Shirley Chenny - IR François Olivier - President and CEO Nelson Gentiletti - CFO

Adam Shine - National Bank Financial David McFadgen - Cormark Securities Matthew Griffiths - Bank of America

Thank you, Julian. Good afternoon and thank you for joining us for our year-end 2017 financial results conference call.

The press release and MD&A with complete financial statements and related notes were issued earlier today. For those of you who are not on our distribution list, the documents are posted on our website at tc.tc.

François Olivier, President and Chief Executive Officer, will provide key operational highlights of the year and some guidance for 2018. Nelson Gentiletti, Chief Financial and Development Officer, will join us for the Q&A session.

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

Please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. Please refer to the MD&A for complete definition and reconciliation of such measures to IFRS financial measures.

Also, this conference call might contain forward-looking statements. Such statements, based on the current expectations of management and information available as of today, inherently involve numerous risks and uncertainties, known and unknown.

The risks, uncertainties and other factors that could influence actual results are described in the 2017 annual MD&A, and the latest annual information form. I would now like to turn the call over to François Olivier.

Thank you, Shirley and good afternoon everyone. Once again, I'm very pleased with our results this year.

We achieved a solid performance, as we continue to execute on our transformation. Before commenting on our yearly performance, let me briefly talk about our results in the fourth quarter, which on appearance contrast with our first nine months.

Our quarterly revenues were down $28 million year-over-year. However, if you exclude the impact of our strategic decision of selling our newspapers, and some other small media assets as well as the effect of the exchange rate, revenues increased $3.3 million in Q4, thanks to the contribution from our packaging acquisition completed in '16 and higher organic growth in that division.

On the profitability side, you will recall that we ended 2016 on a very high note, making it a tough comparable. Having said that, our operational performance was similar to last year, if you exclude the negative impact of about $2 million for our assets dispositions, $3 million for foreign exchange and $3.6 million on favorable impact of the share price variation of our stock-based compensation expense.

Acquisitions and cost-reduction initiatives are beyond our good operational performance in Q4. So in fiscal 2017, we recorded for a third year in a row, the best profitability in our history.

We continue to improve it, while executing our transformation and maintaining a strong balance sheet. As you know, our plan to enhance our growth and profitability for the long-term is threefold.

First, optimize our printing platform, which we did again this year by improving our print sector profitability. Second, strengthen our media portfolio, which we accomplished by divesting our newspaper assets, while improving the media sector profitability.

And finally, third, diversifying our offering into flexible packaging, which we also accomplished by posting solid organic growth and realizing one acquisition. For the past four years, we have remained on track with the implementation of this strategy.

I would like to take the opportunity to acknowledge the outstanding work of all TC employees. Our dynamic and highly aligned team diligently executed our plan once again and delivered great results in 2017.

Our top line remained relatively unchanged at $2 billion. However, if we exclude the impact of our asset disposition and foreign exchange rates fluctuation, our revenues increased by $59 million [ph] or 3% over 2016.

Acquisitions completed in fiscal 2016 and new business, where we were successful in securing in both our packaging and printing divisions contributed to this increase. As for our profitability, excluding the aforementioned factors and the impact of the share price variation on our stock-based compensation expense of $17 million, adjusted operating earnings grew by $24 million or 8% over 2016.

Again, this great operational result came from acquisitions, organic revenue growth and cost-reduction initiatives. This operating performance contributed to our strong cash flow generation, and we improved an already solid balance sheet.

Our net debt-to-EBITDA ratio now stands at 0.3 times. This will enable us to maintain our course of growing our flexible packaging business into sustained dividend growth.

Now, let's take a deep dive into our operations. In 2017, our printing division, once again, had an exceptional year.

Our retailer-related services revenues, which represent 60% of the division's revenues, namely printing of flyers, and in-store marketing products as well as premedia and distribution services increased by 2%. Overall, retailer-related services volume in Canada increased, and the additional volume from our agreement with Lowe's Canada also contributed.

Printed flyers continue to be an essential marketing tool for driving customers into stores. For the other 40% of our printing business, persistent pressure in the ad market continued to have an effect on the newspaper, magazine and commercial product verticals.

Revenues were also negatively impacted, as 2016 included revenues from printing the Canada's Census forms. However, the contribution of the Toronto Star agreement partially offset some volume declines in these verticals.

