Jennifer McCaughey - Director of IR François Olivier - President and CEO Nelson Gentiletti - CFO and Development Officer

Paul Steep - Scotia Capital David McFadgen - Cormark Securities Haran Posner - RBC Capital Markets

Thank you, operator. Good afternoon ladies and gentlemen and welcome to our first quarter 2015 financial results conference call.

Joining me today at our Head Office in Montreal are François Olivier, President and Chief Executive Officer and Nelson Gentiletti, Chief Financial and Development Officer. We will first conduct a prepared question-and-answer period which will highlight some hot topics and then open the lines for any remaining questions you may have.

I would like to remind you that this conference call is intended for the financial community. Media are welcome to listen, but should contact Nathalie St-Jean, Senior Advisor, Corporate Communications for more information or interview request.

For a detailed analysis of our results in addition to our press release, we issued our first quarter 2015 MD&A with complete financial statements and related notes earlier today. For those of you who are not on our distribution list, the documents are posted on our website at tc.tc.

Before we start, I'd like to also remind everyone that the information that will be discussed over the course of this conference call may contain forward-looking statements. Such statements based on the current expectations of management and information available as of today, inherently involves numerous risks and uncertainties, known and unknown.

We caution that by their nature, all forward-looking statements are inherently uncertain and actual results may differ materially from the expectations reflected or implied in such forward-looking statements. The risks, uncertainties, and other factors that could influence actual results are described in the 2014 annual MD&A and the latest annual information form and have been updated in the MD&A for the first quarter ended January 31.

These documents are available on TC Transcontinental's website. TC Transcontinental undertakes no obligation to update publicly such forward-looking statements to reflect subsequent events or changes in the expectations, assumptions, or estimates unless otherwise required by the Securities Authorities.

Let me now begin with the prepared question-and-answer portion of the conference call. Nelson in order to set the stage can you provide a brief summary of TC Transcontinental's strong profitability results for the first quarter?

We had very good results with adjusted EBIT increasing 22% to $53 million mainly due to acquisitions, new contracts announced last year and foreign exchange. The increase also stems from cost reduction initiatives across both sectors including the closure of two printing plans in Ontario and Edmonton.

It was however mitigated by lower advertising revenues in both sectors and higher stock based compensation expense. Net income applicable to participating shares more than doubled the $38 million or $0.49 per share mainly due to our higher operational profit.

Adjusted net income which excludes unusual items increased 37% from $26 million, the $36 million or from $0.34 to $0.46 per share. Our consolidated revenues increased by 1% to $505 million stemming mainly from the contribution from the acquisitions of Capri Packaging and the Sun Media weekly newspapers, as well as from several new printing and distribution agreements announced last year and favorable foreign exchange.

Offsetting these partially was the impact of the divesture of Rastar, lower volumes from our marketing products printing segment and a transitional slow down in our flyer printing operations in the U.S. and to a lesser extent in Canada and lower advertising revenues which affected our consumer magazines and local community newspapers in the media sector.

François, despite a very challenging advertising market, the media sectors profitability improved again this quarter. It was driven mainly by new distribution agreements announced last year to Sun Media acquisition and cost reduction initiative.

Can you provide an update on the Sun Media synergies?

The profitability in the media sector continues to improve this quarter. We reported an improvement of $8 million to adjusted EBIT.

This demonstrates that our strategy to consolidate the local market in Quebec and optimize our cost structure is bearing fruit. In the last 11 months, the Sun Media acquisition has progressively contributed about 9 million to profitability in both the trend and media sectors.

We expect that most of the remaining synergies will be realized in fiscal 2015. However, a portion of these synergies are likely to be mitigated by the challenging advertising market.

François, on March 2, The Competition Bureau approved the sale of TC Transcontinental's consumer magazines to TVA Group. Can you provide the financial impact of this transaction on your results going forward?

We are very pleased that this transaction has been approved by the regulatory authorities. We expect it to close in the coming weeks, in the mean time it is business as usual.

As a reminder, we are selling the consumer magazine business for $55.5 million to TVA Group. Note that starting in the second quarter these assets will be presented as discontinued operations.

On an annual run rate basis, we expect the transaction to be about neutral at the profitability level, as we plan to implement additional cost reduction initiative to compensate the EBITDA that was sold. However, as the causing of the transaction is later than originally anticipated, we may have a negative impact in fiscal 2015.

Going forward, the media sector will focus on the local market which we believe offers us more business opportunities to our 180 newspapers in Quebec, Ontario, Saskatchewan and the Atlantic Provinces. Furthermore, we will continue to grow our educational publishing, business publications and interactive marketing services.

For 2015, we anticipate the profitability of the media sector from continuing operations to be higher than last year. This will be driven by the synergies from the Sun Media acquisition and the cost reduction initiatives.

