Nelson Gentiletti - CFO & Chief Development Officer Shirley Chenny - Advisor IR Francois Olivier - President & CEO

Adam Shine - National Bank Financial Mark Nevill - Scotiabank Drew McReynolds - RBC Capital Markets

Thank you, operator. Good afternoon, ladies and gentlemen and welcome to our third quarter 2016 financial results conference call.

Earlier today, in addition to our press release, we issued our third quarter 2016 MD&A with complete financial statements and related notes. For those of you who are not on our distribution list, the documents are posted on our website at TC.TC.

Francois Olivier, President and Chief Executive Officer, will begin this conference call by providing key operational highlights of Q3. Nelson Gentiletti, Chief Financial and Development Officer, will then proceed with comments on financial results for the quarter, after which the lines will be open for questions.

I would like to specify the conference call is intended for the financial community. Media are in a listen-only mode and should contact Nathalie St-Jean, Senior Advisor Communications, for more information or interview request.

Please be reminded that the information that will be discussed over the course of this conference call might contain forward-looking statements. Such statements, based on the current expectation of management and information available as of today inherently involves numerous risks and uncertainties known and unknown.

The risks, uncertainties and other factors that could influence actual results are described in the 2015 annual MD&A, the latest annual information form and have been updated in the MD&A for the third quarter ended July 31st. I would now like to turn the call over to Francois Olivier.

Thank you, Shirley and good afternoon, everyone. Third quarter results were in line with our expectations.

The decline in revenue growth reflects a difficult market environment; however, the effect on our profitability was mitigated by the measures implemented. We expect that our ongoing initiatives to reduce our cost base and to win new business should continue to have a positive impact on our print and media results in Q4.

On the packaging side, we're excited about the prospects for the future and look forward to making TC Transcontinental packaging a leader in the segment it serves. We continue to deploy resources to sales development for which we're seeing promising progress throughout our long sales cycle.

We also continue to be very active on the acquisition front. In the quarter, we added Robbie Manufacturing, a supplier of flexible packaging located in Lenexa, Kansas, to our network.

We're gradually strengthening our geographic footprint and are gaining access to new vertical markets and manufacturing capabilities. With this latest acquisition, we expanded an already solid sales funnel.

Now let me take a few minutes to comment on our quarterly results by segment. In our printing division for our retail flyer segment, a number of flyers and the page counts remain stable in the third quarter.

Volume stability that we have been seeing quarter after quarter indicates that this medium continues to be a valuable marketing tool for retailers to drive traffic to their stores and that digital alternatives still remain a complement to the printed flyers. Regarding our newspaper printing segment, volume in this business continues to be under pressure.

However, our unique outsourcing offering to publishers allowed us to successfully begin in July a five-year agreement to print the Toronto Star and helped mitigate the declines with our other clients. The smooth start of this agreement continues to demonstrate our ability to help publishers across Canada become more efficient.

This contract also enabled us to further optimize the capacity utilization of our Ontario newspaper platform. Also, following the sales of our newspaper portfolio in Saskatchewan, we decided to close our Saskatoon printing plant.

We continue to be active on the sales front in this vertical. In the quarter, our book printing business remained resilient and has actually shown good growth over the last few quarters.

However, on the magazine side, the accelerating transformation of this market continued to pressure results. Finally, our point-of-purchase printing offering continued to grab our customers' attention and fuel interest, while the traditional non-contractual commercial print market continues to decline.

Moreover this quarter, we no longer have the contribution of the contract to print Canada census forms and Canada Post labor issues also impacted orders in our commercial business. In Q3, however, we fully benefited from our decision taken in Q2 to close our Transcontinental Quebec plant.

We also sold at the end of the quarter most of our commercial printing line of business operated from our Dartmouth plant in Nova Scotia which also resulted in the closure of the facility. Turning to our packaging division, as mentioned in my opening remarks, we're excited about the prospects for the future.

We acquired Robbie Manufacturing in July, a flexible packaging supplier specializing in on-site packaging needs for grocery stores, shrink-wrap packaging of multi-pack consumer goods and packaging solutions for food processors. These new vertical markets, combined with new skills from a talented workforce and the energy of a team of seasoned managers, should certainly provide opportunity to drive new sales.

Our Ultra Flex acquisition, completed in September of last year, continues to perform well. Their sales funnel is healthy and we're confident that the new capacity coming online should have a positive impact on our results.

Regarding Capri, this quarter, results were impacted by a reduction in demand from Capri's largest customer and by the loss of a customer in early 2016 due to a change of control which resulted in the shutdown of this customer's operations. We have since qualified some SKUs with the acquiring company and are slowly ramping up our volume with this new large customer.