To cope with reduced volume, we took steps, once again, to reduce our costs to several optimization initiatives. After our year-end, we also announced the consolidation of our newspaper printing activities in Quebec and consequently, the closure of Montreal-based Transcontinental Métropolitain in late January 2018.

This decision was made due to the decline in the newspaper printing market, and more specifically in connection with the upcoming end of the printing of the La Presse newspaper. The remaining printing activities at this plant will be transferred to other facilities in our network.

This will enable us to optimize further our newspaper printing platform in order to stay competitive. Overall, the printing division's profitability was up again, as we benefited from strong demand for our retailer-related services, from contract wins in 2016 and in '17, from improved efficiencies and from year-over-year impact of plant closures in the previous fiscal year.

On the media side, in 2017, we refocused our activities to our business and education portfolio, as we made the decision to sell our portfolio of local and regional newspapers. We sold our media assets in Atlantic Canada and we have sold, as of to date, the majority of our Quebec and Ontario properties.

Our media sector now represents about 5% of our consolidated pro forma revenues. Our business and education group generates its revenue from various sources, with 75% of revenue being non-advertising based.

And in 2017, this group delivered a good performance, since it's well ahead in its transformation. We strengthened our portfolio, thanks to the acquisition of B2B brands at the beginning of the year, and our educational book publishing activities continued to post very solid results.

The plan for our media sector will be centered on strengthening our offering in our specialty brands for the business, financial, construction sector and in our French language educational book publishing activities. Turning to our Packaging division, in 2017, the investments we made over the last few years in our manufacturing platform and in our sales force enabled us to achieve organic sales growth of about 6% in 2017, as several customers win, finally moved to the production stage.

As I mentioned on several occasions, the sales cycle and certain verticals in the packaging industry are particularly long, but we are now seeing the results of our efforts. And we expect to continue to see strong organic growth in fiscal 2018.

We have successfully completed the integration of Robbie Manufacturing and Flexstar. We are very happy with these acquisitions as they provide us with additional capabilities, very talented management teams and highly skilled work forces.

On the acquisition front, we continue to be very active in developing further the relationships we have built with potential prospect as well as cultivating new ones. This led, after our year-end, to the acquisition of Flexipak, a Montréal-based company.

With this transaction, we extend our footprint in Eastern Canada. We are already planning to enhance the asset base of this facility.

And given the markets it serves, we're also planning to leverage our existing business relationships with Canadian retailers. Finally, we remain optimistic in our ability to conclude future transactions.

In conclusion, looking back on the year, I am proud of our accomplishments and of our people, as they face on a daily basis many challenges that we have successfully turned into opportunities, to accomplish the priorities outlined in our strategic plan. In 2018, for our printing division, we expect that revenues from our retailer-related services will remain relatively stable.

For the remaining 40% of our print portfolio, we will continue to proactively manage our capacity and our cost base corresponding to the activity level in the Canadian printing industry. Also, we will deploy less CapEx than last year.

Nonetheless, we expect this division to continue to generate significant free cash flow in fiscal 2018. And in our media sector, we will complete the divestiture of our local and regional newspaper portfolio in Quebec and Ontario and we expect another good year from our $100 million media portfolio.

Finally, for our packaging division, we expect continued solid organic growth in 2018 and we will benefit from the contribution of our Flexipak acquisition. On the cost side, we may be negatively impacted by the temporary disruption in resin supply caused by the hurricane in the US this past summer.

Finally, we will remain active on the M&A front to further build this division. With that, we will now proceed with the question period.

Thanks a lot. Obviously, this was well telegraphed as a tough comp and some challenges versus last year.

Maybe you can just zero in, in terms of printing and packaging, and sort of direct the questions more specifically to packaging. François, you talked about the year and the organic growth, which was quite strong around 6%.

Any additional color around the Q4? The Q3 organic growth was up in the high single digits.

My presumption is that maybe organic growth in packaging in Q4 was more mid-single unless you want to qualify it as maybe closer to lower single digits. And also, on the context of margins, I'm assuming that most of the year-over-year margin pressure in that overall group, printing and packaging, was related to printing.

But would you say that margins grew year-over-year, specifically related to packaging in the Q4? Thanks

Yes. Relating to the organic growth, we're happy with that.

