. This is the fourth consecutive quarter of profitability improvement for the sector as we benefit from significant cost reduction initiatives, including the closure of our Saint-Hyacinthe plant and the rollout of raddar across the province of Quebec. We expect a tougher comparable in the second half of the year as most of these cost reductions already impacted favorably the second half of last year. Looking at Media, Q2 performance was in line with our expectations as the decrease in revenues and profitability was mainly due to the end of the [ SEAO ] contract last year. Corporate costs were slightly higher than last year and were negatively impacted by higher share-based compensation following the payment of the special dividend in April. Now turning to cash flow; as expected and in line with normal seasonality, we saw a small working capital usage of $10.9 million in the second quarter of 2025. Despite this working capital timing, we generated $80.3 million from operating activities. Our CapEx at $24.5 million was $5.6 million lower than last year and positions us well to finish the fiscal year in line with our guidance of $120 million. We used the cash flow from operation of the last few quarters and the proceeds from the sale of our industrial packaging activities to pay a special dividend in April 2025. Despite the special dividend, our net debt ratio remained very healthy at 1.70x at the end of second quarter 2025 compared to 1.71x 6 months ago. Overall, we are pleased with our solid financial position and excluding the potential impact from tariffs and the labor issues at Canada Post, we remain confident in our outlook. In Packaging, we saw positive volume growth in the first month of our third quarter, including a continued recovery in our medical market. This adds to our confidence to generate volume growth for the sector in the second half of fiscal 2025. This volume growth should support higher profits in the second half of the fiscal year as we remain confident to grow organically the adjusted EBITDA again in fiscal 2025. In Retail Services & Printing, following a solid performance in the first half of the year and despite a more challenging comparable in the second half of the year, we are confident to deliver a stable adjusted EBITDA in fiscal 2025 compared to 2024. On that note, we will now proceed with the question period.

[Foreign Language] Your first question is from Hamir Patel with CIBC Capital Markets.

Thomas, you pointed to lower volumes in the quarter across most packaging end markets. Can you give us some more color there on what you were seeing across the different categories? And if you have a sense as to how your market share position has evolved?

Yeah. Thank you, and thank you for the good questions here. So as we said, the medical is actually going up. That was something we anticipated when we spoke last time end of Q1. So we could see an increase in demand in the Medical segment for Transcontinental. On the other hand, we continue to see some weakness in LatAm. The crops are not high as we speak, lower than last year, and this had a negative impact on our LatAm year-over-year sales. That's the second comment I'd like to make. Third, the rest of the business recovers, but not at the pace we want it. So the sum, actually, you have ups and downs, but the sum remains negative as you see. So it's really a bit across the board we see softness.

Okay, great. And I understand some of your U.S. packaging peers have come out with price increase announcements citing tariff headwinds for some of their input costs. Have you also announced similar increases? And maybe if you could break down for us how much of the organic sales decline in packaging in the second quarter was price versus volume?

Yes, we had some increase for some of the raw materials. But as we said also beginning of the year, we will have price concessions. So overall, it's almost netting flat regarding pricing. So you can -- it's mostly volume.

[Foreign Language] Your next question comes from Adam Shine with National Bank Financial.

So Thomas, just continuing on the packaging theme. As you look to the start of the first month of Q3, you're seeing growth. Besides medical, where are some of the pockets of potential improvement?

Yeah. Thank you, Adam. We see indeed a continuous positive trend in Medical. We had a decent Q2 and we start strong Q3. Altogether, it's overall, Adam, we had a good first period of Q3 with a net positive growth in line with what we actually said and announced. It's a nice recovery in our Beverage segment. We start to seeing some good momentum here. And we should enter in the second part of the year in a better seasonality for both LatAm, given the weather we talked about as well as our Protein business.

Okay. And if we turn to the impact of tariffs, I think on the last call, you talked about maybe 6%, 7% sort of level. Maybe you didn't talk about it, maybe we talked about that post facto. But I think when thinking about USMCA considerations, I think the actual impact potentially is significantly lower. Maybe Thomas or Donald can just elaborate on that.

Yeah, I agree. It is significantly lower. The only one now that will have an impact, but not material is the new increase for this week of 25%. It will have some impact over our ISM business that we ship in the U.S., but nothing material of that.

You're talking to steel.

Steel, yeah, sorry.

No impact on packaging per se.

Okay. No, I appreciate that. And just lastly, on the buyback. I mean, you took a pause in Q2 after being active in Q1. Of course, we saw a special dividend getting paid out in April. Is that still a key element of capital allocation priorities going forward or do we need to start reflecting on where the share price is for maybe a slowdown in that area?