As I have mentioned on several occasions, the sale cycle in the dairy segment is particularly long. However, we remain very positive about this facility long term prospects, both from a manufacturing efficiency and sales funnel standpoint.

In addition, since the beginning of the year, we have incurred additional costs related to starting up new equipment. Finally, on the acquisition front, we remain very active and continue to be optimistic about our future prospects.

On the media side, our portfolio of business titles performed well in the quarter. However, the transformation in the advertising market continued to have an impact on our newspapers and the local solutions group.

Our strategy within this group is to constantly evaluate our portfolio and to assure the long term success of our best performing asset. We have taken significant action since the second quarter in order to adjust our cost and our product offering and these measures had a positive impact on the sector's profitability.

Also in line with our strategy, we sold our local newspaper in Saskatchewan as they had limited synergies with the rest of our portfolio. In conclusion, the market dynamics we faced this quarter were relatively consistent with what we have experienced in previous quarters.

However, the measure we have taken over the course of Q2 and Q3 have eased the pressure on profitability and should continue to do so over the next quarter. We're positive that the outcome of our strategic decisions should be reflected in our future results as we continue to stick to our growth principles, stay focused on optimizing our operations and improving the performance of our best assets while we grow our scale in the promising flexible packaging industry.

I will now turn it over to Nelson for a review of our financial results for the quarter.

Thank you, Francois and good afternoon, everyone. Revenues for the third quarter of 2016 were CAD468 million, a decrease of 2.9% over Q3 of last year.

Adjusted operating earnings went from CAD72 million to CAD63 million and adjusted net earnings attributable to shareholders of the Corporation were CAD44 million or CAD0.57 per share, a decrease of 9.6%. Net earnings attributable to shareholders of the Corporation went from CAD43 million to CAD46 million.

This slight increase is mainly attributable to the favorable variation of restructuring and other costs net of related taxes in Q3 of 2016 and a nonrecurring charge recorded in 2015 associated to some of our pension plans. On the cash flow front, in Q3, cash flow from continuing operations amounted to CAD86 million.

We also generated about CAD9 million of cash from the sale of digital assets and the building. In terms of the use of cash, we paid out an amount of CAD52 million for the acquisition of Robbie Manufacturing and for their debt repayment.

We spent CAD24 million in CapEx, including intangibles and paid CAD14 million in taxes. We also distributed CAD14 million in dividends and repurchased shares for cancellation for CAD6 million.

Since the beginning of our share buyback program in April 2016, we repurchased for cancellation about 340,000 of our Class A subordinate voting shares, representing 34% of our authorized amount. For the past nine months, we have bought back more than 880,000 A shares.

At the end of Q3, our net indebtedness was CAD313 million, with no significant debt maturities before 2019. Our debt to EBITDA ratio stands at 0.8 times.

Finally, let me provide you with some guidance for the fourth quarter. In our printing division, we expect our retail flyer volume to remain relatively stable and we should also benefit fully from the contract to print the Toronto Star which started in July.

We also foresee the growth of our in-store marketing segment to continue over the course of the quarter. The contribution of these elements should partially offset the expected decline in the advertising market of some of segments of our print business, namely commercial, newspapers and magazines.

In terms of profitability, we expect that our new contracts and our continued efforts to optimize our operations through operational efficiency initiatives should help compensate the impact of market dynamics. In our packaging division, we will benefit from the acquisition of Ultra Flex Packaging and the newly acquired Robbie Manufacturing.

We expect Capri to be negatively impacted by the loss of a customer due to its sale and a reduction of demand from its main customer. In addition, investments to increase capacity and support our growth strategy should continue to negatively affect results.

We remain focused on developing new business opportunities and on qualifying our products with existing and new customers. We expect that several of these opportunities currently in our sales funnel will materialize starting in 2017.

In the media sector, we expect that our newspaper publishing activities should continue to feel the effect of the transformation of the advertising market. However, the significant measures we have taken should ease the impact on our profitability.

For the 2016 P&L, assuming the stock price remains at current levels, you should model for full-year corporate costs at the EBIT level of about CAD22 million to CAD24 million. As a reminder, a change of CAD1 in our stock price impacts our results by close to CAD1 million.

Our financial expenses are expected to be in line with last year and our tax rate to be around 30%. In terms of use of cash for the year, you can assume CapEx of around CAD75 million, including intangibles and cash taxes of CAD70 million.

To conclude, our sound financial position and our proven ability to generate considerable cash flow quarter after quarter gives us significant flexibility for our future growth. We intend to continue our approach to capital allocation and support our growth strategy and packaging, while continuing to return capital to shareholders.

