Transcontinental has higher profit but revenues hit by end of Zellers contract

MONTREAL - Transcontinental Inc. has seen a "big Hole" in its revenues as a result of the end of its Zellers printing contract, but that doesn't reflect overall market conditions, president and CEO Francois Olivier said Thursday.

"Zellers was one of our largest customers," Olivier told financial analysts after Transcontinental (TSX:TCL.B) reported a 4.5 per cent drop in revenues to $493.8 million from $517 million year-over-year.

"Obviously, not having them around for this year creates a big hole," he said of Zellers, which has sold most of its locations to Target and ceased operations.

However, Olivier said the end of the contract doesn't reflect the state of the market.

Transcontinental said other factors contributing to lower revenue were the change in the format and type of paper used by some of its major customers, difficult market conditions affecting its magazine, book and catalogue printing business and a soft advertising market.

"Not much has changed in terms of market conditions since the last quarter. The soft advertising market continues to be the greatest challenge for our magazines, newspapers and digital operations," he said.

While advertisers are "prudent" and have postponed some spending, they're trying out new platforms. The end result, though, is a continued volatile market, he said.

Still, the commercial printing and media company reported a more profitable third quarter with net income rising to $32.4 million, or 42 cents per share, in the three months ended July 31. That's up from $8.1 million, or 10 cents per share, in the same quarter last year when the company recognized unusual costs related to its acquisition of Quad/Graphics Canada.

Excluding unusual items, Transcontinental's adjusted net income was up 43.4 per cent compared with a year ago, rising to $35.7 million from $24.9 million.

"Our third-quarter results clearly outperformed in our industry," Olivier said. "Despite the pressure we are facing with regards to the advertising market in our media sector, we have continued to roll out our digital offering and have launched several new products and services."

Olivier said the company will be taking a closer look at assets that are considered to be underperforming and at making money from its digital properties.

Transcontinental bought the printing operations of Quad/Graphics Canada in March 2012 and said there have been more than $35 million to date in synergies from that acquisition.

RBC Capital Markets analyst Drew McReynolds said the third-quarter results were "modestly" head of expectations.

McReynolds said contracts that have already been won by Transcontinental should help its printing division but added that gains will partially offset by the end of the Zellers' contract as well as lower magazine, book and catalogue printing.

And "difficult ad market conditions are expected to continue for the media operations," he added.

Transcontinental is Canada's largest printer and has about 9,500 employees in Canada and the United States.

It's also a leading publisher of consumer magazines and also of community newspapers in Quebec and the Atlantic provinces. The company also does door-to-door distribution of advertising material through its Publisac network in Quebec and Targeo in the rest of Canada. Transcontinental says it has a digital network of more than 3,500 websites, reaching more than 18.7 million unique visitors per month in Canada.