Acquisitions Boost Transcontinental’s Revenues; Agreement with Hearst RenegotiatedDecember 6, 2012
Highlights of Fiscal 2012
In 2012, TC Transcontinental’s revenues increased 6.2 percent, from $1.989 billion to $2.112 billion. This increase stems mainly from the acquisitions of Quad/Graphics Canada, Inc. and Redux Media. It was, however, mitigated by the incentives granted at the renewal of certain printing contracts and by non-recurring revenue from the printing contract for the Canadian Census in 2011.
Adjusted operating income remained relatively stable, from $246.6 million to $245.2 million. The slight decrease of 0.6 percent derives primarily from the Media Sector, due to the end of the school reform in Quebec, which impacted educational book publishing revenues, as well as a soft national advertising market. The decrease was mitigated by new printing contracts, the synergies from the integration of Quad/Graphics Canada and the optimization of the operational structure of our digital operations.
Net income applicable to participating shares declined, from $120.7 million to a loss of $183.3 million. The decrease stems mainly from a $232.0 million asset impairment related to the Media Sector, which was non-cash. The decrease also stems from a $58.0 million provision for notices of re-assessment from tax authorities, which the Corporation is currently contesting, a $57.2 million impairment charge of the carrying value of our U.S. deferred tax asset, and $55.0 million in restructuring and other costs mostly related to the integration of Quad/Graphics Canada, Inc. These items were, however, partially offset by a gain on acquisition of $32.1 million.
Excluding unusual items and discontinued operations, adjusted net income applicable to participating shares decreased 3.8 percent, from $155.3 million to $149.4 million, or $1.85 per share.
Transcontinental and Hearst Corp. Renegotiate Agreement
Transcontinental Inc. and Hearst Corp. reached an agreement in principle to amend the terms and conditions of the 15-year contract started July 2009 to print The San Francisco Chronicle. Under the new agreement, which will be effective Jan. 1, 2013, TC Transcontinental will receive a one-time cash payment of US$200 million from Hearst to compensate for price reductions on future services. TC Transcontinental will continue to print the Chronicle over the term of the agreement, receive payment for services and maintain ownership of the printing plant and equipment.
Given the new market reality in the San Francisco Area, the Chronicle will only require the use of up to two-thirds of the printing equipment under the original contract. As a result, the Chronicle will benefit from price reductions of approximately US$30 million per year from TC Transcontinental, over the remaining term of the agreement, to account for the upfront payment and the reduction in the use of the printing equipment.
The impact on the profitability of TC Transcontinental’s Fremont, California plant will not be significant as the US$200 million upfront payment will be deferred and transferred to revenues over the remaining life of the contract and the Corporation will be able to reduce its cost base to compensate for the reduction in the use of the required printing equipment. Furthermore, TC Transcontinental will focus on using the available capacity for other potential customers.
“We are pleased to continue to foster our growing relationship with Hearst Corporation, not only in printing, but also in magazine publishing, with our Elle brand partnership in Canada, and in digital solutions with our advertising representation partnership,” said François Olivier, president and CEO of Transcontinental Inc.
Other Highlights of Fiscal 2012
For the Printing Sector, the acquisition of Quad/Graphics Canada, which was completed on March 1, 2012, should generate close to $200 million in annual revenues and a net increase in adjusted operating income before amortization of more than $40 million by the end of 2014, of which $11.4 million was realized in 2012. In the midst of this transaction, the corporation began reorganizing its printing operations in Canada by ensuring the use of its most productive equipment. Moreover, black-and-white book printing operations were sold in 2012. A number of multi-year agreements with retail customers and with Rogers, valued at more than $1.75 billion, were renewed and expanded.
In fiscal 2012, the Media Sector expanded its content offering by acquiring or launching several community newspapers and purchasing, from its partners, all outstanding shares of the Métro Montréal newspaper. The introduction of the brand Fresh Juice, which offers food-related content on a number of different platforms, and the addition of Éditions Caractère to the portfolio of educational books for the general public, enhanced the catalogue of titles published by the corporation.
However, in the process of reviewing its brand portfolio and to channel its efforts toward the development of its leading multiplatform brands, the corporation decided to stop publishing the More and Vita brands.
Development of new services
In 2012, TC Transcontinental added television production to its service offering. Several mobile apps were also developed for its own properties and those of its partners, namely On the Table and P$ Mobile Service for Stationnement de Montréal. The job search site JobGo.ca was also launched. In addition, the Corporation expanded its digital offering by signing numerous advertising representation agreements and partnerships and by acquiring Redux Media, a leading online advertising network. Through its innovation program, the corporation introduced Panoramax, the largest promotional insert in Canada printed on high-volume presses.
The adjusted net indebtedness ratio improved from 1.48x as at Oct. 31, 2011, to 1.32x as at Oct. 31, 2012. Under its share purchase program, as at October 31, 2012, the Corporation bought back 2,011,600 of its Class A Subordinate Voting Shares at a weighted average price of $8.86, for a total consideration of $17.8 million. Transcontinental Inc. also put in place a new five-year unsecured term-credit facility of $400 million which matures in February 2017. An amount of $194.9 million was drawn on this facility as at October 31, 2012.
In fiscal 2013, the acceleration of synergies from the integration of the operations of Quad/Graphics Canada, Inc., optimization of the Media Sector structure and continuation of the marketing activation strategy which has enabled the Corporation to renew and expand contracts with key accounts in 2012, should enable it to improve its profitability in a fast-changing industry. These elements should offset the loss of Zellers, a major client who announced in 2012 that it will be closing all its stores by March 2013.
The Corporation is also starting fiscal 2013 in an excellent financial position with a net indebtedness ratio of 1.32x. Also, given its planned investment of about $70 million in property, plant and equipment, it should also be generating considerable net cash flows, which will allow it to further reduce its indebtedness, invest in the development of new marketing services and strategic acquisitions, and return funds to its shareholders.
Largest printer and leading provider of media and marketing activation solutions in Canada, TC Transcontinental creates products and services that allow businesses to attract, reach and retain their target customers. The Corporation specializes in print and digital media, the production of magazines, newspaper, books and custom content, mass and personalized marketing, interactive and mobile applications, TV production and door-to-door distribution.