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

Mark Neville - Scotiabank Drew McReynolds - RBC Capital Markets Matthew Gan - Cormark Securities

Thank you, Suzy. Good afternoon and thank you for joining us for our second quarter 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.

Francois Olivier, President and Chief Executive Officer, will begin by providing key operational highlights of the quarter. Nelson Gentiletti, Chief Financial and Development Officer, will then proceed with an overview of the financial results after which, the lines will be opened for questions.

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, 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 expectation 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 2016 annual MD&A, the latest annual information forms and has been updated in the MD&A for the second quarter ended April 30. I would now like to turn the call over to Francois Olivier.

Thank you, Shirley and good afternoon, everyone. Once again, we delivered good results this quarter.

Overall, the revenue and earnings increased and our leverage ratio declined. We continue to generate strong cash flow this quarter, which will enable us to drive further the diversification of our portfolio towards flexible packaging.

Our performance this quarter clearly illustrates the strength of our strategy as we stay the course with TC Transcontinental's transformation. A significant step in our optimization and diversification strategy was the announcement this quarter of the sales process for our remaining portfolio of local newspapers located in Québec.

This follows the sales of our media assets in Saskatchewan in 2016 and in Atlantic Canada in the second quarter of this year. We are convinced that selling these assets to local players is the best course of action to ensure the sustainability of local media and to foster greater connections with advertisers and communities they serve.

I would like to take the opportunity to sincerely thank our employees for their professionalism, for the quality of their work day after day and their resilience in this context of transition. We started the sales process in mid-April and it's well underway.

We are seeing a lot of interest for all of our newspapers and we are confident that a majority of these publications will find takers among solid local players. Therefore, we anticipate executing many transactions between now and our year-end.

Following the sales of the Québec papers, our media sector form of the business information and education group represent about $100 million in annual revenues. This portfolio is performing well and it's much more resilient as it is significantly less exposed to the volatility of advertising revenues.

TC media focus will be on strengthening its portfolio of specialty brands for the business, financial and construction sectors and its educational book publishing activities. Now let's continue with some key highlights by activity.

In our printing division, overall demand for our retailer-related services, namely flyers and store marketing printing services, pre-media and distribution services increased again this quarter. So far, this year, these services grew 4% and they represent 60% of our printing division overall revenues.

Regarding our newspaper printing activities, a five-year agreement we signed to print the Toronto Star, which started last July, helped mitigate the declines with our other newspaper clients. Demand for book printing continue to be healthy this quarter as we seize many opportunities in the marketplace.

On the magazine side, the advertising revenues for our customers continue to be under pressure, thus impacting our revenues. Finally, the noncontractual commercial print segment of our portfolio continues to be impacted by secular decline.

Also recall that in the second quarter of last year, we have the contribution of the agreement to print Canada's census forms. Overall the print division continues to perform exceptionally well.

Profitability was up again this quarter as we benefited from strong demand from our retailer -related services from previous contract wins and from improved efficiencies. Turning to our packaging division, we have invested in our platform and our sales force in the past quarters to enable us to grow sales organically.

We are pleased to see the impact on our organic growth this quarter. We are confident that our growth with accelerate over the next quarters and more than offset the additional costs we are incurring to support our growth plan including our capital expenditure program recently completed.

Also during the quarter, we successfully completed the integration of Flexstar in Vancouver and we're very happy with this acquisition as it provide us with additional capabilities. Finally, we will remain very active on the acquisition front.

On the media side, our business information and education group improved their profitability and post a bottom line increase. Also, the brands we acquired earlier this year from Rogers Media performed very well.

In conclusion, the execution of our strategy contributed once again to the sound performance of our operations. On the printing side, our main segments are solid and our focus to continuously optimize the use of our network remains the principal driver of our free cash flow generation.

On the media side, we are concentrating our efforts on our business and educational portfolio. In addition, we anticipate to conclude a large part of our divestiture of our local papers in Québec by October 31.