Like in this business, one shipment of one customer in one quarter can make a big difference, as our asset base is not that big and we have some relatively large customer in our portfolio. So I'm happy with that.

And we expect to do as good and probably better next year. So it's just one quarter.

But we think that we're going to do the same or probably better than last year in terms of organic growth with which what we have in the funnel. And in terms of the margin, obviously, when we have organic new customer or new piece of business in the print division, the contribution to the bottom line is a lot higher than in packaging, because in packaging, we're building the asset-base, we're installing equipment, we're training people, we're launching new products.

So obviously, the conversion rate is a lot lower in packaging for now that it is in the print business, where our asset-base is there for many years and fixed. And you’re, about the margin, you're right.

Like, there's always, when you run a big, big platform like the one we run in print, you have the regular business and you have some little unusual that are positive and negative. I could comment that in Q3 this year, we had some positive unusual in print.

And then, not so much in Q4 this year, which was the other way around, next year. So if you recall, we had a very, very strong Q3 in terms of margin in print.

And then this Q4, a little bit less. When I say a little bit less, it's still 23% something margin.

But this is the difference, Adam. Like no difference when you look at the regular business and the regular margin.

Not a lot of difference between Q3 and Q4. It's just those unusual that are playing a role here quarter-to-quarter.

Okay. And I don't know if Nelson is on the line.

So I'll ask the question to you, François, maybe Nelson can pop in. I mean, well, it's interesting in the context of corporate costs, Nelson, obviously alluded to $30 million of corporate cost for the year at the time of the Q3 reporting.

And then we got the spike up in the share price, thereafter, which would have otherwise suggested we'd run above, well above $30 million. You guys came in at $30.5 million, which suggests that may there was a little more work done in terms of cost savings at the corporate level.

Can you François or Nelson speak to that? And then, related to that, you guys usually give around Q4 reporting the go ahead, sort of details in terms of corporate cost for F18 and a few other CapEx and other metrics.

Are you likely to do that, again, this year? That’s it for me.

Thanks.

Yes. So, Adam, just to cover all your points, you're absolutely, right.

We had guided to $30 million for the costs. But I think if you look at the breakdown, we had a spike in the price of the stock at the end of the quarter.

And I think the anomaly we have is actually the increase would have been -- is actually higher than people would have modeled because we typically close on the last Sunday. And we take an average of the last five days of the price of the stock.

And so because you had a spike, at the back end, right, like that -- so likely, there is $3 million to $4 million of costs, we have more on the share price than would have been modeled at the time. And you're right.

Once you factor that out, there's a couple of million dollars of corporate cost that we came in lower than we had expected. Some because we did a good job, I think, because we've been obviously pushing hard at reducing those corporate costs in anticipation of the media business, obviously, leading our portfolio.

But also, we have a little bit of timing on some of the costs. We're expecting certain costs to come in slightly higher and so we might have a bit of a lag on that.

To answer your second question in terms of the modeling looking-forward, we'd be guiding right now at corporate costs at the EBITDA level for next year at above $25 million. And with the same $1 per share price roughly, as the impact on the stock price.

And as far as CapEx, we're planning for about $50 million next year.

Hi and thank you. A couple of questions.

So first of all, just on organic growth. When I look at the printing and packaging sector in Q3, the organic revenue growth was positive 0.7%, this quarter was negative 2.0%.

Adam touched upon the packaging organic growth being bit lower this quarter, was there other factors? Was printing down as well?

Well, I think, one of the main thing is what I mentioned, the way we close the month every year, like, we had a little bit more activities in Q3 that were recorded, where we close and when we execute the retailers campaign. So we had a little bit more revenue recognized in Q3 compared to Q4.

That's, I would say, the main thing. You could say that the retailers were a little bit more active.

In Q3, I think, our organic growth in retail was more like close to 3%. This quarter, it's more around 1%.

But it's -- these are the two factors, a little bit less copy could be in the product mix they're buying to. I know our plans were pretty full in the quarter.

But what the customer ordering, how much we're billing them for that. So you put all of that together, that's the little difference that you see in print at the sale.

And then like I mentioned on the profit side, it's just unusual, things like supplier/volume discount that were recorded in one quarter instead of another and stuff like that, that could add it up to a couple of millions rather quickly. But there's no -- like the business been solid all year around, and it's been solid in Q4.