However, I would like to highlight that the level of profitability upside as compared to last year is also greatly dependent on the advertising environment.

François, while the printing division's profitability is stable and it continues to increase its EBITDA margins, organic revenues have declined. Can you provide some color on where the decline is coming from for this quarter?

Our printing revenue declined this quarter for three main reasons. First, we experienced lower commercial printing volume and our marketing product segment which is our lowest margin business in printing primarily driven by lower advertising spending, market erosion and business we are intentionally letting go due to our portfolio repositioning.

We have stated many times in the past that this segment is the most impacted by a shift from advertising dollar from traditional platforms to digital platforms. Recall that we are in the process of converting this business to a more contract based business, namely through the development of point-of-purchase materials.

While the POP business is progressing very well, it is not enough to compensate the loss in volume. Second, we experienced a transitional slow down in our retail flyer printing operations in the U.S.

And as since we lost our portion of volume from a U.S. retailer customer in the first quarter, which we have since replaced in February with another U.S.

retailer. Therefore, the volume gap going forward will be eliminated.

Recall that this is volume that we are producing in our Fremont, California facility. Finally the retail flyer market in Canada was softer in the first quarter versus the same time last year.

The main reason is that some customers cut back on spending after acquire holiday season and this was amplified by the exit of Target from the Canadian market. Recall that last year we had experienced increased volume as retailers were responding to Target's entry into the Canadian marketplace.

Having said this, we do not see a trend of lower retail flyer volume on the horizon. In fact for fiscal 2015, we believe the retail flyer volume will be relatively stable and not any different as in the past few years.

For 2015, the printing division will continue with a strategy of optimizing its cost structure and focus on developing additional revenues particularly in newspaper outsourcing and point-of-purchase materials. Our acquisition and packaging will also continue to contribute positively in 2015.

The integration of Capri has been very successful. In fact we have started to build the sales team and have had discussions with potential customers and are very encouraged by possible future developments.

Recall however that the sales cycle is very long in this business and we therefore do not expect a material impact of new business on 2015 financials.

Nelson, can you review of use of cash in the first quarter and provide an overview of TC Transcontinental's priorities for 2015?

I'm happy to report that TC Transcontinental continued to generate strong cash flow. In the quarter we generated $76 million of cash flow from operations before working capital changes and taxes paid compared to $66 million last year.

In the quarter we invested $19 million in capital expenditures including intangibles. We also distributed cash to shareholders and paid $13 million in dividends or $0.16 per share to holders of participating shares.

As mentioned in our Q4 conference call, since our tax loss carry-forward was related to our Quad Acquisition were fully used. We also paid $41 million in cash taxes compared to a positive adjustment of $3 million last year.

Essentially this amount is the combination of tax payments for 2014 and tax installments for 2015. The remainder of the funds were used to pay down debt and interest payments.

In the quarter, we also extended our $400 million credit facility for two additional years and repaid a U.S. debt of $50 million.

As of January 31, we had $118 million drawn on our credit facility and the majority of our main debt matures at or after 2019. We remain in a strong financial position with a net debt to EBITDA ratio of 1.2 as of January 31.

For 2015, our objective is to maintain financial flexibility for potential acquisitions primarily in the packaging. However, we will continue to prone a multi-pronged approach to capital allocation.

Today, we announced a 6% increase in our quarterly dividend and we will continue to pay down debt, invest in capital expenditures and as always return value to shareholders in the form of dividends. If we do not close an acquisition in the next 12 to 18 months, we will then revisit our capital allocation priorities.

Nelson, TC Transcontinental does not provide any specific guidance on profitability but what information can you share with the financial community for 2015?

For 2015 P&L, you should model the following; revenues from the newspaper printing agreements with the Gazette started in August 2014, and the Vancouver Sun which started in February 2015. Revenues from the printing agreement signed with Quebecor in 2014, contribution from our two acquisitions namely Capri which closed in May 2014 and the Sun Media weekly newspapers in Quebec which closed in June 2014.

Continued cost cutting efforts across the organization, controllable corporate cost at the EBITDA level above 2014, interest expenses close to the 2014 level, a tax rate in the high 20s, and also finally take into consideration that we continue to operate in the challenging advertising environment which will put pressure on our volume in some of our niches. Also note, that our consumer magazines will be accounted for as discontinued operations starting in Q2 of 2015, and that this may have a negative impact this year since the transaction is expected to close later than we had originally anticipated.

However, on an annual run rate basis, we expect this transaction to be about neutral at the profitability level. In terms of use of cash for 2015, you should assume the following; an inflow of $55.5 million and you should net from that applicable taxes when the magazine sale is completed which is expected to be in Q2.

A maximum of $75 million for CapEx including intangibles and annual cash taxes are expected to be around $50 million for the year, the bulk of which was paid in Q1 of 2015.