Finally, we are confident that we will successfully transform TC Transcontinental and build our scale in the promising flexible packaging segment. I'll now let Nelson quickly run over through some of our key financial figures for the quarter and finish with an update of our outlook.

Thank you, Francois and good afternoon, everyone. Revenues for the second quarter of 2017 improved by 0.3% year-over-year to $499 million.

Operating earnings grew from $16 million to $68 million. Adjusted operating earnings, which exclude restructuring costs, impairment of assets and other costs increased 13% from $56 million to $64 million.

This quarter, our results have not incurred -- have not incurred significant impact of the share price variation on our stock-based compensation expense. Net earnings grew from $5 million to $46 million.

This increase is mainly attributable to a decrease in the asset impairment charge and in the restructuring and other costs and to a lesser extent to the increase in adjusted operating earnings, which in turn was partially offset by a rise in income taxes. Adjusted net earnings increased 24% from $34 million to $43 million or from $0.44 per share to $0.55 per share.

On the cash flow front in Q2, we generated $93 million of cash flow from operations before changes in non-cash operating items. We received $25 million for the sale of assets mainly from our media assets in Atlantic Canada.

After paying $20 million in taxes, we invested $12 million in CapEx including intangibles and paid $8 million for contingent consideration related to an acquisition realized in 2016. We also distributed $50 million in dividends.

This quarter, the working capital had an unfavorable impact on the cash flows from operating activities due to the timing differences in certain payments to our suppliers. At the end of the quarter, our net indebtedness was $235 million with no significant debt maturities before 2019.

Our net debt to EBITDA ratio improved to 0.6 times as at April 30. Now let me provide you with an update of our expectations regarding fiscal 2017.

In our printing division, accounting for the additional contribution from the agreement with Lowe's Canada, we expect a slight increase in revenues from our services to retailers. We will also benefit in part from the year-over-year contribution of the Toronto Star newspaper printing agreement until July of 2017.

However, these elements should be affected by the expected volume decline from the circulation and page count decreases in newspapers and the negative impact of declining printed advertising spending in magazines and commercial products. However, the end of the nonrecurring contract to print the Canadian Census Form will not have an impact on the second half results.

In terms of profitability, our focus will continue to be on optimizing our operations through operational efficiency initiatives. In our packaging division, we will benefit from the acquisition of Robbie Manufacturing and Flexstar Packaging.

We expect as the integration process comes to an end that these acquisitions will start to generate synergies. We will continue to deploy resources to strengthen our salesforce and our manufacturing platform.

We will also carry out our M&A plans in this promising market in a disciplined manner as to invest in quality assets that meet our strategic criteria namely verticals, specific skills, geography and synergies. We expect that our manufacturing capacity, combined with our North American salesforce should drive organic growth.

In the media sector, the share of our local newspaper publishing activities in our business portfolio will decrease as the sale of our assets materialize. For our business and education group, we will benefit from our acquisition of financial brands and we expect the result will remain strong.

For the 2017 P&L, assuming stock price at yesterday's closing, you should model for full-year corporate costs at the EBITDA level of about $29 million. As a reminder, a change of $1 in our stock price impacts our results by close to $1 million.

Our financial expenses are expected to be slightly higher with last year and our tax rate around 28%. In terms of use of cash for the year, you can assume CapEx of around $60 million and cash taxes of approximately $60 million.

To conclude, our sound financial position and our proven ability to generate considerable cash flow quarter-after-quarter gives us significant flexibility to successfully execute our M&A strategy to achieve future growth. The site acquisitions packaging assets we also intend to continue with our approach to capital allocation by supporting organic growth in packaging and by continuing to return capital to shareholders.

This concludes the formal part of the conference call. Suzy, we're not open for questions.

Hi. Good afternoon.

Just curious on the M&A front we've seen multiples for publicly-traded packaging companies continue to move higher. So, I am just curious if thus having any impact on sort of the dealers, you'll kind of source or multiples for what sellers are expecting?