Well, it's still an element. We're quite happy with the return we gave the last 12 months to the shareholders, including part of it from the buyback -- coming from the buyback and also, as you mentioned, the special dividend. And it's still part of our plan, but sometimes we're working also on M&A that will put us aside regarding the NCIB. So -- but it's still part of the plan.

Okay. And sorry, just one point of clarification. Thomas, did you say something about ISM and [ PAC ] and acquisitions? Did I mishear that?

Yes. We mentioned that actually, Adam, in Q1 as well. We have a strong pipeline of acquisitions for ISM, and I expect some announcements to be made in Q3.

Your next question comes from Kasia Kopytek with TD Cowen.

It's Kasia on the line for Sean. I have a couple of questions. Just sticking with the packaging theme a little bit. You gave some good color around medical and LatAm. Just on Latin America so with the destocking that looks like it's essentially complete. Last quarter, you talked about basically the ability to convert your backlog just being limited by how quickly you can manufacture or convert that. Is that still the case? And how do you see that pace in the second half?

So thank you, Kasia, for your question. Two things on that. The backlog is mainly medical. We saw the recovery in demand starting back end of Q1 and Q2 demonstrated that. So we continue to have a strong backlog we convert in sales in medical. So that's really truly the case for medical. In LatAm, it's not backlog-related nor destocking. It is really weather. It's an agriculture-based business. And depending on the size of the crops, we sell more or less. We had a weak first half of the year, crop related and seasonality should push us up in the second half.

Got you. I appreciate that. And then I think last quarter, you mentioned also something in Ecuador and just the electricity there being a problem. Is that -- do you think you can get that back in the second half as well?

That's a good point, and thank you for remembering this actually. We had some electricity shortages in Q2 in Ecuador. That's very true. That has disrupted the business more from a profitability standpoint than a volume standpoint. We had to experience some plant shutdowns because of the electricity shortages impacting bottom line, not too much top line.

Got it. And just switching gears a little bit. Your competitor, Amcor recently referenced lower demand in North America for Flexibles. I mean it sounds like you're experiencing similar things. They also mentioned weaker beverage volumes. Are you seeing anything there? I mean there's, I guess, some debate around whether beverages are cyclical or seasonal, but any context you can provide around that sub-segment?

Beverages by definition is indeed seasonal. I [ wouldn't ] say cyclical, but I would say seasonal. Obviously, as the weather turns out warmer, people tend to drink more. Apart from that, we don't see any change. We don't see any weakness in the Beverage segment. Maybe this is specific to the portfolio our competitors are working with, but we don't see that.

Got you. Switching gears to Retail Services & Printing segment. In the MD&A, you talked about higher book printing volumes and that being enabled by just some competitive pricing on contracts you're able to secure because of FX tailwinds. Am I right in thinking that this is sort of more of a onetime volume bump just given that the U.S. dollar is depreciating here? How should I think about that?

Well, obviously, the currency has helped us becoming even more competitive. That's a fact. That being said, we reported last year some high level of prospection and business development in book to grow the business, which has paid off in Q1 and continues to pay off in Q2. And our pipeline of opportunities and business development in book remains strong for the remainder of the year. So I wouldn't consider this as one-timers.

Okay. I was just thinking maybe because of the stronger or the weaker Canadian dollar, you were able to make some competitive pricing. But now that we're reversing course, maybe you're not able to offer that competitive pricing, but it sounds like that's not the case.

Donald speaking. Obviously, the weaker the Canadian dollar is for TC is good for our book business. So second quarter, we were close to CAD 1.40, but we're still around CAD 1.35, CAD 1.36, which is good overall in exchange rate. That's one thing. And second thing is our book business kind of slowed down, I would say, 18 months ago following a strong push during the COVID period. And we think this is also a more normal business right now. Having said that, we do have some one-timer, and I mentioned it in my comments, there were some of the business from a U.S. printer that we gave. We don't expect to lose the entire business next year, but there will be a little bit less from that client. But overall, it's a strong currency help us, but the U.S. dollar is still at CAD 1.35 is still good for us.

Yeah, that makes sense. Just aside for book printing, there were some encouraging comps for your specialty printing and ISM. And I appreciate some of that was just from an easier comp versus last year. But maybe can you parse out was there some favorable kind of underlying growth happening beneath the surface for those particular areas? Any context you can provide?

I will say -- I agree with you for the book business. Actually, it was an easier comp, and -- but we do have a very strong quarter. But ISM has been growing for us either by acquisition or strong organic growth over the last 3, 4 years, actually more than that. So it's not an easy comp on that side of the business. Specialty, I agree also because specialty, which is not as big for us, has been suffering a little bit like the book post-COVID impact. But overall, ISM is keeping a very great momentum of organic growth for us over the last few years and every quarter.