Thank you, François, and Nelson. This concludes the formal part of the conference call.

Operator, we are now open for questions.

François maybe we could start with your commentary around transitioning some of the business on the printing side presumably related to marketing products and potentially some of the commercial print. Could you talk about the magnitude of how much there is in that business to go, as well as maybe the transition time as to when you think that's going to move off and how much volume you would have to try to replace there?

Yes. In general, what we are trying to do is we are trying to enter some vertical where we could have more long term contractual business, as opposed to commercial business that is put out for bid and we have a lot printer bidding on that.

So we have built the PLP business to above $40 million. And another thing that impacts some of those decision or the speed of which we do the portfolio management or exiting some businesses there, when we shut down some operation or some factory, we take a hard look at all the book of business, and we tend to only transfer the business that fit our long term view.

So, I would say that sometime the closure of factory do accelerate some of those decision as we don’t want to redeploy additional capacity or expense for business that we don't foresee it as being a long-term growth opportunity for us. So, this is something that sometime accelerate the decrease in commercial printing volume when we shutdown factory.

But this is kind of what I can tell you as far as what is going on right now.

Okay. And then on Sun Media, with the integration plans, how are you feeling in terms of maybe where you’re tracking and then the timing - I think indicated color to most of the impact was going to hit 2015.

Are you through most of the execution steps and it’s the numbers showing up or is there still lot more in the plan left to execute?

No. This transaction was announced last year and some of the relationship between us and QMI or Quebecor are started prior to the media assets being transferred to us mainly in the printing division, where we started to produce some work for Quebecor last year in February.

So since February it slowly started to contribute on the print side, then it started to contribute on the media side a little bit in June, when the transaction was closed a lot more in September, when The Competition Bureau finally - and in the process of divesting some papers. So from a publishing standpoint we really only started to execute our plan, let’s call it October and most of the decision that needed to be made are made.

So right now, we’re operating in an environment where all decision have been made and that's why we expect the remaining synergy to hit the P&L in 2015. Having said that, some of the synergies are - we call it market related, we expect to sell a lot more of our digital product in the market where Quebecor were organically present.

That's our plan. That's not like cutting cost, you need to go and sell the product.

So far it has been a good success but to answer your question, all the decisions are being made and based on what we control we feel that we are going to hit the mark with the $20 million which is split about two-thirds in media and a third in the print division.

Great. Last one from me is just on Capri, which sound by your comments that management and the board presumably are more comfortable getting ready to maybe move forward in the packaging world but potentially another transaction.

Could you remind us what your criteria are in terms of how we should think about what you'd look at?

It’s a very good question. We add a lot of hypothesis that we put on the table when we enter that market.

And we own Capri since May and now we are comfortable with all that our hypothesis are turning to be true. We’re very happy about the transaction and we are now more comfortable about the flexible packaging market.

We build the sales force that was not existing in the Capri organization then we are starting to really respond to our in a very credible manner with some customer. So basically yes, we are more at ease and we are very active in terms of trying to do some organic development, but also on the M&A front - obviously on the M&A front, some of our criteria would be something that is close to what we have acquired in terms of manufacturing capabilities at Capri and something that would be adjacent to the vertical we’re in or offer us new vertical than the one we are in.

And we want to go at it very prudently and we want the second and third move to make sense and integrate well what we have acquired to create a little bit of network of factory. So we’re very happy with the purchase and then we’re spending a lot of time trying to figure out that the next move both organically and through acquisitions.

Great. Thank you.

Hi, I just want to follow-up first of all on, stemming in May, and you said if you don’t close acquisition - I figure out how many months was it? Can you remind me how many months was it?

Dave we said 12 to 18 months.

12 to 18 you revisit your capital allocation strategy. So you’re talking about an acquisition here, is that primarily in the packaging space or is it just any large acquisition?

Yes I think in the prepared remarks that we said that we would expect the deployment of capital to be principally in the packaging space.

Okay. And so when you talk about revisiting your capital allocation strategy, does that mean to - and further if you don’t do an acquisition in that factory, you would do a one time special dividend or increase your dividend or buyback stock or can you provide anymore color on that?

I think the only thing we could say is we have the leverage ratio today of 1.2 and if you look at the cash flow profile of the company, we generate well north of $100 million a year of free cash flow after CapEx and everything else. So, its clear that in 18 months if we don’t make any sizeable acquisitions then our leverage ratio would be probably below 1.

So certainly we would revisit what we do with the structure and I think it could be I’m not saying, I don’t know it would be a special dividend, not likely but I mean I guess anything is possible. But I think it is always with us a combination of relooking at our annual dividend policy, looking a share buybacks, could it be special – it could be any combination up there - but I think it’s for us it is way too early to speculate about that.

