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Transcontinental's Reports Q2: Revenues Down 1%

Thursday, June 15, 2006

Press release from the issuing company

MONTREAL, June 14 -- For the second quarter ended April 30, 2006, Transcontinental's revenues were $553.7 million, down 1% from the second quarter of 2005. As mentioned by management when this year's first quarter results were released, foreign exchange impact significantly affected adjusted net income per share in the second quarter, which was $0.41 compared to $0.46 in the year-earlier quarter. Nevertheless, Transcontinental's operations showed promising signs of improvement, which could not, however, completely offset this negative exchange-rate effect and competitive market conditions in commercial and retail printing. The efficiency improvements resulting from several major restructuring projects, notably in the Corporation's U.S. direct-marketing activities and newspaper publishing in the Atlantic Provinces, have begun to bear fruit and should generate stronger profit margins during the second half of the year and in 2007. Furthermore, recent investments in the latest technology for book and magazine printing as well as the start-up of a brand new book-printing plant in Louiseville, Quebec, will progressively improve results in these segments over the coming quarters. These elements should partly compensate the anticipated negative foreign exchange impact. The Corporation also developed its digital network through an investment in digital retail display company Enixa Media and several other announced initiatives. The innovative home-improvement magazine listing guides using our Style at Home and Décormag brands and launched in partnership with Yellow Pages Group have also been very successful. Finally, with a net debt to capitalization ratio of 29% as of the end of the quarter, Transcontinental is in an excellent financial position to further invest in its growth. "Our second-quarter results are in line with our expectations," said Luc Desjardins, president and chief executive officer of Transcontinental. "As anticipated, the strengthening Canadian dollar continued to have a significant impact on our bottom line. However, we have been addressing this situation, aggressively counterbalancing it with many sales-development, cost-reduction and efficiency-improvement initiatives. We have completed several major retooling and restructuring plans, which have further improved our positioning and efficiency in key segments, notably in U.S. direct marketing. Those undertakings and many investments in new media position us well going forward. We therefore maintain our annual earnings-per-share objective for 2006." Financial Highlights - Second Quarter, 2006 For the second quarter ended April 30, 2006, consolidated revenue was down 1% to $553.7 million from $556.9 million in the year-earlier period, while adjusted operating income before amortization was down 6% to $91.4 million from $97.6 million. The JDM acquisition completed at the beginning of the second quarter of fiscal 2005 contributed $3.2 million to revenues and $0.3 million to adjusted operating income before amortization, while the paper effect (variations in the price of paper, paper supplied and changes in the type of paper used by customers of our printing operations) had a $5.5 million positive impact on revenues. These benefits, as well as those derived from the recent reorganizations in our U.S. direct-marketing and Atlantic-Province newspaper-publishing activities, and from increased volume and efficiency in our newspaper-printing and Mexican operations, were more than offset by competitive market conditions in the commercial and retail printing markets and costs associated with the different initiatives of our planned $10-million strategic investment program to support our Evolution 2010 business project. In addition, variations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts caused a $11.4-million decrease in revenues and a $4.8-million decrease in adjusted operating income before amortization during the second quarter. It is important to note that the spot exchange rate was 1.15 CAD/USD (0.87 USD/CAD) on average in the second quarter of 2006 versus 1.23 CAD/USD (0.81 USD/CAD) on average in the second quarter of 2005, a 7% variation. Net income decreased by 11%, from $37.8 million in the second quarter of 2005 to $33.7 million in 2006, coming mainly from the negative foreign exchange impact combined with slight increases in amortization and financial expenses. On a per-common-share basis, it decreased from $0.43 to $0.39. Adjusted net income, which does not take into account a $3.1-million pre-tax restructuring charge in 2006 and $5.1 million in 2005, decreased by 13%, from $41.3 million in the second quarter of 2005 to $35.8 million in 2006. On a per-common-share basis, it decreased by 12%, from $0.46 to $0.41. The 2006 restructuring charge stems from a consolidation of the commercial and direct- marketing printing facilities in the Toronto area announced on May 16, 2006, and from the transfer of equipment and other costs for the last part of the book-printing consolidation project announced last year. Financial Highlights - First Half, 2006 For the first half of fiscal 2006, consolidated revenues were $1,101 million versus $1,072 million in the year-earlier period, a 3% increase, while adjusted operating income before amortization went from $177.5 million to $170.6 million. The JDM acquisition completed in the beginning of the second quarter of fiscal 2005 contributed $26.3 million to revenues and $3.5 million to adjusted operating income before amortization, while the paper effect had a $9.3 million positive impact on revenues. Exchange-rate variations between the Canadian versus the U.S. and Mexican currencies caused a $18.5-million decrease in revenues and a $9.3-million decrease in adjusted operating income before amortization during the first half of the year. The average spot exchange rate was 1.16 CAD/USD (0.86 USD/CAD) in the first half of 2006 versus 1.22 CAD/USD (0.82 USD/CAD) in the first half of 2005, a 5% variation. Organic revenue growth was $11.8 million over the first half of 2005, coming mainly from stronger performances in newspaper printing and publishing, U.S. direct marketing and the Catalog and Magazine Group. Net income decreased by 8%, from $66.9 million in the first half of 2005 to $61.6 million in 2006, due mainly to the negative foreign exchange impact combined with slight increases in amortization and financial expenses. On a per-common-share basis, it decreased from $0.75 to $0.70. Adjusted net income, which does not take into account a $3.2-million pre-tax restructuring charge in 2006 and $5.1 million in 2005, decreased by 9%, from $70.4 million in the first half of 2005 to $63.8 million in 2006. On a per-common-share basis, it decreased by 8% from $0.79 to $0.73. Excluding the negative foreign exchange impact in 2006 and unusual items, earnings-per-share would have been $0.80, representing an increase of 2% over the first half