I'm going to turn over the line shortly, but just the last question on monetization of your noncore real estate assets. It's a bit of a tougher market. I appreciate you probably want to wait to get full value. I think you have two buildings left for $60 million to $80 million. How are you thinking about the timing of that?

Well, that's certainly -- as we said earlier, the tariffs don't impact us that much on the P&L side of the business. But I will say that the uncertainty coming from the tariff impact announcement has created a very slower market. So we were hoping to do those transactions in this fiscal year. I'm not saying it's impossible, but we definitely see a slowdown in the market, and we will wait for the right pricing. So more to come, but it's slower than it was a couple of months ago.

[Foreign Language] Your next question comes from Stephen MacLeod with BMO Capital Markets.

Lots of great color so far. So I just wanted to follow up on a couple of things. Just with respect to the Canada Post situation, if we do see strike action being implemented, is the impact sort of similar to what it would have been in terms of the magnitude back in December or is there something that -- has anything changed in the business that might change -- something else changed in the business that might change what the potential strike impact could look like?

Yeah. So thank you for the question. The answer is no. To make it short, we don't expect to see as big an impact as we had last year in November. Several reasons for that. Number one, we anticipated on that. So we obviously could put an alternative distribution network earlier with more preparation and as a consequence, less expensive moving forward. The second thing is the distribution hasn't stopped as we speak, as you know. And there is ongoing negotiations between the unions and Canada Post under the supervision of the government. So we don't expect to see any major disruption moving forward at this stage. But the quick answer is, no, we do not expect to see as big an impact in Q3.

Okay. That's helpful. Just digging in a little bit on the packaging space. So it sounds like, obviously, you're maintaining your guidance for a stronger back half of the year. On the volume side and you've talked about a few places where you've seen some strength. I'm just curious if you could give some color on how that translates into margins in the back half of the year.

Well, we combine both things, it's growing organically and continuing to be frugal and cost conscious. So the two agendas continue to run in parallel. So we don't expect to see a significant or a big impact on our margin percentage level.

Does that mean -- meaning on a year-over-year basis, you expect not to see much margin expansion? Is that how you mean that?

Well, if you look at like this quarter, last second quarter, as we mentioned it, was a very strong quarter for TC. Margin was above 17%, and we were under. But Q1, we were year-over-year equal. And last year, the second half margin-wise was down. So we expect to be at least better than last year over the margin with the forecast we gave in the first half, the outlook.

Okay. Okay. No, that's helpful. And then maybe just finally on the Retail Services & Printing sector, you gave some good color around the books business and kind of the outlook there. Can you just talk a little bit about on ISM, sort of where are you seeing pockets of strength in that business? Is it across the board or are there specific areas where you're seeing incremental strength? And I guess related to that, did you see anyone kind of pull back on ISM spending with -- to reflect tariffs or has that not happened?

The answer is no, we do not see any customers pulling back budgets for that. We continue -- we grow the business organically in ISM. We -- it's a project-based business, and we have an active prospection activity which goes from coast to coast. We also expand our footprint in ISM. So it's an organic growth across the country. No sign of customers pulling back or reducing spend in that.

[Foreign Language] Your next question comes from Maher Yaghi with Scotiabank.

I wanted -- my first question I wanted to ask is on M&A. You mentioned you are looking to undertake one in your ISM business. Just wanted to ask you, your current leverage is 1.7. Where do you feel you can be comfortable taking that up to in the current environment under -- with -- inside an M&A transaction? And also on the packaging side, can you discuss your M&A funnel and if it's expanding or getting smaller? And how do you feel about the opportunities for M&A in that segment?

I can take the leverage ratio. We're, as you said, 1.70, and we will generate a lot of free cash flow till the rest of the year. So we should get better if there's no acquisition. Having said that, we always said that we don't have a specific target. We're comfortable under 2. Why we're comfortable to be under 2 give us a lot of opportunity to either be active like we did on special dividend on NCIB. In the past, when we did [indiscernible], we went as up as 3.5 because we were -- we were very confident to get back to 2 over the next 2 years, which we did. So it gives you a range of possible acquisition. Having said that, yes, we do have ISM transaction in the pipeline, but nothing major that will push us at a very high level of debt ratio.

Yes, I'll take the question on the Packaging M&A. So two things to say here. First, remember, we've been investing a lot in our CapEx to grow organically. So capacity-wise and technology-wise, I think we're in a good spot to grow organically packaging without M&A; first thing. Second thing, the activity in M&As, in packaging is limited as we see. We receive from time-to-time some opportunities to look at, but they're very minor. And there is nothing really that would make a huge difference for us strategically. So very, very quiet activity in M&A these days in packaging.