I think our focus is as we said in the plan is to grow the company. I think we’ve got, we believe great opportunities leveraging the assets that we’ve bought from Capri to build a sustainable growth focused business in packaging.

And that’s really where our efforts right now are focused.

Okay. And just reading your press release, you talked about growth in packaging in this kind of thinking that you might close an acquisition, another acquisition in your 2015 year, do you think that is a possibility or probably not going to happen this year?

It’s always a possibility, we’re working very hard but we are very diligent to have the right asset at the right price. And we have the mean to be patient to find the right second move and we want to buy a growth platform and we want to make sure we choose the right next move.

But yes it's a possibility that it happened in 2015.

Okay. And can you remind us what the Capri capacity utilization is right now, it hasn’t changed right since the acquisition?

No, we have room to increase the volume as we have started to work with them on improving their operational efficiency. So we are helping them finding a new capacity with the same asset that they have and we are planning also to do a little bit of CapEx in that operation, it is a very efficient operation to improve the capacity in the months to come.

So, correct me if I’m wrong, but I believe that when you acquire that asset it was running around 70% utilization is that true and haven't changed much?

Yes, just to give you numbers, this plant is generating about $75 million of sales right now and we think we could bring it roughly to about $100 million without sizable CapEx and then if we do a little bit of CapEx, we could probably bring it to 1.5, 1.30 in terms of capacity. So a problem right now is not the capacity is we need to win some organic sales growth and we're working very hard to do just that in the coming months.

Okay. And then in your press release you talk about the fact that that you’re pursuing the possibility of printing for another newspaper publisher, do you think that's a reasonable probability that you would win another contract this year in 2015?

The answer is yes about the possibility of winning. About the timing it’s very hard to predict because these deals are very significant decision for the publisher when you produce your own newspaper, and you have people, and you have assets, and you have – you’re letting go apart of your business.

So these discussions tend to be much more than what's your price, it's a whole process of how you outsource this and how you get out of part of your business and outsource that to company like ours. So it’s a very, very long process to make those decision happen.

So what I can tell you is that we have a lot of discussion with a lot of people who are printing their paper internally right now. I feel that we will be successful in the future as far as when this is very hard to comment upon right now.

Okay. That's it from me.

Thank you.

Thanks very much. Good morning.

Just a couple of follow-ups from me. First maybe on the TVA magazine sale, Nelson I think you mentioned something with respect to taxes.

Can you just remind us what the net proceeds you’re expecting from this sale?

I think what we mentioned is obviously the gross proceeds are $55 million and there likely will be although we can't - we are finalizing there are now some tax implications associated with the sale of this asset. But as a reminder, the asset is accounted for as a capital gain.

So obviously you’re only paying tax on the tax rate on half the side. So we expect that there will be some taxes and we will be able to kind of affirm that up as we get closer to the sale.

But on a net basis obviously it will be a nice chunk of cash coming into the company.

Okay. Thank you for that.

And then another question just with respect to Target, you fled the impact on Canadian flyer printing spend from competition. You guys also distribute the targets flyers in Quebec.

I'm just wondering if you can help us just quantify the impact on that one?

As far as the business of printing flyers, I think what we see right now is a lot of retailers are ramping up for the rest of the year. A lot of our customer have announced store opening and all that.

So we expect the year to unfold normally here in the Canadian retail landscape for us as far us printing flyers even though January was a little bit more soft. We don't see any change.

For us obviously there is an impact of the Target exiting the market. The first impact is on opportunities take on, we felt that we had a chance to win the flyer business in the near future.

Now that's not going to happen. So we lose a very big opportunity to regain our former volume from Zellers in the past.

So, that's not going to happen. From the distribution standpoint we were the distributor of Target for flyers in the East of Canada.

Obviously we are going to lose that and this is the couple of million dollar for our media operation both in Quebec and the Atlantic Province. So that was like the other retailer, couple multimillion dollar account and distribution that is going away.

Okay. That's very helpful François.

Thanks for that and then maybe lastly just a follow up on the Packaging acquisition opportunity. Just wondering if you would comment on sort of the competitive landscape when you're looking at some of these opportunities that come up.

How competitive is the market for new assets and you’re successful in acquiring Capri for less than eight times EBITDA, just curious if you would comment at all what you see as a reasonable price to pay for these assets?

We want to pay a fair price for assets. We will not be blurred by the very high multiple that are going on right now in this market and we know that historically the value of those assets is around seven or eight times.

Right now they are trading for more than that. But we feel that we have a pretty good story to tell in terms of our plan and our growth profile in that industry and we feel that we could have access to some assets that fit our strategy and that we could afford at a reasonable multiple based on the quality of the assets.

That's great. Thanks very much.

Thank you everyone for joining us today. And we'll speak to you at our Q2 conference call.

Thank you.