This concludes the formal part of conference call. Operator, we're now open for questions.

So I guess I will start with packaging, first of all you have been pretty clear over the last couple of quarters that the largest customer at Capri is been going through inventory rebalancing. Is that obviously the main driver here and perhaps even a step up or is there something specific with that customer in regard to perhaps its own sales actually seeing some year-over-year declines?

Yes, obviously, like printing, when you print flyers for retailers, their business is very healthy or not very healthy, we kind of print the same amount of copies and the same amount of -- the packaging is very different. If your customer is very busy then you get very busy and one of our main customer was a little more soft, in Q2 and Q3 due to a rebalance their inventory, but we think this quarter and next quarter it will be a little bit softer than last year and based on our discussion with them, it would probably pick up their natural level in Q1 as they have experienced some movement in their business, it's not really for me to discuss.

But obviously when our customer is busy, we’re busy when they are less busy and certainly that's the case in Q3 with our main customer, and it's not for us to talk about the business of our customer but this customer represents a very large portion of the sales of that factory so yes you are quite right Adam, it's not only an inventory situation that was the case in Q2. Right now they are a little bit slow and we are slow with them in a sense.

But nothing alarming, their business is very healthy and we think it's going to get back to normal level in the future quarters.

Understood, but if we go back to some of the color provided in the prior two quarters, I think you said the impact of at least the inventory rebalancing was about $2 million to $2.5 million per quarter. Acknowledging some of the incremental weakness in the outright demand, would be fair to say it again you know you’re not obviously segmenting packaging and printing, but it would be fair to say it is 2 million to 2.5 million impact was arguably three times what it was in the prior periods?

Because it certainly was like a deeper compression in packaging this quarter.

On the profitability thing, [indiscernible] obviously if your sales are slowing down usually what you do as a good businessman is reduce your costs as we're building this division for future growth and we look at what's in the funnel and we think we will convert. You are quite right for that factory, not all the other factory but just that factory this quarter was a little soft.

If you’ve also to remember that in January we lost our number 2 customer in that factory because they got sold and we’re in he process of rebuilding the funnel with the acquirer. So we have two stress and instead of reducing costs we're adding costs.

We have increased the capacity of the factory by 25% and we installed new equipment, so obviously we’re not concerned about that from a quarter to quarter result, but certainly in Q3 we felt the pain of little bit less value because of the two reasons I mentioned with customer and adding costs instead of reducing cost. So obviously we feel a little more in Q3, but we're quite positive about what we're doing and the long term plan for this factory.

Maybe one quick question for Nelson, Nelson, I think it might have been in the prior quarter or perhaps elsewhere, I was under the impression that second half EBIT was expected to be relatively flat year over year. Is that something still anticipated?

Or we're likely to see still bit of a year-over-year weakness just given the Q3 dynamic?

I think just on your first point, we don't give guidance. I don't think we have ever said EBIT would be flat in the second half of the year I think when we guided for the limited outlook that we give in our numbers, we did say that the quarter would be a bit weaker but what we did say as well is that we saw greater weakness in print in Q2 and that we would see an acceleration of the improvement in Q3 if you remember because in Q2 we said we had a drop, we had some secular declines in revenues but we had less cost catalyst but since that time we have executed obviously the closure of the plants and in addition to that in this quarter we said we would start to print the Toronto Star which we did in July.

We picked up some volume from our retailer and so that decline actually sequentially is improving in print and I think if you look at our guidance or our outlook that we give, we continue to see that improving as we go into Q4. So as we're going through Q2, Q3, Q4, print year-over-year is improving, but on an overall EBIT side, I don't think we gave any guidance.

In media we're telling you now that we still see a very difficult advertising market but what we see is the work that we have done on the cost side, we hope will offset a large significant part of that. I think on the packaging size, what you are hearing is that the inventory adjustment has gone either way side we do have slowness in one of our customers, but that we expect certainly at the tail end of the next quarter and during the beginning of the following quarter, that year over sequential decline is going to slow.

Just first in Capri, [indiscernible] have you ever quantified the impact from that?

No. We don't disclose information about customers, not really our job, we’re trying to guide you in terms of what's happening in the factory and the factory is more touchy as this customer represents a very large scale of what's happening in that factory.

We never disclose that.

No, sir, the last customer that was acquired, the impact.

The size is about a $5 million customer.

That’s annual?

Yes, annual.

So maybe just on Robbie, the margin profile on that business versus Ultra Flex, there is a few hundred basis point difference in the margin. I am just curious if there's anything you can do whether it is with headcount or anything to get that of or is it really just the function of the product offering of what you are doing?

