BUSINESS

Transcontinental's third-quarter profit takes hit from Quebec student strikes

09/06/2012 01:45 EDT | Updated 11/06/2012 05:12 EST
MONTREAL - Student strikes in Quebec contributed a weakening of Transcontinental results in the third quarter as the cancellation of classes resulted in lower textbook sales.

The Montreal-based media company and printer said Thursday it wouldn't outline specifics of the financial impact, but said it expects to recover some of the lost sales in the current quarter following a resumption of classes.

The media sector suffered its third successive quarter of lower profits. Organic profits decreased by $7 million in the quarter with more than 70 per cent relating to its educational book publishing group that was primarily driven by the ending last year of school reforms in Quebec.

"This impact was also worsened by a slowdown in textbook demand as a result of the student strikes here in Quebec," president and CEO Francois Olivier said during a conference call.

Soft national advertising outside Quebec and costs related to its acquisition of Quad/Graphics Canada also helped cause profits to plummet to $8.1 million.

Transcontinental (TSX:TCL.A) earned 10 cents per share for the period ended July 31. That compared to 39 cents per share a year earlier when net income was $31.5 million.

Adjusting for one-time items, profits dropped 23 per cent to $24.9 million or 31 cents per share, compared with $32.5 million or 40 cents per share in the year-ago period.

Revenues were $517 million, up eight per cent from $479.4 million due to the acquisitions of Quad/Graphics and Redux Media, new printing contracts and community newspaper launches in Quebec.

The increase was partially offset by reduced educational book sales, printing contract incentives and lower community newspaper ad revenues.

Organic revenues fell by three per cent, but were down 9.5 per cent in the media sector, with about 45 per cent of the drop due to the impact of school reform last year.

"Going forward the advertising market should remain volatile. In fact the fourth quarter is so far gearing up to be softer than last year," he told analysts.

Olivier said organic digital revenues were down for the first time advertising spending slowed in the quarter. However, he said Transcontinental continues to invest to develop its communication platforms including mobile, e-flyers, websites and television production.

He said the printing segment performed well and is on track to generate more than $40 million in synergies over the next 18 months from the acquisition of Quad/Graphics' Canadian plants that once belonged to Quebecor World.

Drew McReynolds of RBC Capital Markets said the results were below expectations, with adjusted EPS falling below his estimate of 45 cents per share.

"Not unlike other media companies in calendar second quarter, the remaining decline was due to weak national advertising spending in newspaper publishing and year-over-year declines in digital revenue," he wrote in a report.

McReynolds said the printing results largely in line, with organic revenues up one per cent mainly due to new book and flyer contracts.

The analyst said the loss of Zellers will be a drag on a cautious outlook next year with most of the impact in the first quarter.

Olivier wouldn't say how much revenue is derived by Zellers, which is a top-20 retail customer. While it will lose revenues from printing Zellers flyers, it will continue to print those for the Bay and other of the retailer's brands.

"The impact will be manageable but meaningful and there will be a lag between when the Zellers stores close and when the Target stores open," he said, adding it hasn't finalized agreements with the large U.S. retailer that is opening in Canada early next year.

Transcontinental (TSX:TCL.A) is the largest printer in Canada and fourth-largest in North America. It is a publisher of magazines, French-language educational resources and community newspapers in Quebec and the Atlantic provinces. It also has a digital network of more than 3,500 website.

On the Toronto Stock Exchange, Transcontinental shares closed at $8.60, down 65 cents or seven per cent in Thursday trading.