Morningstar DBRS Confirms Transcontinental Inc.'s Issuer Rating and Senior Unsecured Debt at BBB (low), Stable

DBRS Limited (Morningstar DBRS) confirmed Transcontinental Inc.'s (Transcontinental or the Company) Issuer Rating and Senior Unsecured Debt rating at BBB (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Transcontinental's stable operating performance over the last 12 months, benefitting from its profitability and financial position improvement program, which more than offset demand challenges within the traditional print and medical packaging product segments. The Stable trends reflect Morningstar DBRS' expectation that Transcontinental's deleveraging and operating efficiency initiatives over the last 12 to 24 months will support the Company's ability to effectively manage near-term earnings pressure or macroeconomic uncertainty in the near to medium term, including the potential impact of tariffs or an economic slowdown, within the context of the BBB (low) credit rating category. The credit ratings continue to reflect the significant benefits of diversification that the Company has experienced with the Packaging segment, which now represents 58% of consolidated F2024 revenue (up from approximately 11% in F2016).

Transcontinental's reported revenue declined by 4.3% to $2.81 billion in F2024 from $2.95 billion in F2023, primarily driven by the Printing segment because of lower traditional print product volumes and the end of Publisac distribution in Québec, as well as lower packaging sales volumes in the medical industry. Morningstar DBRS-calculated EBITDA improved to $469 million in F2024 from $447 million in F2023, as the Company's margin profile benefitted from its profitability and financial position improvement program, which more than offset the impact of lower volumes. The trends driving revenue and profitability continued in Q1 2025, as revenue declined by 5.4% to $643 million, compared with $680 million in Q1 2024. Meanwhile, Morningstar DBRS-calculated EBITDA increased slightly to $98 million in Q1 2025, versus $96 million in Q1 2024.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action should the Company continue to grow its segments that present more favorable long-term outlooks, including packaging and in-store marketing (ISM), such that consolidated operating income grows on a consistent basis, coupled with gross leverage moving below 2.0 times (x) in a sustainable manner.

Conversely, a deterioration in operating performance (for example, one that contributes to a sustained erosion of market share and/or more aggressive financial management than anticipated, such that Morningstar DBRS-adjusted leverage increases above 3.0x on a sustained basis could result in a negative credit rating action. Morningstar DBRS also notes that Transcontinental has a history of using its balance sheet to fund accretive acquisitions that are followed by periods of concentrated deleveraging.

EARNINGS OUTLOOK
Morningstar DBRS anticipates Transcontinental's earnings to remain stable in F2025 as revenue declines are offset by improved operating efficiency. Morningstar DBRS forecasts Transcontinental's revenue to decline toward $2.7 billion in F2025, from $2.8 billion in F2024. Morningstar DBRS expects revenue in the Packaging segment to decline in the low to mid-single-digit range in F2025, primarily driven by the sale of Hood packaging operations in October 2024 and near-term challenges in the medical packaging product segment, partially offset by organic volume growth in food packaging. Morningstar DBRS forecasts revenue in the Printing segment to decline in the low single digits as declining traditional print products are expected to more than offset growth in ISM and raddarTM contributions. Morningstar DBRS expects EBITDA margins to improve to more than 17% in F2025 from 16.7% in F2024, primarily driven by efficiency improvement initiatives Transcontinental has undertaken over the last 24 months, including head count rationalization and consolidation of operations through strategic facility reductions. Morningstar DBRS anticipates EBITDA margin growth will be partially offset by pricing pressure in F2025. Morningstar DBRS forecasts EBITDA margins will experience modest improvements through F2026 as the Company continues to divest non-core facilities. As such, Morningstar DBRS forecasts adjusted EBITDA to be in the $465 million to $475 million range in F2025, versus $469 million in F2024.

FINANCIAL OUTLOOK
In terms of financial profile, Morningstar DBRS expects Transcontinental's key credit metrics to strengthen once again in F2025 on the back of stable earnings coupled with debt repayment during the year. Morningstar DBRS anticipates cash flow from operations to remain relatively flat at around $325 million in F2025, in line with operating profit. Capital expenditures are expected to remain flat at approximately $120 million, primarily focused on maintenance and investment in the Media segment, including artificial intelligence integration in children's book publishing. Meanwhile, Morningstar DBRS anticipates dividends to grow into the $150 million to $160 million range, including a $1 per share special dividend distributed in Q2 2025. As such, free cash flow (FCF) is expected to decline into the $50 million to $75 million range in F2025, compared with $168 million in F2024. Morningstar DBRS expects the Company to generate up to $200 million from asset sales in F2025. Furthermore, Transcontinental repaid $200 million of its notes that were set to mature in 2025. As a result, barring any debt-funded acquisition activity in F2025, Morningstar DBRS anticipates gross leverage to improve below 2.0x in F2025, from 2.2x in F2024.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBH
Transcontinental's credit ratings remain supported by the Company's strong market position in the print industry, attractive long-term outlook in the Packaging segment and ISM product segment, diversified customer base and product offerings, and strong FCF-generating capacity. The credit ratings also continue to consider the structural shift to digital media from print, as well as the risks associated with growth through acquisition.

Comprehensive Financial Risk Assessment (CFRA): A/AL
Transcontinental's CFRA reflects Morningstar DBRS' expectation that, through stable earnings and disciplined financial management, which at times includes periods of debt-funded acquisitions followed by periods of deleveraging, Transcontinental will maintain credit metrics within a range considered supportive of the BBB (low) credit ratings (i.e., debt-to-EBITDA in the 2.0x to 3.0x range).

Intrinsic Assessment (IA): BBBL
The IA is based on Transcontinental's CBRA and CFRA. Taking into consideration peer comparisons, among other factors, Morningstar DBRS places the IA in the lower end of the IA range given the uncertainty related to future events and the operating environment, as well as Transcontinental's history of debt-funded acquisitions.

Additional Considerations: None

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/452445.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025),
https://dbrs.morningstar.com/research/447184
-- Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025),
https://dbrs.morningstar.com/research/447185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024),
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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