The margin obviously, you have seen only a month of results, I don't think the first month is indicative. But I can tell you the EBITDA margin of this Company is a little bit lower, but the other companies that we acquired so far because of the market they are in and the way they go to market, but in terms of improving, we don't have any plans of reducing the cost in that sense.

Most companies we buy we buy them for their growth prospects or we intend to grow them. Obviously where we could improve the margin is working on the cost side of things, working on our supply chain with our supplier and as we grow, we're buying a lot more material and we're getting to be a bigger customer for our suppliers and obviously some advantage come with that and we intend to take advantage of that but from an operations standpoint, we're looking not to cut costs but to add value in the factories that we’re buying.

Okay. And maybe one final with Ultra Flex, maybe just remind us where we're with that, I think there is some new equipment that’s coming, when that arrives when that wraps up or when that’s operational?

The new equipment has all arrived it has been commission as we speak, there is actually one piece that has not came in that will come in just before Christmas, but the bulk of the equipment is installed. Some is commissioned and running in the finishing aspect and illumination aspect and the printing aspect I think is a matter of a couple of days when it's going to start to produce sellable material in terms of the pouching [ph] equipment, 50% of the capacity is running right now has been installed and the rest will be just before Christmas.

Okay, I believe that’s now speaking, you said in the past it would be for new product for that business, I'm just curious is the equipment similar to what's running their now? Or if it's different do you have sort of people familiar with it?

I'm just wondering how the smooth that will be.

The printing equipment is similar but just wider, faster and more automated and more efficient. So it's not an issue in terms of a learning curve, it's actually going very, very well.

In terms of elimination equipment is exactly the same, of what we have, so this is a shoo-in, there is no learning curve. In terms of the pouching equipment, it is giving us new abilities that we did not have the before.

There is pouch with certain attribute that we couldn’t manufacture before. Actually it's manufacturing some pouch that there's a shortage of capacity of manufacturing those types of pouches in the marketplace right now.

This is not exactly what we were doing but we feel very confident that in that factory we were doing all sorts of pouch for various verticals so we’re not nervous about enough learning curve of those machine and the one that has been running for 2.5 months now is running very well and we have no issues. So we don't really anticipate any issue or learning curve.

The costs we incur is that once you install that, you’ve additional people to run these things, but it's been a smooth start of the equipment so far.

Just Francois one follow-up from me, in your comments, just walk through the different segments of the business, just broadly speaking when you look at specifically your magazine printing and newspaper printing side, if you would kind of strip out the Toronto Star, can you just give a big picture, a couple of comments on just what kind of decline trajectory you're seeing in those two segments? And just more interested in is it a steady decline as we all know the structural issues out there, DSE it accelerating in terms of decline, I guess alternatively to ask the question, are there any kind of inflection points that really changed the trajectory of the underlying kind of weakness in those two segments?

Yes. Both markets are double-digit declines.

We looked at our business book, magazine book is actually growing for us, but magazine is certainly declining depending on the type of magazine for us 10% to 15%. So this is a very severe decrease and I believe that our customer are suffering as much if not more in there, ad revenue, so I don't see any slowdown of this.

I don't see any bright spot. So this is a market where we know what's coming and we're planning for it and we're not dreaming.

So this is going to remain a tough market and I believe in the months or years to come some magazines might only have the financial model to go digital which will is not be a good thing for us but it's not the core of what we are doing at Transcontinental printing magazines, but it's certainly a market that is under pressure right now. Newspaper market in terms of decline of copies is very similar in terms of percentage of decline.

Having said that, as you know very well, Drew, a lot of our contractual agreements kind of isolate us a little from those declines so we're not suffering as much but certainly from a medium standpoint, a 15% decrease would probably be the right number and again there, not a lot of sign of rebounding in positive territory. So obviously for us we have to combine our retail flyer, printing volume with our newspaper printing volume in the same factory.

So as we create capacity in a sense in the newspaper printing because we need to print less copies for our customers, our strategy is to print more retail flyer's on those equipment as they are the most performing assets and to try to win new business in the industry like we did with the Toronto Star and business when you could create a win-win for both corporations, I think this contract with Toronto Star is a big win for the Toronto Star and it's a big win for Transcontinental and I think it's good for both companies so we’re looking forward to do more of these but certainly the fact that the market is under a lot of pressure, kind of help having our business model of outsourcing or printing if you still do it being more on the radar screen and we certainly continue to be active trying to print other people within our network of newspaper.

Thank you everyone and talk to you in December.