of 2005. This measure gives a good indication of the net operational performance of the Corporation in the first half of the year. Investments and reorganizations Over the past 18 months, Transcontinental has announced a series of investment projects and reorganizations affecting several of the printing and publishing niches identified as most strategic. These processes are now starting to bear fruit, and will help partly offset the continuing foreign exchange effect. U.S. Direct-Marketing Transcontinental purchased CC3 in December, 2003 and JDM in February, 2005. A three-year integration plan had been established for CC3, which involved combining four plants into one toward the end of this period as leases came due. The enlarged plant resulting from this consolidation in Warminster, Pennsylvania uses a production set-up unique in this industry and is the largest plant in Transcontinental's network. A two-year integration plan was put together for JDM and was completed much faster than anticipated. The integration and amalgamation process for both acquisitions are now completed, and results for this segment have already shown improvement in the second quarter and should continue to do so going forward. Book Printing The Peterborough, Ontario plant was closed in October, 2005 and operations were transferred to Louiseville, Quebec. A new, ultra-modern plant has been constructed in Louiseville to house the operations of both of these former plants, and production began in the second quarter of 2006. The plant is now ramping up production, and the official inauguration will be June 21. At the same time, a new Goss Sunday 4000 press was installed at the Beauceville book-printing facility. Such features as printing auto-transfer will improve efficiency and give this plant a unique competitive advantage as we enter high season for this group. This new state-of-the-art technology makes Transcontinental's operations some of the most advanced and flexible in its industry, and should enable us to partly compensate for the negative foreign exchange-rate effect. Media Sector developments Transcontinental unveiled its digital media strategy as part of its Evolution 2010 business plan, and has been busy at work since. The investment in digital retail display company Enixa Media, the launch of classified-ad site merkado.ca, and the opening of a new Web TV studio for daily webcasts on LesAffaires.com are all promising new ventures undertaken in the second quarter. The Corporation will increasingly look to partnerships with established brands for expansion. In that vein, it announced the Canadian-edition launch of the world's leading men's lifestyle site AskMen.com during the quarter. The new Home Improvement magazine listings guide launched in partnership with Yellow Pages Group and Transcontinental Media's Style at Home/Décormag magazines have proven very successful in both their print and online versions, and bode well for similar future projects. Just after the end of the quarter, the licensing arrangement with U.S. publisher Meredith Corporation for the Canadian version of the women's magazine More was announced, to be launched next spring. Outlook Printing in North America is an industry in transition. Transcontinental management believes it has positioned itself well by specializing in niches with high growth potential requiring different approaches and skill sets from those of traditional printers. It is also developing an integrated offering, with value-added services before and after print such as premedia, database management, fulfillment and distribution. Finally, Transcontinental believes that by continuing to reap the benefits of new sales approaches and by investing on average more than 6% of revenues in capital projects in these high-growth niches (compared to an average of less than 4% for the main printers in North America) in order to increase efficiency, it has positioned itself well for the future. In the media sector, the effects of demographic shifts on media advertising spend are tendencies anticipated by and beneficial for Transcontinental. Our community newspapers, including our newly acquired Le Progrès of Coaticook, Quebec, are strong local brands. Leveraging them on the Internet, a process we are currently investing in, will further entrench them as the voices of their communities. Magazine ad spend is continuing strongly, and Transcontinental remains the only major Canadian publisher with tandem publications in French and English, allowing advertisers to reach their desired demographic from coast to coast through a single partner. In our media sector, we will continue to execute according to our strategy of developing innovative products and services, leveraging our strong brands and taking the digital turn to complement our products and services offering. Our consolidated results for the first half of the year have been in line with our expectations in spite of a much stronger Canadian dollar than anticipated at the beginning of the year, which has been partially offset by lower energy costs, the timing of our strategic investments and certain groups performing slightly better than expected. In the second half we should gradually get the full benefit of the investments and reorganizations realized in the past year, especially in our U.S. direct-marketing and book-printing operations. In these two segments, we have lowered our cost base significantly and are more flexible in terms of production capabilities. However, we anticipate these positive operational factors to be offset by a stronger negative foreign exchange-rate effect. With the rapid appreciation of the Canadian dollar versus the U.S. dollar since the beginning of the year, Transcontinental management expects to end fiscal 2006 with a negative exchange-rate pre-tax impact of approximately $22 million using a constant exchange rate of 1.10 CAD/USD for the remainder of the year. Management also anticipates an additional $19 million pre-tax impact for fiscal 2007 using the same constant exchange-rate assumption. Taking into consideration the 1.10 CAD/USD constant exchange rate mentioned above for the remainder of the year, current energy prices, the positive effect from the share buy-back program and quicker than expected efficiency improvements from recent reorganizations and investments, notably in our U.S. direct-marketing operations, Transcontinental's management maintains its previously stated earnings-per-share objective before unusual items of $1.50 to $1.60 for fiscal 2006. For the balance of the year, we plan to: focus on sales development efforts in the Eastern U.S. direct-marketing operations in order to leverage recent investments; implement our strategy to counter competitive market conditions in commercial printing; put more effort into developing organic growth, including newspaper outsourcing projects; and pursue our strategic investment plan to support a number of new non-capital expenditure initiatives as outlined in our Evolution 2010 business plan.

 

 

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