Yes, the multiple are getting higher, but in the last 18 months, they’ve been around where they are right now. So, it's not really changing our strategy in a sense that the assets that we feel are the right assets for the long term.

We will look at them and we will follow up to a certain point what the market is dictating, but we feel that and we're still in a zone where we could act depending on how does that fit with what we have, how much synergy that we have. Obviously, we cannot only look at multiples and some company you acquire and you need to put a lot of CapEx in them a year after.

Some other you buy and they're okay for a couple years. So, there's many aspect that could influence the multiple but the environment we're in today is an environment that we've been in for the last 18 months and we've been able to act on certain acquisitions in the past 18 months and we feel that we will be able to do so also going forward.

Okay. No, that's fair.

You talked about or you're talking about investing in equipment and people within packaging. Is it an ongoing thing or any hazards -- a lot of that's been done at least serve given your current footprint or is there quite a bit more still coming?

Well I think we did a big bunch like when we started in '14 we only had one plant and we didn't have a whole lot of capacity in sales. So, we added about $10 million, $12 million of investment there to create about $25 million of capacity because at that time we couldn’t forecast the next deal.

So, we needed to have capacity. We did the second deal and the second deal had a lot of win in their sales in terms of ability to win new business.

So, by the time we started to overwrite the second acquisition, we were lacking capacity. So, we added another $15 million of investment there.

So basically, within the first plant -- first company we bought, we created this year about $50 million of capacity. So, from a capacity standpoint, if we're growing at around 8%, 9%, 10%, which is $25 million U.S., we're okay in terms of capacity what we have for about two years.

Once you have the equipment and it's installed and it's running you need people to fill it up and we have invested in recruitment and bringing new sales people on Board and spending a lot of investment upfront, bringing people in the sales team and as you know, when you bring a new person in the sales, it takes a couple of months for them to get going. So that's where we're at.

So, I think that for the next 18 months in terms of the organic growth with the assets that we have right now, I think most of the expense are behind us. Now it's for us to bring the sales in and put it on the new machine that are installed and we're at the beginning of that.

So, I think the heavy lifting is behind us. Now it's for us to grow organically and we feel that we will grow more organically in Q3 and Q4 that we have done in Q1 and Q2.

Having said that, we've done an okay job, but we think that organic growth is going to start to accelerate now towards the back end of the year.

And I think for your model Mark, typically we would expect, when we started, we were spending closer to 6%, 7% of revenues on CapEx. So, I think as Francois said, we're pretty well-capitalized I think for your model that's used 3%, 4% of revenues that that's probably a good figure for the next couple of years, unless we were to win an exceptionally major contract, which is not in the regular course of business.

Okay. So, when you said you're okay in capacity for roughly two years, is that included equipment and people?

Yes, maybe adding a little bit of people along the ship and all that, but once you're there, your conversion is pretty good. In our print business when we win new business, the conversion is very high because the assets are there and the people are there.

Obviously in packaging, we need to build that and we need to start equipment and we've been in the last six to eight months incurring a lot of cost to prepare for the growth and now as the volume is going to come in, it's going to start to contribute more to the bottom line and the closer you are to capacity, the more contribution that you have obviously to the bottom line.

And do you have or could you give us a rough estimate of what organic growth has been in the packaging business in the first half?

Close to 5% and we think that we will be able to do better now in the Q3 and Q4.

Okay. All right.

Thank you very much.

Yes, thanks very much. Just a quick follow-up Francois, thanks for that granularity on the packaging side, just in terms of building your pipeline of new business on packaging for fiscal 2018, we're halfway through obviously this fiscal year.

Just wondering what kind of visibility, you have at the moment in terms of building that roughly incremental $25 million in revenue?

I could say it's going very well. We're confident.

I guess the thing we're learning is onboarding business and not space could be quick, but it could be -- could take a little bit of time and in that business a three-month delay is not something unusual. So, we feel pretty good about our sales funnel right now both for what we've sold in '16 that should materialize in Q3 and Q4 but what we've been working on in the last six or eight months for '18, we feel that we will be in that 5% to 10% range for '18 as we progress into the year, but we will be above what GDP growth or what the market is doing in 2018 with what I see right now in terms of activities and what's in the funnel.