Okay, great. So just, Donald, I wanted to ask you, I know it's still not. I mean the Senate -- the House has approved the Budget Reconciliation Bill in the U.S. and now it's up going to the Senate. But a lot of discussion I've been getting is on Section 899. I mean it is focused on asset management entities, but is there anything in Section 899 that could increase your tax bill in the U.S.

I don't know what 899. But what I do know about this new project is that it may have an impact over the free cash flow that we generate in the U.S. and that we want to bring back in Canada, either by loans or dividend. This is something that they've been working around for many -- they've been talking about. But the way we read it right now with our tax specialists, it's going to be -- first, it needs to be approved, which might be a long process. Second, it will be over next year. It's not like it will happen in 24 months. It's a longer period where we think we can find ways to adjust ourselves. So there's -- you finance direct in the U.S. So we're following that. But I don't see on the short-term, any material impact on the free cash flow coming out of the U.S., but this is something that we will follow for sure.

Yeah, there are ways around it from -- in terms of how you finance the operations, financing in the U.S. directly instead of Canada. And it's still withholding tax application that is problematic. But I understand what you're saying. It's still very new, and it will take time to get implemented. So you can work around it. Okay, great. Just one last question I had is on volume. You seem -- on the packaging side, you seem to have a positive outlook in the second half. Apart from the increase that you're seeing in the short-term on the medical side, what gives you confidence that the growth in volume is going to continue for the next couple of quarters? Sorry, but do you have that kind of visibility out into your Q4 in terms of the volume?

We do. So starting with where from the medical continues to be strong and will be strong Q3, Q4. I remind you that last year, Q3, Q4 for medical were very weak. It's a bit the same as the book story we had a year before. So the year-over-year will show a very strong and interesting growth in medical. All-in-all, we're also having a very strong pipeline of opportunities. We're focusing on the efficacy and efficiency of our closing ratios. So all-in-all, we have good line of sight on a stronger H2 than H1. Yes, we do.

[Foreign Language] Your next question comes from Drew McReynolds with RBC Capital Markets.

Two for me. Thomas, on your comments around the good sales pipeline within packaging and all the commentary you've just said about volume and the visibility on volume. I know internally, there's a little bit of a bigger focus on the sales side and replenishing the pipeline and getting the funnel stronger. Can you talk to those internal initiatives that are incremental that are being put into place? And is this kind of allowing you to gain share in terms of that volume or is the improving sales pipeline more an industry dynamic? And then secondly, for you, Donald, just on the remaining cost savings, I think there was a target of $40 million last quarter. You were at $30 million. You're probably still realizing ongoing cost savings. Just where are we with respect to realizing the remaining $10 million?

All right. So I'll take the first one, Donald, you take the second. In terms of sales pipeline, we have a strong process, and I'm focusing a lot on making sure this process is going fine and there is a good execution. That's really what it is. I'm not expecting any tailwind, if you will, from the industry. If there is good. If there is not, I don't think we need it. The only tailwind would come from seasonality in LatAm, as we discussed. So it's really around managing our process in a very efficient and quick manner. Targets are well-identified, opportunities are known. It's closing them. Do you want to take the?

Yeah. We will achieve this cost saving. And even in the opening comments by Thomas, we did mention that we're confident regarding the sale outlook for packaging for the second half, but we will still be pushing -- we're still pushing for cost efficiency. And our comment at the beginning of the year was and it remained that sales because of the price concession we're giving right now in the market will probably be flattish for TC on the packaging side, but we're remaining confident for organic growth on EBITDA. So this is the cost saving program that continue to kick in to support us. And obviously, RS&P has a very strong first half; some challenge in the second half. Therefore, we're active also on this side. So we will achieve this target of $40 million for sure.

[Foreign Language] [Operator Instructions] Your next question comes from David McFadgen with Cormark.

Great. Yeah, a couple of questions. So I think you said you have decent visibility on the volume growth for packaging in the back half of the year. So I would imagine in order to meet that EBITDA expectation of growth in packaging, packaging EBITDA, you need that volume, right? Is that true?

It's both volume and cost. The answer is yes. We need volume and cost at the same time. Hence, the agenda and the focus we could share today.

Okay. Okay. And then just switching to ISM. I mean that business has typically grown at a pretty good clip. Can you give us an idea of the growth that business experienced in the quarter and how much that business represents for the whole Printing segment?

The growth in the quarter was -- the growth was about 5% for the quarter for the business. And the business now, if we exclude the commercial part of the business, I think we disclosed it separately now is north of $200 million.

There are no further questions at this time.

Thank you, Joel, and thank you, everyone, for joining us on the call today. Looking 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.