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Transcontinental Blames Poor Results on Delay of New Presses, Outsourcing to Competitors

Thursday, September 15, 2005

Press release from the issuing company

MONTREAL, Sept. 14 -- A number of situational factors are largely responsible for the fact that income is down compared to 2004 in the third-quarter results announced by Transcontinental today. These factors include temporary production disruptions arising from the consolidation and reorganization of certain business units, start-up costs following the installation of new equipment, and market conditions that remain difficult for commercial printing in Canada and for book printing. Furthermore, the negative foreign exchange impact continued to significantly affect exports to the United States. Recall that on August 24, 2005, the Corporation announced a downward revision of its earnings-per-share objective for fiscal 2005; earnings per share are expected to be 5% to 10% lower than the bottom of the range announced in December 2004, which was $1.74. "Our investments in state-of-the-art equipment, in the reorganization and consolidation of some business units, and in promoting and developing our brands will strengthen our position in our various markets and allow us to be more competitive, particularly in our exports to the United States," said Luc Desjardins, president and chief executive officer of Transcontinental. "While these difficult conditions are expected to continue to affect our results in the short term, we firmly believe that these numerous initiatives will help create long-term value for our shareholders, one of the Corporation's primary objectives. Furthermore, in addition to our ongoing programs to reduce costs and enhance productivity, we intend to use our substantial cash flow to continue our long-term development, both by continuing to pursue acquisitions in our niche segments and by increasing our focus on organic growth. With this strong renewal, Transcontinental is positioning itself to continue to stand out from the competition in the future." Financial Highlights For the third quarter ended July 31, 2005, Transcontinental reported consolidated revenues of $531 million, up 6% over revenues of $502 million in the same quarter of 2004, while operating income before depreciation, amortization and unusual items amounted to $80 million compared to $85 million in 2004, a 7% decrease. The acquisition of Avid Media's magazines in June 2004 and of U.S. direct marketer JDM in February 2005 added $27 million to revenues and $2 million to operating income before depreciation and amortization. Organic growth contributed $9 million to revenues. However, operating income before depreciation, amortization, unusual items, and the foreign exchange impact from existing operations was down by $4 million due to production disruptions and persistently difficult market conditions in some niches. Lastly, the paper effect added $4 million to revenues without affecting income, while fluctuations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts caused a decrease of $11 million in revenues and $4 million in operating income before depreciation and amortization. Income from continuing operations before unusual items thus went from $33 million (or $0.37 per common share) in the third quarter of 2004 to $28 million (or $0.31 per common share) in 2005, a decrease of 16%. Including unusual items, i.e. costs associated with the consolidation of book printing operations in Canada announced on April 5, 2005 and of flyer printing operations in Winnipeg, income from continuing operations for the third quarter was down by 12%, from $31 million (or $0.35 per common share) in 2004 to $27 million (or $0.31 per common share) in 2005. Including discontinued operations, notably publishing and distribution activities in the Winnipeg area which we disposed of in 2004 and the related gain on disposal, net income decreased by $8 million from $35 million in 2004, or $0.39 per share, to $27 million, or $0.31 per share, in the third quarter of 2005. For the first nine months of fiscal 2005, consolidated revenues grew to $1.6 billion compared to $1.5 billion in 2004, an increase of 8%. Operating income before depreciation, amortization and unusual items amounted to $256 million, up slightly from $255 million in 2004. Income from continuing operations before unusual items was down 1%, from $99 million (or $1.11 per common share) in 2004 to $98 million (or $1.10 per common share) in 2005. Including unusual items, income from continuing operations for the first nine months was down 3%, from $97 million (or $1.09 per common share) in 2004 to $94 million (or $1.06 per common share) in 2005. Including discontinued operations, notably publishing and distribution activities in the Winnipeg area which we disposed of in 2004 and the related gain on disposal, net income decreased by $6 million from $100 million in 2004, or $1.13 per share, to $94 million, or $1.06 per share, for the first nine months of 2005. Operating Highlights The main operating highlights for the quarter are as follows: - Revenues for the Information Products Printing sector went from $174 million in 2004 to $173 million in 2005, while growth in the Corporation's Mexican operations and in the Magazine and Catalogue Group was offset by a decrease in the Book Group and by the negative foreign exchange impact. Operating income before depreciation and amortization was down slightly, from $35 million in 2004 to $33 million in 2005, due to temporary production disruptions related to the reorganization and consolidation of some business units, start-up costs following the installation of new equipment, and persistent pricing pressure in the book printing segment. The operating margin before depreciation and amortization went from 20.3% for the third quarter of 2004 to 18.9% in 2005. - Revenues from the Marketing Products Printing sector rose from $225 million in the third quarter of 2004 to $247 million in 2005, an increase of 10% stemming mainly from the acquisition of U.S. direct marketer JDM. Operating income before depreciation and amortization was down 10%, from $30 million to $27 million, because of temporary production disruptions related to the reorganization and consolidation of our direct marketing operations in the United States, the negative foreign exchange-rate impact, and persistent pricing pressure in the commercial printing segment. The operating margin before depreciation and amortization went from 13.1% in 2004 to 10.8% in 2005. - Revenues from the Media Sector increased 4%, from $127 million in 2004 to $132 million in 2005, while operating income before depreciation and amortization was stable at $22 million. Growth in the distribution of advertising material was offset by lower than expected advertising sales for community newspapers in the Atlantic provinces and by increased investments in circulation and promotion for certain publications. The operating margin before depreciation and amortization was down slightly from 17.7% in the third quarter of 2004 to 17.1% in 2005. - In coming quarters, Transcontinental will benefit from printing the free commuter daily Metro in Ottawa and Toronto and, as of this fall, from printing The New York Times for the Ontario and Upstate New York markets. The Corporation also has the contract to print more than 200,000 copies of the 720-page French-language version of the sixth volume of the Harry Potter series for the Canadian market. Management also believes that the strong demand for direct marketing services in the U.S. should continue and that once the reorganization and consolidation of operations is completed, Transcontinental will be in a position to reap maximum benefit from this situation. The Corporation also fully expects the Retail Group to continue its strong performance for the rest of the year, along with door-to-door advertising material distribution activities and community newspaper publishing outside the Atlantic provinces. Finally, now that the labour dispute between the owners and players of the National Hockey League has been settled, sales of The Hockey News magazine should gradually improve. - At the annual Senior Management meeting in August 2005, the Transcontinental management team presented the highlights of the new business project that will replace Horizon 2005. This new project, which both extends and surpasses its predecessor, received the enthusiastic support of all managers and will be officially launched in November 2005, once it has been reviewed and approved by the Board of Directors.

 

 

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