Okay. That's great.

And on the margins again certainly versus our expectations, you continue to handily exceed, want to drill down a little bit and I know you're not going to give margin guidance overall, but just can you talk to the puts and takes on sustaining your 22%, 23% annualized margin in printing and packaging. And do we get better from here all else been equal given the current revenue mix or are we kind of nearing the maximum that you can achieve and also on the margin front, once all the media divestitures are out of the way, can you kind of give us a rough range on median margins to expect on the core $100 million in revenue remaining?

Thank you.

Yeah, I think in the print division, I think I mentioned that before as the business, the sales decreased a little bit every year, we tend to send the work to the most productive assets to Transcontinental -- of Transcontinental network. So, selling it at the same price for the customer and essentially yield better margin as we move the volume towards the most efficient operations and presses that we have.

So, we think that those margins are going to stay where they are or move up a little bit. In terms of the portfolio of businesses that we will have in media, they will be good margin business, probably around the 18%, 20% EBITDA margin, maybe a little bit more.

And packaging I think we're building this and obviously we're looking at the margin, but we are not in the same kind of environment as we are in printing and our media business, which is maximizing the assets that we have. In packaging, we're building this and that this year we've added a lot of cost and certainly our strategy this year was not to maximize margin.

Was to prepare for organic growth. I think our margin, having said that, are still decent, but what we're focused on in packaging is growing in organic growth and developing new verticals and I think we will be in the zone that other flexible company -- packaging company are which is around the 15% EBITDA margin that's where right around that number is where we should be able to build that sector over the years.

Okay. That's great Francois.

And more a qualitative question, when we look at some of the declining business, particular commercial printing and newspaper printing, can you just give us an update on where you are on the commercial printing side in terms of percentage of contractual business and then on the newspaper side if there's -- how realistic would it be to get a couple of additional contracts in that business let's say over the next year or so?

Yeah, in terms of your second question for newspaper, we know very well which file are the one that could become actionable in the years to come and we are working on it and for now there's nothing to report on this but we know exactly who are the potential and they know us as well. So, in terms of contractual business as we progress in the print portfolio, we're moving more and more toward contractual business.

If you look at our retail business, which is 60% of our revenue, it's totally contractual. If you have the newspaper, which is also totally contractual, you're probably right around the 75%.

Magazine is contractual. The only piece that is less contractual is the commercial business, but even there it is about a little bit north of a $200 million business.

I think we are more than 50% of that business now that is contractual repetitive around point-of-purchase material printing for retailers, direct marketing stuff for banks and we have large customer that have I have signed contracts. So, we're moving towards probably more than 70%, 75% of our portfolio on what we call contractual and some of it even repetitive business.

So, this is where we're -- this is where we're heading and we are not chasing too much the business that is not contractual.

That's great. Thanks for all that.

Thank you.

Good afternoon. I was wondering if you can provide any sort of color whether quantitatively or qualitatively on the progress of implementation synergies or realization synergies for the Robbie and Flexstar acquisition, thanks?

Yes, these two acquisitions we had set up targets for synergies and they will be realized or surpassed. Having said that, these are not huge numbers.

You're talking it probably combined about probably right around $3 million roughly and we'll get that done. So, the EBITDA of these company that we've acquired will go up and that's what their plan call for into six months into the year.

Both of these operations are on track to deliver their plan, which include the synergies that we had identified when we acquired them.

Okay. Thank you and then in terms of your portfolio of Quebec Media assets, you're looking to divest, would you give just -- providing colors into the size or revenue or EBITDA basis.

Yeah, revenue is right about $100 million, there is the revenue and the EBITDA is single digit and that's right around where we are in terms of the EBITDA.

Okay. Thank you very much.

Thanks.

Thank you, very much everyone and talk to you next quarter. Have a great summer.