And we expect the retail-related services to be strong in 2018. So no material change to our booking or customer behaviors.

And so when you look out to 2018, just on the printing side of the business, do you think you could hold that business flat organically in 2018 and then have some growth on the packaging?

We have not hold the print business flat organically for the past 6 or 7 years. We've hold the retailer-related services in the zone of plus 2% to minus 2% for the past 6 or 7 years.

So that's 60% of our portfolio. But the other portfolio, which is -- the other 40%, which include newspaper, magazines and commercial has been declining, in some case, double digits for years.

So when you put 60% of the portfolio stable or growing and 40% declining, for the last 6 or 7 years, we've been able -- we've declined sales, I would say on average 2.5% to 3%. That's what we see going forward.

But on the bottom line, we've been able, every single year, to find a way to increase profitability by managing our costs by -- and by winning new customers. So we see the same, we’re going to try to execute the same kind of recipe next year.

But certainly, it's not going to be an environment where we will see sales being stable in print. We expect the same kind of decline we've seen in the past 4, 5 or 6 years.

Okay. And you talked about potentially being impacted by the shortage of resin.

Can you quantify that at all? Or is it too early to say?

No, it's too early to say. And obviously, we don't have any problem of supply in terms of getting the material.

But some category of plastic prices went up. And we have some for most part of our customer, we have a pass-through for the price increase.

But there is a lag. Some people, we give a 30 days of break, 60 days, 90 days.

So some of the material, we bought, prices have went up. And there is a lag, so we might be affected for one quarter.

Obviously, when it's going to go back down then we don't -- again, the advantage that we gave, what we that's just a comment we're making.

Okay. And then, when I look at the balance sheet, you have a big cash balance at the end of the year.

Is there any reason why you would carry it so high? And why not you see that pay down the debt or is that prepping for potential acquisition or any comment there?

Well, one, yes, we do have a lot of cash. Two, we can't pay down the debt because the debt has fixed maturities.

And if we were to pay, we would pay that in anticipation, I mean, there would be significant financial penalties, which wouldn't make sense. And basically, right now, I think as François mentioned in his prepared comments, we are obviously active in the -- on the M&A front.

And we want to make sure that we keep that flexibility so that we can act on when we see the opportunities. So really, the excess funds really -- we've targeted really to two things, right now.

One, looking at obviously development of the company and M&A and flexible packaging, and as we mentioned before to sustain dividend growth.

Okay. So just on the dividend there, I mean, what will management be recommending to the board in terms of the dividend, given the strong free cash flow and very little leverage?

Well, we can't -- I don't think we're in a position to comment on that now. I mean, as we've mentioned in the past, we typically review our dividend once a year.

And that typically gets done when we report the first quarter. And as we get closer to that based on the facts we have, obviously, there will be a discussion and ultimately, the board will make the decision to approve the dividend they deem is appropriate to increase at that time, but that will be in the first quarter.

Hi. Thank you for taking the question.

The only thing that I had that hasn't been touched on is, just with all the talk of tax changes in the US, can we expect any impact that can show through you guys? Or have you thought about what the impact would potentially be, given the two plans that they're trying to reconcile?

Yes. Well, I mean, obviously, depending on which plan gets pushed through.

I mean, based on the news today, I mean, it doesn't look -- it looks less likely that it's going to pass. In fact, I mean, from your perspective, I mean the two things, I think, you need to look at certainly based on the cash flow we generate in the US and going forward, it's obviously very positive, because they're talking about reducing the tax rates by 15 points.

And that's really the big item to look at. The second item, which I think is important, people are aware and if you read the financials, we have a significantly large tax asset on the balance sheet, which is due to prior year losses, prior to 2008, 2009 that are sitting on the balance sheet over $100 million.

And those deferred tax assets are recorded right now at the current income tax rate that we have in the books. So if the tax rates do go down, clearly, those tax assets will be worth less, and we will have to at that point in time, when we know the change, have to take down the asset to basically, market to market at that current tax rate.

So you'll see when you publish the financial statements you'll -- the tax rate drops by a third, then a third of the tax asset will lose its value, and we'll have to reduce that at that point in time.

Well, thank you, everyone, and happy holidays.